Question 1

Which of the following best defines fiscal policy?

Accepted Answer

Changes in federal taxes and expenditures intended to achieve macroeconomic policy objectives.

Question 2

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

Accepted Answer

Unemployment insurance payments increasing during a recession.

Question 3

Suppose the government increases its purchases of goods and services by $150 million, and the government purchases multiplier is 2.5. What is the expected change in equilibrium real GDP?

Accepted Answer

$375 million

Question 4

Which of the following fiscal policy actions would be considered contractionary?

Accepted Answer

Decreasing government purchases and increasing taxes.

Question 5

If the tax multiplier is $-1.5$ and the government cuts taxes by $80$ million, what is the expected change in equilibrium real GDP?

Accepted Answer

$120$ million

Question 6

Which of the following best describes the 'crowding out' effect?

Accepted Answer

An increase in government spending leads to a decrease in private expenditures due to higher interest rates.

Question 7

During the Great Recession, the American Recovery and Reinvestment Act (ARRA) was enacted. What type of fiscal policy was this, and what was its intended effect on aggregate demand?

Accepted Answer

Expansionary; increase aggregate demand

Question 8

Which of the following is NOT a difficulty in implementing fiscal policy?

Accepted Answer

Immediate effect on aggregate demand

Question 9

If the government runs a budget deficit, what happens to the federal government debt?

Accepted Answer

It increases

Question 10

Which of the following is a transfer payment?

Accepted Answer

Unemployment insurance payment

Question 11

Suppose the government increases transfer payments by $50$ million and the transfer payments multiplier is $1.8$. What is the expected change in equilibrium real GDP?

Accepted Answer

$90$ million

Question 12

Which of the following statements about government purchases and total government spending is correct?

Accepted Answer

Government purchases exclude transfer payments.

Question 13

Austerity measures in Greece during the early 2010s are best described as:

Accepted Answer

Contractionary fiscal policy

Question 14

If the government wants to reduce inflation, which fiscal policy action should it take?

Accepted Answer

Decrease government purchases and increase taxes

Question 15

Which of the following is true about the tax multiplier compared to the government purchases multiplier?

Accepted Answer

The tax multiplier is usually smaller in absolute value than the government purchases multiplier.

Question 16

Japan's 'Abenomics' fiscal stimulus in the mid-2010s aimed to combat deflation and stagnation. What was the expected effect on unemployment?

Accepted Answer

Decrease unemployment

Question 17

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

Accepted Answer

Controlling the money supply

Question 18

If the government increases taxes, what is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand decreases

Question 19

Which of the following best describes a balanced budget?

Accepted Answer

Government expenditures are equal to tax revenue.

Question 20

Suppose the government increases government purchases by $200$ million, the government purchases multiplier is $2$, but crowding out reduces the effect by $30$ million. What is the net change in equilibrium real GDP?

Accepted Answer

$370$ million

Chapter 16: Fiscal Policy – Macroeconomic Study Notes

Study Guide - Practice Questions

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