Question 1

Suppose the government wants to close a recessionary gap of $100 billion using only a tax cut. If the marginal propensity to consume (MPC) is 0.8, what is the minimum tax cut required to achieve this goal?

Accepted Answer

$$\125$ billion

Question 2

Which of the following best describes the 'crowding-out effect' in the context of expansionary fiscal policy?

Accepted Answer

Expansionary fiscal policy increases interest rates, which reduces private investment spending.

Question 3

If the government increases spending by $20 billion and the MPC is 0.75, what is the total change in aggregate demand due to the multiplier effect?

Accepted Answer

$$\80$ billion

Question 4

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment compensation payments that increase during a recession

Question 5

A progressive tax system contributes to built-in stability because:

Accepted Answer

The average tax rate rises as GDP rises, automatically restraining economic expansions.

Question 6

Which of the following best explains why a tax cut must be larger than an equivalent increase in government spending to achieve the same increase in aggregate demand?

Accepted Answer

Because part of a tax cut is saved, while all government spending directly increases aggregate demand.

Question 7

Which of the following is NOT a type of lag associated with fiscal policy?

Accepted Answer

Transmission lag

Question 8

Suppose the government implements a contractionary fiscal policy by increasing taxes and decreasing government spending. What is the intended effect on the aggregate demand curve?

Accepted Answer

Shift the aggregate demand curve to the left

Question 9

Which of the following statements about the cyclically adjusted budget is correct?

Accepted Answer

It measures what the budget deficit or surplus would be if the economy were at full employment.

Question 10

If the marginal propensity to save (MPS) is 0.2, what is the value of the government spending multiplier?

Accepted Answer

$$5$$

Question 11

Which of the following is a potential problem with discretionary fiscal policy due to political considerations?

Accepted Answer

Politicians may enact expansionary policies for electoral gain even when not economically justified.

Question 12

During a recession, which of the following is most likely to occur due to automatic stabilizers?

Accepted Answer

Tax revenues decrease and transfer payments increase.

Question 13

If the government wants to achieve a $10 billion increase in aggregate demand and the MPC is 0.6, how much should it increase government spending?

Accepted Answer

$$\4$ billion

Question 14

Which of the following best describes the effect of a regressive tax system on built-in stability?

Accepted Answer

It decreases built-in stability because the average tax rate falls as GDP rises.

Question 15

Which of the following scenarios illustrates the 'recognition lag' in fiscal policy?

Accepted Answer

It takes several months for policymakers to realize the economy has entered a recession.

Question 16

Why might a temporary tax cut fail to increase aggregate demand as much as expected?

Accepted Answer

Households may save most of the tax cut if they expect taxes to rise again in the future.

Question 17

Which of the following best describes the fiscal policy actions of most state and local governments during a recession?

Accepted Answer

They are often pro-cyclical, reducing spending or raising taxes, which can worsen the recession.

Question 18

If the government increases spending by $$2 billion and simultaneously cuts taxes by 2 $$billion, with an MPC of 0.75, what is the total initial impact on aggregate demand?

Accepted Answer

$$\3.0$ billion

Question 19

Which of the following is a reason why discretionary fiscal policy has increasingly relied on tax changes rather than changes in government spending?

Accepted Answer

Tax changes can be implemented more quickly than government spending projects.

Fiscal Policy, Deficits, and Debts: A Study Guide

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