Question 1

Which of the following best describes the difference between a budget deficit and the national debt?

Accepted Answer

A budget deficit occurs when government outlays exceed revenue in a given year, while the national debt is the accumulation of all past deficits and surpluses.

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8. What is the value of the government spending multiplier ($$m_s$$)?

Accepted Answer

$$m_s = \frac{1}{1 - 0.8} = 5$$

Question 3

If the government increases spending by $$200$$ billion and finances this entirely by borrowing, and the loanable funds market moves from $$500$$ billion to $$575$$ billion in equilibrium, what happens to private investment and consumption, assuming complete crowding out and no change in net exports?

Accepted Answer

Private investment falls by $$125$$ billion and consumption falls by $$75$$ billion.

Question 4

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment compensation that increases automatically when more people lose jobs.

Question 5

Which of the following is a shortcoming of fiscal policy that can cause it to destabilize rather than stabilize the economy?

Accepted Answer

Time lags in recognition, implementation, and impact.

Question 6

If the marginal propensity to consume (MPC) is $$0.75$$ and the government increases spending by $$100$$ billion, what is the total change in income (GDP) according to the spending multiplier?

Accepted Answer

$$400$$ billion

Question 7

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

Accepted Answer

Increases in federal spending can lead to increased interest rates, which may crowd out private consumption and investment spending.

Question 8

Which of the following is an example of supply-side fiscal policy?

Accepted Answer

A research and development (R&D) tax credit for firms.

Question 9

According to the Laffer Curve, what happens to tax revenue if tax rates are increased beyond a certain point ($$t^*$$)?

Accepted Answer

Tax revenue decreases because high rates discourage production and income.

Question 10

Which of the following is the largest source of tax revenue for the U.S. federal government as of 2024?

Accepted Answer

Individual income taxes

Question 11

Which part(s) of federal spending can be changed during the annual budgeting process?

Accepted Answer

Discretionary outlays

Question 12

Which of the following best describes the purpose of countercyclical fiscal policy?

Accepted Answer

To smooth out fluctuations in the business cycle by using expansionary policy during recessions and contractionary policy during expansions.

Question 13

Which of the following is a progressive tax system?

Accepted Answer

A system in which people with higher incomes pay a larger portion of their income in taxes.

Question 14

Which of the following is a reason why mandatory federal outlays have been growing?

Accepted Answer

All the answer choices are correct.

Question 15

Which time lag is described by the difficulty in determining when the economy enters a recession or expansion, especially when GDP data are released only every three months?

Accepted Answer

Recognition lag

Question 16

Suppose the government implements an expansionary fiscal policy by increasing spending by $$800$$ billion, and the MPC is $$0.8. $$What is the total predicted change in GDP?

Accepted Answer

$$4,000$$ billion

Question 17

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

Accepted Answer

Immediate impact on aggregate demand

Question 18

Which of the following best describes the marginal propensity to consume (MPC)?

Accepted Answer

The portion of additional income that is spent on consumption.

Question 19

Which of the following is a characteristic of supply-side fiscal policy?

Accepted Answer

It increases incentives for productive activities and takes time to affect aggregate supply.

Question 20

Which of the following is true about fiscal policy?

Accepted Answer

Fiscal policy refers to the use of budget tools, government spending, and taxes to impact the macroeconomy.

Lecture 10: Fiscal Policy

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