Question 1

Assume that because the government cancels a large infrastructure program construction firms earn less and lay off workers. Consequently, the region where they live suffers from decreased sales. This story illustrates

Accepted Answer

A)   a reverse multiplier effect.
B)   an increase in aggregate demand.
C)   a negative technology shock.
D)   Each of these answers is correct.E) A) and D)
F) C) and D)

Question 2

Ricardian equivalence

Accepted Answer

A)   will occur more when consumers practice consumption smoothing.
B)   does not occur when a political administration is set to change.
C)   has not occurred in the United States.
D)   is less significant when consumers deem tax cuts or rebates as permanent.E) None of the above
F) C) and D) D

Question 3

If Ricardian equivalence holds, fiscal policy has no effect on either inflation or real growth.

Accepted Answer

A) True 
 B)False

Question 4

Crowding out I. limits increases in aggregate demand due to fiscal policy. II. affects expansionary fiscal policy. III. increases the multiplier effect.

Accepted Answer

A)   I and II only
B)   II and III only
C)   I and III only
D)   I, II, and IIIE) B) and C)
F) A) and D)

Question 5

Under what circumstances is fiscal policy most effective as a tool to stimulate the economy, and how should the policy be financed? Identify time periods when circumstances like this existed.

Accepted Answer

Fiscal policy is usually most effective ...

Question 6

Suppose that in an open economy the government engages in extensive spending financed through bond sales that raise interest rates in the economy. Is it possible for net exports to fall and offset the government's AD stimulus to some extent?
B. If interest rates are high in the economy, there will be a net inflow of funds from other countries. The increased demand for the local currency will cause it to appreciate. This will reduce exports and increase imports, and thus net exports (X-M) will fall and negatively impact AD.

Accepted Answer

B. If interest rates are high in the eco...

Question 7

The crowding out effect refers to an increase in private spending that leads to a decrease in government spending.

Accepted Answer

A) True 
 B)False

Question 8

The lags associated with the Kennedy administration's tax cuts were extremely long.

Accepted Answer

A) True 
 B)False

Question 9

Crowding out occurs when I. the government borrows money from the public that firms would have used for investment funds. II. the government sells bonds, raising interest rates and causing people to save more and consume less. III. an economy is closed and does not trade with the outside world.

Accepted Answer

A)   I only
B)   I and II only
C)   II and III only
D)   I, II, and IIIE) B) and C)
F) All of the above

Question 10

The implementation lag is likely to be

Accepted Answer

A)   longer for changes in government spending than for changes in taxation.
B)   shorter for changes in government spending than for changes in taxation.
C)   indefinitely long for both changes in government spending and changes in taxation.
D)   similar in length for both changes in government spending and changes in taxation.E) All of the above
F) C) and D)

Question 11

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

Accepted Answer

A)   $100,000
B)   $200,000
C)   $300,000
D)   $500,000E) A) and B)
F) C) and D)

Question 12

The time necessary for the government to put a fiscal policy plan in place is called a(n)

Accepted Answer

A)   legislative lag.
B)   recognition lag.
C)   implementation lag.
D)   Each of these answers is correct.E) All of the above
F) A) and C)

Question 13

The time necessary for Congress to propose and pass a fiscal policy plan is called a(n)

Accepted Answer

A)   legislative lag.
B)   recognition lag.
C)   implementation lag.
D)   Each of these answers is correct.E) A) and B)
F) All of the above A

Question 14

Because of the multiplier effect, if a shock causes aggregate demand to increase by $200 million, then the government should __________ in order to restore the economy back to its original growth rate.

Accepted Answer

A)   do nothing
B)   increase government spending by more than $200 million
C)   reduce government spending by less than $200 million
D)   increase government spending by $200 million and cut taxes by $200 millionE) A) and D)
F) A) and C)

Question 15

Suppose the economy is initially at Point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by

Accepted Answer

A)   increasing taxes so that the AD curve shifts back to AD1.
B)   increasing taxes so that the AD curve shifts further out to AD5.
C)   increasing government spending so that the AD curve shifts back to AD1.
D)   increasing government spending so that the AD curve shifts further out to AD5.E) A) and B)
F) C) and D)

Question 16

In what way are monetary and fiscal policies similar?

Accepted Answer

A)   They both target aggregate demand to overcome business fluctuations.
B)   They are both somewhat ineffective when the economy suffers real shocks.
C)   They both involve some amount of borrowing from the public.
D)   Each of these answers is correct.E) None of the above
F) All of the above

Question 17

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

Accepted Answer

A)   Consumers overspent the rebate and fell into debt.
B)   Consumers used much of the rebate to pay off existing debt.
C)   Consumers spent the money on frivolous items that did not have a multiplier effect.
D)   Consumers decided to save all of their rebate money.E) None of the above
F) A) and D) B

Question 18

Which of these would help a government fight a recession?

Accepted Answer

A)   raising taxes
B)   cutting taxes
C)   cutting spending
D)   paying down the national debtE) A) and B)
F) None of the above

Question 19

If, in the best case scenario, increased government spending were used to revive the economy from a recession, the increased spending would

Accepted Answer

A)   be offset by a decrease in inflation.
B)   be a little more than the fall in consumer confidence in order to help make up for lost GDP.
C)   not need to be as large as the fall in consumer consumption.
D)   be exactly the same as the fall in consumer consumption.E) None of the above
F) A) and B)

Question 20

Mistimed contractionary fiscal policy can cause

Accepted Answer

A)   a real shock.
B)   rising interest rates.
C)   a recession.
D)   inflation.E) B) and D)
F) All of the above

Exam 35: Monetary Policy

Assume that because the government cancels a large infrastructure program construction firms earn less and lay off workers. Consequently, the region where they live suffers from decreased sales. This story illustrates

Correct Answer
verified

Ricardian equivalence

Correct Answer
verified
D

If Ricardian equivalence holds, fiscal policy has no effect on either inflation or real growth.

Correct Answer
verified

Crowding out I. limits increases in aggregate demand due to fiscal policy. II. affects expansionary fiscal policy. III. increases the multiplier effect.

Correct Answer
verified

Under what circumstances is fiscal policy most effective as a tool to stimulate the economy, and how should the policy be financed? Identify time periods when circumstances like this existed.

Correct Answer
verified
Fiscal policy is usually most effective ...
View Answer

Correct Answer
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B. If interest rates are high in the eco...
View Answer

The crowding out effect refers to an increase in private spending that leads to a decrease in government spending.

Correct Answer
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The lags associated with the Kennedy administration's tax cuts were extremely long.

Correct Answer
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Crowding out occurs when I. the government borrows money from the public that firms would have used for investment funds. II. the government sells bonds, raising interest rates and causing people to save more and consume less. III. an economy is closed and does not trade with the outside world.

Correct Answer
verified

The implementation lag is likely to be

Correct Answer
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If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

Correct Answer
verified

The time necessary for the government to put a fiscal policy plan in place is called a(n)

Correct Answer
verified

The time necessary for Congress to propose and pass a fiscal policy plan is called a(n)

Correct Answer
verified
A

Because of the multiplier effect, if a shock causes aggregate demand to increase by $200 million, then the government should __________ in order to restore the economy back to its original growth rate.

Correct Answer
verified

Suppose the economy is initially at Point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by

Correct Answer
verified

In what way are monetary and fiscal policies similar?

Correct Answer
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Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

Correct Answer
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B

Which of these would help a government fight a recession?

Correct Answer
verified

If, in the best case scenario, increased government spending were used to revive the economy from a recession, the increased spending would

Correct Answer
verified

Mistimed contractionary fiscal policy can cause

Correct Answer
verified

Exam 35: Monetary Policy

Assume that because the government cancels a large infrastructure program construction firms earn less and lay off workers. Consequently, the region where they live suffers from decreased sales. This story illustrates

Correct AnswerverifiedShow Answer

Ricardian equivalence

Correct AnswerverifiedD

If Ricardian equivalence holds, fiscal policy has no effect on either inflation or real growth.

Correct AnswerverifiedShow Answer

Crowding out I. limits increases in aggregate demand due to fiscal policy. II. affects expansionary fiscal policy. III. increases the multiplier effect.

Correct AnswerverifiedShow Answer

Under what circumstances is fiscal policy most effective as a tool to stimulate the economy, and how should the policy be financed? Identify time periods when circumstances like this existed.

Correct AnswerverifiedFiscal policy is usually most effective ...View AnswerShow Answer

Correct AnswerverifiedB. If interest rates are high in the eco...View AnswerShow Answer

The crowding out effect refers to an increase in private spending that leads to a decrease in government spending.

Correct AnswerverifiedShow Answer

The lags associated with the Kennedy administration's tax cuts were extremely long.

Correct AnswerverifiedShow Answer

Crowding out occurs when I. the government borrows money from the public that firms would have used for investment funds. II. the government sells bonds, raising interest rates and causing people to save more and consume less. III. an economy is closed and does not trade with the outside world.

Correct AnswerverifiedShow Answer

The implementation lag is likely to be

Correct AnswerverifiedShow Answer

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

Correct AnswerverifiedShow Answer

The time necessary for the government to put a fiscal policy plan in place is called a(n)

Correct AnswerverifiedShow Answer

The time necessary for Congress to propose and pass a fiscal policy plan is called a(n)

Correct AnswerverifiedA

Because of the multiplier effect, if a shock causes aggregate demand to increase by $200 million, then the government should __________ in order to restore the economy back to its original growth rate.

Correct AnswerverifiedShow Answer

Suppose the economy is initially at Point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by

Correct AnswerverifiedShow Answer

In what way are monetary and fiscal policies similar?

Correct AnswerverifiedShow Answer

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

Correct AnswerverifiedB

Which of these would help a government fight a recession?

Correct AnswerverifiedShow Answer

If, in the best case scenario, increased government spending were used to revive the economy from a recession, the increased spending would

Correct AnswerverifiedShow Answer

Mistimed contractionary fiscal policy can cause

Correct AnswerverifiedShow Answer

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D

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Fiscal policy is usually most effective ...
View Answer

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B. If interest rates are high in the eco...
View Answer

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A

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B

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