Question 1

Which of the following best describes fiscal policy?

Accepted Answer

Fiscal policy refers to changes in government spending and taxes to achieve macroeconomic policy objectives.

Question 2

Suppose the government increases its spending by $$0.3 trillion and the resulting increase in real GDP is 0.6 $$trillion. What is the government purchases multiplier ($$GPM$$)?

Accepted Answer

$$GPM = \frac{0.6}{0.3} = 2$$

Question 3

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

Accepted Answer

Unemployment insurance payments increasing automatically when unemployment rises.

Question 4

In the AD-AS model, what is the immediate effect of expansionary fiscal policy?

Accepted Answer

It shifts the aggregate demand ($$AD) $$curve to the right.

Question 5

Which of the following is a discretionary outlay in the federal budget?

Accepted Answer

Defense spending

Question 6

If the marginal propensity to consume ($$MPC) is 0.75$$, what is the spending multiplier ($$SM$$)?

Accepted Answer

$$SM = \frac{1}{1 - 0.75} = 4$$

Question 7

Which of the following is a potential shortcoming of fiscal policy?

Accepted Answer

Fiscal policy can be subject to recognition, implementation, and impact lags.

Question 8

What is crowding out in the context of fiscal policy?

Accepted Answer

When government spending leads to lower private investment due to higher interest rates.

Question 9

Suppose the government increases taxes by $$0.2$$ trillion and real GDP decreases by $$0.3$$ trillion. What is the tax multiplier ($$TM$$)?

Accepted Answer

$$TM = \frac{-0.3}{0.2} = -1.5$$

Question 10

Which of the following policies is most likely to increase long-run economic growth according to supply-side fiscal policy?

Accepted Answer

Increasing government spending on infrastructure and education.

Question 11

If the government runs a budget deficit for several consecutive years, what is the likely effect on the national debt?

Accepted Answer

The national debt will increase.

Question 12

Which of the following is true about mandatory outlays in the federal budget?

Accepted Answer

They are determined by ongoing programs such as Social Security and Medicare.

Question 13

During a recession, which fiscal policy is most appropriate to restore full employment?

Accepted Answer

Expansionary fiscal policy, such as increasing government spending or cutting taxes.

Question 14

Which of the following is NOT considered an automatic stabilizer?

Accepted Answer

A one-time stimulus payment passed by Congress

Question 15

If the government increases spending by $$100$$ billion and the $$MPC is$$ $$0.8$$, what is the total change in real GDP according to the spending multiplier?

Accepted Answer

$$\Delta Y = \frac{1}{1 - 0.8} 	imes 100 = 5 	imes 100 = 500$$ billion

Question 16

Which of the following best explains why fiscal policy may be less effective than monetary policy for countercyclical stabilization?

Accepted Answer

Fiscal policy often faces recognition, implementation, and impact lags.

Question 17

What is the effect of expansionary fiscal policy on interest rates and private investment?

Accepted Answer

Interest rates increase and private investment decreases due to crowding out.

Question 18

Which of the following is a supply-side fiscal policy tool aimed at increasing labor productivity?

Accepted Answer

Lowering marginal income tax rates.

Question 19

If the economy is experiencing rising inflation, which fiscal policy should be implemented to restore equilibrium?

Accepted Answer

Contractionary fiscal policy, such as decreasing government spending or increasing taxes.

Question 20

Which of the following statements about the relationship between deficits and debt is correct?

Accepted Answer

A budget deficit in a given year adds to the national debt.

Fiscal Policy and Macroeconomic Stabilization: Chapter 16 Study Notes

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