(Solution) If government tax revenues change automatically and in a countercylical direction over the course of the business cycle, this would be called a(n):...

If government tax revenues change automatically and in a countercylical direction over the course of the business cycle, this would be called a(n):

 

 

 

 

 

Choose an Answer:

 

A. shifting the government expenditure line upward but parallel to its current position.

 

 

B. changing the tax system so that the tax line is shifted upward but parallel to its present position.

 

C. changing the government expenditures line so that it has a negative slope.

 

 

D. changing the tax system so that the tax line has a flatter slope.

 

 

Within the aggregate demand and aggregate supply framework, fiscal policy that emphasizes activist government policies to stabilize the economy would view cutting personal income taxes as primarily a shift:

 

 

 

 

Choose an Answer:

 

A. right in the aggregate demand curve.

 

 

B. left in the aggregate demand curve.

 

 

C. right in the aggregate supply curve.

 

 

D. left in the aggregate supply curve.

 

 

Assume the economy is in the midst of a severe recession. Which of the following policies would be consistent with active fiscal policy?

 

 

 

 

Choose an Answer:

 

A. a Parliamentary proposal to incur a federal surplus to be used for the retirement of public debt

 

 

B. a reduction in agricultural subsidies and veterans' benefits

 

 

C. a postponement of a highway construction program

 

 

D. a reduction in federal tax rates on personal and corporate income

 

 

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion at each price level by:

 

 

 

 

Choose an Answer:

 

A. increasing government spending by $4 billion.

 

 

B. increasing government spending by $40 billion.

 

 

C. decreasing taxes by $4 billion.

 

 

D. increasing taxes by $4 billion.

 

 

All else equal, a contractionary fiscal policy in Canada which reduces domestic interest rates tends to:

 

 

 

 

Choose an Answer:

 

A. increase Canadian imports.

 

 

B. increase the international value of the dollar.

 

 

C. reduce the foreign demand for Canadian dollars.

 

 

D. aggravate an existing Canadian trade deficit.

 

 

The additional taxes needed to pay the interest on the public debt reduce incentives to work, save, invest, and bear risks.

 

 

 

 

Choose an Answer:

 

A. True

 

 

B. False

 

 

An increase in taxes would be an expansionary fiscal policy.

 

 

 

 

Choose an Answer:

 

A. True

 

 

B. False

 

 

With a progressive tax system, as the level of income increases in an economy, the average tax rate will:

 

 

 

 

Choose an Answer:

 

A. decrease.

 

 

B. increase.

 

 

C. remain the same.

 

 

D. either decrease, increase, or remain the same.

 

 

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:

 

 

 

 

Choose an Answer:

 

A. shift the AD curve to the right.

 

 

B. increase the equilibrium GDP.

 

 

C. not affect the AD curve.

 

 

D. shift the AD curve to the left.

 

 

An expansionary fiscal policy in Canada might unintentionally cause demand-pull inflation if:

 

 

 

 

Choose an Answer:

 

A. the dollar unexpectedly appreciates while the expansionary policy is in place.

 

 

B. the dollar unexpectedly depreciates while the expansionary policy is in place.

 

 

C. the policy produces severe crowding out.

 

 

D. our trading partners experience recession during the time of the fiscal policy action.

 

 

Which one of the following best describes the net export effect associated with an expansionary Canadian fiscal policy?

 

 

 

 

Choose an Answer:

 

A. domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports increase.

 

 

B. domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports fall.

 

 

C. domestic interest rate rises, foreign demand for dollars falls, dollar depreciates, and net exports increase.

 

 

D. domestic interest rate rises, foreign demand for dollars increases, dollar appreciates, and net exports decline

 

 

If government tax revenues change automatically and in a countercylical direction over the course of the business cycle, this would be called a(n):

 

 

 

 

Choose an Answer:

 

A. discretionary fiscal policy.

 

 

B. expansionary fiscal policy.

 

 

C. political business cycle.

 

 

D. nondiscretionary fiscal policy.

 

 

Which one of the following is a leading economic indicator?

 

 

 

 

Choose an Answer:

 

A. index of consumer expectations

 

 

B. the unemployment rate

 

 

C. the consumer price index

 

 

D. federal income tax collections

 

 

The actual budget may be in deficit while the full-employment budget is in surplus.

 

 

 

 

Choose an Answer:

 

A. True

 

 

B. False

 

 

A major reason that a public debt cannot bankrupt the Federal government is because:

 

 

 

 

Choose an Answer:

 

A. the public debt is mostly held by foreigners.

 

 

B. the Federal government has the Social Security Trust Fund.

 

 

C. the public debt can be easily refinanced.

 

 

D. the Federal government can draw on its gold reserves.

 

 

Some economists believe the budget deficit is directly linked to the trade deficit through real interest rates and the international value of the dollar.

 

 

 

 

Choose an Answer:

 

A. True

 

 

B. False

 

 

How is the public debt calculated?

 

 

 

 

Choose an Answer:

 

A. by adding up consumption, investment, government purchases, and net exports and then cumulating the annual totals over the years of the nation

 

 

B. by subtracting consumption and investment from government spending each year and then cumulating the annual totals over the years of the nation

 

 

C. by subtracting current government spending from current government tax revenues

 

 

D. by adding up the difference between annual government tax revenues and annual government spending and cumulating the differences over the years of the nation

 

 

 

Refer to the above data. A 10 percent proportional tax on income would:

 

 

 

 

Choose an Answer:

 

A. affect neither the size of the multiplier nor the stability of the economy.

 

 

B. the size of the multiplier and make the economy more stable.

 

 

C. increase the size of the multiplier and make the economy less stable.

 

 

D. reduce the size of the multiplier and make the economy more stable

 

 

One reason the public debt will not bankrupt the Federal government is that the:

 

 

 

 

Choose an Answer:

 

A. cost is shifted to future generations.

 

 

B. debt has a procyclical effect on the economy.

 

 

C. debt can be refinanced by selling new bonds.

 

 

D. burden of the debt will be crowded-out by new investment.

 

 

Which one of the following might offset a crowding-out effect of an increase in government spending financed through expansion of the public debt?

 

 

 

 

Choose an Answer:

 

A. a decline in net exports

 

 

B. an improvement in business profit expectations

 

 

C. decrease in the money supply

 

 

D. a decline in public investment

 

 

Other things being equal, which of the policies will have the most expansionary effect on the economy?

 

 

 

 

Choose an Answer:

 

A. a balanced budget

 

 

B. a budget surplus held as an idle money balance

 

 

C. a budget deficit financed by creating new money

 

 

D. a budget surplus used for debt retirement

 

 

Which is regarded as an automatic stabilizer in the economy?

 

 

 

 

Choose an Answer:

 

A. interest rates

 

 

B. exchange rates

 

 

C. the inflation rate

 

 

D. the progressive income tax

 

 

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:

 

 

 

 

Choose an Answer:

 

A. increased government spending or increased taxation, or a combination of the two actions.

 

 

B. increased government spending or decreased taxation, or a combination of the two actions.

 

 

C. increased government spending or increased taxation, but not a combination of the two actions.

 

 

D. decreased government spending or decreased taxation, or a combination of the two actions.

 

 

The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

 

 

 

 

Choose an Answer:

 

A. True

 

 

B. False

 

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