Q: Which of the following equations correctly defines a budget deficit?

$$\text{Budget Deficit} = \text{Government Spending} - \text{Tax Revenues}$$

Question 1

Suppose the economy is in a recession with real GDP at $14.2 trillion and a price level of 98. Which fiscal policy would be most appropriate to move the economy toward potential GDP?

Accepted Answer

Increase government purchases or decrease taxes

Question 2

If policymakers are concerned about rising inflation due to real GDP exceeding potential GDP, which fiscal policy should they implement?

Accepted Answer

Contractionary fiscal policy

Question 3

Which of the following best describes the multiplier effect of an increase in government purchases?

Accepted Answer

The initial increase in spending leads to a larger total increase in real GDP due to induced consumption

Question 4

Given the following scenario: A $$100 billion increase in government purchases induces an additional 100 $$billion in consumption spending. What is the value of the spending multiplier?

Accepted Answer

$2

Question 5

Which of the following equations correctly defines a budget deficit?

Accepted Answer

$$	ext{Budget Deficit} = 	ext{Government Spending} - 	ext{Tax Revenues}$$

Question 6

What is the likely effect of a temporary increase in government purchases on interest rates and private investment, according to the crowding-out effect?

Accepted Answer

Interest rates rise and private investment falls

Question 7

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

Accepted Answer

Lowering income tax rates to encourage work and investment

Question 8

If the government runs a budget deficit every year, what happens to the national debt?

Accepted Answer

The national debt increases

Question 9

Which of the following best explains why Social Security and Medicare are considered 'fiscal time bombs'?

Accepted Answer

Projected expenditures will eventually far outstrip projected tax revenues due to an aging population and rising healthcare costs

Question 10

Suppose the government increases both government purchases and taxes by $100 billion each. What is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand will increase, but by less than $100 billion

Question 11

Which of the following combinations of monetary and fiscal policy will decrease aggregate demand in the short run?

Accepted Answer

Increasing the discount rate and decreasing government spending

Question 12

If the government wants to reduce inflation without causing a recession, which policy mix is most appropriate?

Accepted Answer

Decrease government purchases and/or increase taxes

Question 13

Which of the following is NOT a goal of supply-side fiscal policy?

Accepted Answer

Reducing the long-run rate of economic growth

Question 14

If the marginal propensity to consume (MPC) is 0.5, what is the value of the simple spending multiplier?

Accepted Answer

$$\frac{1}{1-0.5}$$

Question 15

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

Accepted Answer

The initial increase in government spending is partially offset by reductions in private spending

Question 16

Which of the following is a real-world example of a supply-side policy?

Accepted Answer

The government funds the construction of new highways to improve transportation infrastructure

Question 17

If the government runs a budget surplus, which of the following is true?

Accepted Answer

Tax revenues exceed government spending

Question 18

Which of the following is a likely long-term consequence of falling birthrates for Social Security and Medicare?

Accepted Answer

A decline in the number of workers per retiree, making the programs harder to fund

Question 19

Which of the following best explains why the long-run tax multiplier may be larger than the short-run spending multiplier?

Accepted Answer

Tax reductions have a longer-lasting impact on the economy than short-run spending increases

Fiscal Policy: Mechanisms, Effects, and Policy Debates

Study Guide - Practice Questions

Study Guide - Flashcards