Question 1

Which of the following best describes a budget deficit?

Accepted Answer

When the government's tax receipts are less than its expenditures.

Question 2

Suppose the government increases both its spending and taxes by $100 billion. What is the expected effect on aggregate demand according to the balanced budget multiplier?

Accepted Answer

Aggregate demand will increase by more than $$0 but less than 100 $$billion.

Question 3

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

Accepted Answer

An increase in unemployment benefits during a recession.

Question 4

If the government wants to defuse the Social Security 'time bomb,' which of the following is NOT one of the four main alternatives?

Accepted Answer

Increase government investment in infrastructure.

Question 5

What is the effect of an increase in personal income taxes on the labor market and potential GDP?

Accepted Answer

It decreases the full-employment quantity of labor and potential GDP.

Question 6

Which equation best represents the fiscal imbalance?

Accepted Answer

$$PV_{commitments} - PV_{tax\ revenues}$$

Question 7

A government implements an expansionary fiscal policy. Which of the following is most likely to occur?

Accepted Answer

Aggregate demand increases and real GDP rises.

Question 8

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

Accepted Answer

Personal income taxes.

Question 9

If the government runs a persistent budget deficit, which of the following is a likely long-run effect?

Accepted Answer

Confidence in the value of money declines, possibly leading to inflation.

Question 10

Which of the following best describes the tax wedge in the labor market?

Accepted Answer

The difference between the before-tax and after-tax wage rate.

Question 11

Suppose the government increases transfer payments by $50 billion. What is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand will increase by more than $50 billion due to the transfer payment multiplier.

Question 12

Which of the following is a limitation of discretionary fiscal policy?

Accepted Answer

Law-making time lag.

Question 13

If the government increases spending on productive services and capital, what is the supply-side effect?

Accepted Answer

Potential GDP and aggregate supply increase.

Question 14

Which of the following is NOT considered a transfer payment?

Accepted Answer

Defense spending.

Question 15

What is the effect of a contractionary fiscal policy on aggregate demand and real GDP?

Accepted Answer

Aggregate demand decreases and real GDP falls.

Question 16

Which of the following best describes a structural deficit?

Accepted Answer

A deficit that would occur if the economy were at full employment.

Question 17

If the government increases both taxes and government purchases by $200 billion, and the government expenditure multiplier is 1.5 while the tax multiplier is -0.5, what is the net effect on aggregate demand?

Accepted Answer

$$200	imes1.5 + 200	imes(-0.5) = 200$$

Question 18

Which of the following is a discretionary fiscal policy action?

Accepted Answer

A tax cut passed by Congress.

Question 19

What is the likely effect if a budget deficit crowds out investment?

Accepted Answer

The economic growth rate slows and potential GDP declines.

Question 20

Which of the following is the smallest source of tax revenue for the U.S. federal government?

Accepted Answer

Sales and excise taxes.

Chapter 16 Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards