Chapter 12 Flashcards
Expansionary fiscal policy financed by government borrowing can lead to
a. higher interest rates and lower private investment under the crowding-out view
b. an increase in AD under the Keynesian view
c. no change in AD under the new classical view
d. all of the above
d.
The crowding-out effect implies that the budget deficit will
a. increase real interest rates and lower the future stock of private capital
b. decrease real interest rates and increase the future stock of private capital
c. increase the productivity of workers in the future
d. lead to higher levels of income for workers in the future
a.
The crowding-out effect suggests that
a. expansionary fiscal policy causes inflation
b. high marginal tax rates crowd out tax deductions
c. the demand stimulus effects of the budget deficit will be weak because the borrowing to finance the deficit will lead to higher interest rates
d. a budget surplus will cause the economy to slip into a major recession
c.
The new classical model implies that the effect of government increasing expenditures by debt financing
a. has the same effect as if it was financed by raising current taxes
b. is highly expansionary on AD and the economy
c. will result in higher real interest rates
d. will result in lower personal savings
a.
The new classical model implies that a shift to a more expansionary fiscal policy will
a. stimulate AD and employment
b. regress AD and employment
c. increase the real rate of interest
d. exert little or no impact on the real interest rate, AD, and employment
d.
According to the new classical view, a $20 billion increase in government expenditures financed by a budget deficit will
a. stimulate output by $20 billion
b. stimulate output of more than $20 billion
c. stimulate output but by less than $20 billion
d. leave output unchanged
d.
Other things constant, an increase in marginal tax rates will
a. decrease the supply of labor and reduce its productive efficiency
b. decrease the supply of capital and decrease its productive efficiency
c. encourage individuals to buy goods that are tax deductible instead of those that are more desired but non-deductable
d. do all of the above
d.
Which of the following statements is true?
a. The empirical evidence indicates that countries with higher marginal tax rates have higher economic growth rates
b. unlike other policies, supply-side tax cuts have their full impact on an economy instantaneously
c. The supply-side effects of changes in marginal tax rates take place over lengthy time periods
d. In the 1960s and 1980s when the marginal tax rates were reduced, the share of income taxes paid by high-income taxpayers fell.
c.
The modern consensus view of fiscal policy stresses
a. that the federal government should always balance its budget
b. that offsetting factors make fiscal policy much less potent than the Keynesian view suggested
c. that proper timing of fiscal policy is very difficult to achieve, rendering fiscal policy less useful as a stabilization tool
d. both b and c
d.
Which of the following is the best explanation of how expansionary fiscal policy can crowd out net exports?
a. Expansionary fiscal policy leads to high budget deficits. Foreigners become concerned about the stability of the United States and stop buying American goods as a result
b. When the government spends more, some of its spending is on foreign goods. As imports rise, net exports fall.
c. the higher interest rates associated with expansionary fiscal policy attract foreign investors. To buy US financial assets, foreigners raise the real exchange rate, which in turn causes net exports to fall
d. the cut in taxes associated with expansionary fiscal policy stimulates AS. As aggregate supply rises, consumers have a greater incentive to purchase domestic goods, causing imports to fall and net exports to drop
c.
Which of the following groups would be least likely to support a balanced budget amendment to the US Constitution?
a. Keynesians
b. new classicals
c. supply-siders
d. believers in the crowding out view
a.
“Expansionary fiscal policy will tend to substantially increase current real output.” Which of the following models would tend to support such a statement?
a. the Keynesian model and the new classical model, but not the crowding out model
b. the Keynesian model and the crowding out model, but not the new classical model
c. the Keynesian model, but not the crowding out or new classical model
d. all three models
c.
According to the Keynesian view, expansionary fiscal policy will have its greatest impact
a. when planned aggregate expenditures equal total output
b. during a strong economic expansion
c. when widespread unemployment is present
d. during a period of severe inflation
c.
Keynesian critics would argue that expansion in government debt during a recession would lead to
a. consumer optimism and a substantial increase in private consumption and investment
b. higher future interest payments and tax rates
c. lower future interest payments and tax rates
d. a strong recovery and substantial future economic growth
b.
Why might increases in government spending be ineffective during a recession?
a. the level of aggregate demand will not affect output and employment during a recession
b. increases in government spending cannot stimulate aggregate demand
c. according to the Keynesian view, fiscal policy will be largely ineffective during a recession
d. recessions often reflect a coordination problem related to the composition of AD not just its level
d.
Which of the following is a potential drawback of an expansion of government spending projects during a recession?
a. Spending projects are easily reversed once the economy has been recovered
b. Government spending projects are not included in the calculation of GDP
c. Those benefiting from spending projects will lobby for a continuation of these projects long after the economy has recovered
d. Government spending projects will not encourage rent-seeking activity
c.
How will a high level of saving impact long-run economic growth?
a. saving will drive interest rates higher, and thereby increase the returns to investment and stimulate growth
b. saving provides the source of investment capital that allows businesses to expand production and the economy will grow
c. saving will reduce consumption and thereby retract economic growth
d. saving will reduce the funds available for investment and thereby retract entrepreneurship and economic growth
b.
A person’s marginal tax rate determines the percentage of
a. taxes that are allocated to the repayment of government debt
b. additional earnings that the individual is permitted to keep
the individual’s total income that must be paid in taxes
d. additional taxable income allocated to saving rather than investment
b.
Other things constant, a reduction in marginal tax rates will tend to increase aggregate supply because the low taxes will increase
a. disposable income, which will induce an increase in consumption and aggregate supply
b. business optimism, which will increase both investment and aggregate supply
c. savings, which will lead to lower interest rates and increase in consumption, and an increase in aggregate supply
d. the attractiveness of productive activity relative to lesuire tax avoidance
d.
Increases in government expenditures and large budget deficits are projected for 2010-2019. The crowding out and new classical views indicate this fiscal policy will lead to
a. lower interest rates and tax rates that will enhance economic growth
b. higher interest rates and tax rates that will enhance economic growth
c. increases in AD that will lead to strong economic growth
d. high rates of future inflation
d.
