Question 1

Which of the following best describes discretionary fiscal policy?

Accepted Answer

Deliberate changes in government spending or taxes to achieve macroeconomic objectives.

Question 2

Suppose the government increases its purchases by $$0.2 trillion, resulting in an increase in real GDP of 0.4 $$trillion. What is the government purchases multiplier ($$GPM$$)?

$$GPM = \frac{\Delta Y}{\Delta G}$$

Accepted Answer

$$GPM = 2$$

Question 3

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

Accepted Answer

Unemployment insurance payments that rise during a recession.

Question 4

If the government believes real GDP will exceed potential GDP, which fiscal policy should it implement to restore long-run equilibrium?

Accepted Answer

Contractionary fiscal policy: decrease government spending or increase taxes.

Question 5

Which of the following equations correctly defines the tax multiplier ($$TM$$)?

Accepted Answer

$$TM = \frac{\Delta Y}{\Delta T}$$

Question 6

Which of the following best explains the concept of 'crowding out' in the context of fiscal policy?

Accepted Answer

Government borrowing raises interest rates, reducing private investment and consumption.

Question 7

Suppose the government cuts taxes by $$0.2 trillion, resulting in a decrease in real GDP of 0.3 $$trillion. What is the tax multiplier ($$TM$$)?

$$TM = \frac{\Delta Y}{\Delta T}$$

Accepted Answer

$$TM = -1.5$$

Question 8

Which of the following is NOT a limitation of fiscal policy?

Accepted Answer

Immediate effect on aggregate demand

Question 9

If the government increases spending by $$100$$ billion and the multiplier is $$1.5$$, what is the total expected increase in aggregate demand ($$\Delta AD$$)?

$$\Delta AD = 	ext{Multiplier} 	imes \Delta G$$

Accepted Answer

$$\Delta AD = 150 $$billion

Question 10

Which of the following best describes the difference between the federal deficit and the federal debt?

Accepted Answer

The deficit is the annual shortfall, while the debt is the sum of all past deficits.

Question 11

Which of the following is a supply-side fiscal policy aimed at increasing long-run economic growth?

Accepted Answer

Providing tax incentives for research and development.

Question 12

If the government increases transfer payments by $$0.4$$ trillion and real GDP increases by $$0.5$$ trillion, what is the transfer payments multiplier ($$TRM$$)?

$$TRM = \frac{\Delta Y}{\Delta TR}$$

Accepted Answer

$$TRM = 1.25$$

Question 13

Which of the following is most likely to occur if the government increases spending during a period of full employment?

Accepted Answer

An increase in inflation.

Question 14

Which of the following is a real-world example of an automatic stabilizer?

Accepted Answer

Unemployment benefits that rise automatically as more people lose jobs.

Question 15

Which of the following best explains why fiscal policy may be less effective in the long run?

Accepted Answer

Crowding out offsets the increase in government purchases by reducing private consumption, investment, and net exports.

Question 16

Which of the following is NOT a component of government expenditures?

Accepted Answer

Corporate profits

Question 17

Suppose the government implements a policy that increases the efficiency of labor resources. Which supply-side policy is this an example of?

Accepted Answer

Education and training subsidies

Question 18

Which of the following best describes the multiplier effect?

Accepted Answer

The process by which an initial change in spending leads to a larger change in aggregate demand.

Question 19

Which of the following is a likely consequence of a large and persistent government budget deficit?

Accepted Answer

An increase in the federal debt over time.

Question 20

Which of the following is a primary source of U.S. federal government revenue?

Accepted Answer

Individual income taxes

Fiscal Policy: Concepts, Effects, and Limitations in Macroeconomics

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