Question 1

Which of the following best describes the crowding-out effect in the context of expansionary fiscal policy?

Accepted Answer

It is the tendency of expansionary fiscal policy to decrease planned investment or consumption in the private sector due to rising interest rates.

Question 2

Suppose the government increases spending by $50 billion and finances it by borrowing. According to the crowding-out effect, what is the likely impact on the economy?

Accepted Answer

Private investment may decrease due to higher interest rates, partially offsetting the increase in aggregate demand.

Question 3

Which of the following is NOT considered an automatic stabilizer?

Accepted Answer

A one-time infrastructure spending bill passed by Parliament

Question 4

According to the Ricardian equivalence theorem, what is the effect of an increase in the government budget deficit on aggregate demand?

Accepted Answer

There is no effect on aggregate demand because people anticipate higher future taxes and adjust their spending.

Question 5

Which of the following best explains why fiscal policy is difficult to use for fine-tuning the economy?

Accepted Answer

Fiscal policy time lags are long and variable, making it hard to predict when effects will occur.

Question 6

If the government implements a temporary tax cut, which theory suggests that the effect on total consumption spending will be minimal?

Accepted Answer

Permanent income hypothesis

Question 7

Which of the following equations best represents the relationship between tax revenue (TR), tax rate (t), and the tax base (Y) as described by the Laffer Curve?

Accepted Answer

$TR = t 	imes Y$

Question 8

A government is considering reducing marginal tax rates to stimulate economic growth. According to supply-side economics, what is a possible outcome?

Accepted Answer

Lower marginal tax rates may increase productivity, leading to higher real GDP and potentially higher tax revenues if the tax base expands.

Question 9

Which of the following is an example of a direct expenditure offset?

Accepted Answer

A government increases spending on public hospitals, causing private hospitals to lose patients and reduce their own spending.

Question 10

Which of the following best describes the effect time lag in fiscal policy?

Accepted Answer

The time that elapses between the implementation of a policy and the results of that policy.

Question 11

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

Accepted Answer

The net effect depends on the relative sizes of the government spending multiplier and the tax multiplier.

Question 12

During a recession, which automatic stabilizer is most likely to increase household disposable income and moderate the downturn?

Accepted Answer

An increase in employment insurance payments

Question 13

Which of the following statements about the Laffer Curve is correct?

Accepted Answer

There is a tax rate at which tax revenues are maximized; beyond this point, higher rates reduce revenues.

Question 14

If a government responds to a deep recession by increasing spending, but the effect is delayed and inflation occurs before the policy takes effect, which fiscal policy problem does this illustrate?

Accepted Answer

Long and variable time lags in fiscal policy

Question 15

Which of the following best describes the recognition time lag in fiscal policy?

Accepted Answer

The time required to gather information about the current state of the economy.

Question 16

Which of the following is a likely effect of automatic stabilizers during an economic expansion?

Accepted Answer

They reduce the budget deficit by increasing tax revenues and decreasing transfer payments.

Question 17

If the permanent income hypothesis holds, what is the expected effect of a one-time government rebate on consumer spending?

Accepted Answer

A minimal effect, as consumers base spending on anticipated lifetime income.

Question 18

Which of the following scenarios best illustrates an indirect crowding-out effect?

Accepted Answer

Government spending on highways leads to a reduction in private investment due to higher interest rates.

Question 19

Which of the following is a key reason why automatic stabilizers are effective in moderating business cycles?

Accepted Answer

They automatically adjust government revenues and expenditures in response to changes in economic activity.

Question 20

If the government increases taxes and uses the additional revenue to increase spending on public goods, what determines the net effect on aggregate demand?

Accepted Answer

The size of the government spending multiplier relative to the tax multiplier.

Chapter 12 : Fiscal policy

Study Guide - Practice Questions

Study Guide - Flashcards