Q: If the nominal interest rate is 6% and the inflation rate is 2%, and the tax rate on interest income is 25%, what is the real after-tax interest rate? Use the formula: $$ r_{after-tax} = (1 - t) \times i - \pi $$

$$ r_{after-tax} = (1 - 0.25) \times 0.06 - 0.02 = 0.045 - 0.02 = 0.025 or 2.5$$%

Q: If the government expenditure multiplier is 1.5 and the government increases spending by $200 billion, what is the expected change in real GDP?

$$ 1.5 \times 200 = 300 $$ billion increase in real GDP

Question 1

Which of the following best describes the two main purposes of the federal budget?

Accepted Answer

To finance government spending and to influence the level of economic activity

Question 2

Suppose the government collects $$3 trillion in receipts and spends 3.5 $$trillion in outlays in a fiscal year. What is the government budget balance, and what does it indicate?

Accepted Answer

Budget balance is $0.5 trillion deficit; the government is running a budget deficit.

Question 3

Which of the following is NOT one of the four main sources of federal budget receipts?

Accepted Answer

Sales taxes

Question 4

A tax wedge is best defined as:

Accepted Answer

The difference between the pre-tax and post-tax return to an economic activity

Question 5

If the nominal interest rate is 6% and the inflation rate is 2%, and the tax rate on interest income is 25%, what is the real after-tax interest rate? Use the formula: $$ r_{after-tax} = (1 - t) 	imes i - \pi $$

Accepted Answer

$$ r_{after-tax} = (1 - 0.25) 	imes 0.06 - 0.02 = 0.045 - 0.02 = 0.025  or 2.5$$%

Question 6

The Laffer Curve illustrates which of the following relationships?

Accepted Answer

The relationship between tax rates and tax revenue

Question 7

Which of the following best describes a fiscal stimulus?

Accepted Answer

An increase in government spending or a decrease in taxes intended to increase aggregate demand

Question 8

Automatic fiscal policy refers to:

Accepted Answer

Changes in government spending and taxes that occur without new government action, such as unemployment benefits

Question 9

Which of the following is an example of a discretionary fiscal policy?

Accepted Answer

Congress passes a new law to increase infrastructure spending

Question 10

If the government expenditure multiplier is 1.5 and the government increases spending by $200 billion, what is the expected change in real GDP?

Accepted Answer

$$ 1.5 	imes 200 = 300 $$ billion increase in real GDP

Question 11

Which of the following best describes the difference between a structural deficit and a cyclical deficit?

Accepted Answer

A structural deficit exists even at full employment, while a cyclical deficit is due to temporary economic downturns.

Question 12

The Federal Reserve’s dual mandate refers to which two policy goals?

Accepted Answer

Maximum employment and stable prices

Question 13

Which of the following is the primary monetary policy instrument currently used by the Federal Reserve?

Accepted Answer

The federal funds rate

Question 14

If the Federal Reserve lowers the federal funds rate, what is the most likely sequence of effects on the economy?

Accepted Answer

Lower borrowing costs → increased investment and consumption → higher aggregate demand → higher real GDP

Question 15

During a recession, the Federal Reserve is most likely to:

Accepted Answer

Lower the federal funds rate to stimulate borrowing and spending

Question 16

Which of the following best explains why the Fed focuses on the core inflation rate?

Accepted Answer

It excludes volatile food and energy prices, providing a clearer view of underlying inflation trends

Question 17

Which of the following events could put a bank at risk during a financial crisis?

Accepted Answer

A sudden loss of confidence leading to massive withdrawals (bank run)

Question 18

Which of the following was a major policy response by the Fed and Congress to the 2007-2008 financial crisis?

Accepted Answer

Injecting liquidity into the banking system and passing fiscal stimulus packages

Question 19

If the tax multiplier is $$-0.8$$ and the government cuts taxes by $$100$$ billion, what is the expected change in real GDP?

Accepted Answer

$$ -0.8 	imes (-100) = 80 $$ billion increase in real GDP

Question 20

Which of the following best describes generational accounting?

Accepted Answer

A method for measuring the distribution of fiscal burdens across current and future generations

Ch. 13/14: Monetary and Fiscal Policy Study Guide

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