Question 1

Which of the following best describes discretionary fiscal policy?

Accepted Answer

Intentional actions by the government to change spending or taxes to achieve macroeconomic objectives.

Question 2

Suppose the government increases its purchases by $200 billion and the government purchases multiplier is 1.5. By how much will equilibrium real GDP increase, assuming no crowding out?

Accepted Answer

$300 billion

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

If the government believes real GDP will be above potential GDP, which fiscal policy should it enact?

Accepted Answer

Contractionary fiscal policy: decrease government purchases or increase taxes.

Question 5

Which of the following best explains the multiplier effect?

Accepted Answer

A change in autonomous expenditure leads to a larger change in real GDP due to induced increases in consumption.

Question 6

During the Covid-19 pandemic, the U.S. government enacted a large expansionary fiscal policy package. What was the primary goal of this policy?

Accepted Answer

To shift aggregate demand to the right and restore real GDP to its potential.

Question 7

Which of the following is NOT a limitation of using fiscal policy to stabilize the economy?

Accepted Answer

Immediate effect on aggregate demand without any lag.

Question 8

Suppose the tax multiplier is $-0.8$ and Congress decreases taxes by $100$ billion. What is the expected change in equilibrium real GDP?

Accepted Answer

$80$ billion

Question 9

In the long run, an increase in government purchases will:

Accepted Answer

Be exactly offset by reductions in consumption, investment, and net exports, leaving real GDP unchanged.

Question 10

Which of the following would most likely induce Congress and the president to conduct contractionary fiscal policy?

Accepted Answer

A significant increase in inflation.

Question 11

If the government increases transfer payments, what is the expected effect on household consumption and real GDP?

Accepted Answer

Household consumption will increase, and real GDP will increase due to the multiplier effect.

Question 12

Which of the following is most likely to be effective in increasing the growth rate of real GDP in the long run?

Accepted Answer

Permanent cuts in business taxes.

Question 13

A budget deficit occurs when:

Accepted Answer

Government expenditures are greater than tax revenue.

Question 14

Which of the following best describes the effect of crowding out in the short run?

Accepted Answer

An increase in government purchases decreases the supply of loanable funds, raising interest rates and reducing private spending.

Question 15

Which formula correctly expresses the government purchases multiplier?

Accepted Answer

$\frac{	ext{Change in equilibrium real GDP}}{	ext{Change in government purchases}}$

Question 16

If the aggregate demand curve shifts to the right due to an increase in government purchases, the shift will be:

Accepted Answer

By more than the initial increase in government purchases.

Question 17

Which of the following is a reason why estimating the size of fiscal multipliers is difficult?

Accepted Answer

Aggregate demand and short-run aggregate supply are affected by many factors simultaneously.

Question 18

Suppose real GDP is $13$ trillion and potential real GDP is $13.5$ trillion. If the government purchases multiplier is $2$, by how much should government purchases increase to restore the economy to potential real GDP?

Accepted Answer

$0.25$ trillion

Question 19

Which of the following is true about automatic stabilizers?

Accepted Answer

They help limit the severity of recessions by adjusting government spending and taxes automatically.

Question 20

Which of the following best describes the effect of a decrease in tax rates?

Accepted Answer

It increases disposable income and increases the size of the multiplier effect.

Fiscal Policy and Its Macroeconomic Effects

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