Chapter 12

Question 1

Fiscal policy deals with each of the following, except

Answer 1

the money supply.

Question 2

There is a recessionary gap when

Answer 2

equilibrium GDP is smaller than full employment GDP.

Question 3

Over the last four decades we have had

Answer 3

both deficits and surpluses.

Question 4

Which statement is true about automatic stabilizers?

Answer 4

They have helped smooth out the business cycle.

Question 5

Statement I: The federal budget deficit more than doubled between 1987 and 1992.
Statement II: High federal budget deficits tend to push up real interest rates.

Answer 5

Both statements are true.

Question 6

When there is a recession, the biggest percentage decline would be in

Answer 6

corporate after-tax profits.

Question 7

Each of the following is an example of discretionary fiscal policy except

Answer 7

the unemployment insurance program.

Question 8

If equilibrium GDP is $1 trillion greater than full employment GDP, and there is an inflationary gap of $250 billion, the multiplier is

Answer 8

4.

Question 9

The national debt passed the $2 trillion mark in

Answer 9

1986.

Question 10

Which statement is true?

Answer 10

Over 50 percent of the outstanding public debt is owed by foreigners.

Question 11

In the 1930s, John Maynard Keynes said that our main economic problem was

Answer 11

weak aggregate demand.

Question 12

Which statement is true?

Answer 12

Because the national debt grows each year, we have to pay more and more interest on the debt; because interest payments keep rising, our deficits keep growing, further pushing up the debt.

Question 13

Right now our national debt is

Answer 13

Over $8 trillion

Question 14

Between fiscal years 1989 and 1992, our federal budget deficit

Answer 14

rose substantially.

Question 15

In the mid-1990s, the federal budget deficit

Answer 15

fell substantially.

Question 16

Large budget deficits tend to

Answer 16

raise interest rates.

Question 17

Interest rates in the United States would have been higher in recent years had it not been for

Answer 17

the inflow of funds from foreigners.

Question 18

When government expenditures in a given year exceed tax receipts, there exists

Answer 18

a budget deficit.

Question 19

An illustration of the term “automatic stabilizer” is provided by

Answer 19

The tendency of tax collections to fall as the economy moves into a recession.

Question 20

If full employment GDP is $8 trillion and equilibrium GDP is $7 trillion

Answer 20

there is definitely a recessionary gap.

Question 21

The reason the multiplier is greater than 1 is that

Answer 21

income is re-spent.

Question 22

John Maynard Keynes believed that

Answer 22

we could spend our way out of the Great Depression.

Question 23

When government expenditures in a given year are less than tax receipts, there exists

Answer 23

a budget surplus.

Question 24

Suppose the deficit in the year 2010 is $500 billion; in the year 2011 it falls to $200 billion. If the national debt at the beginning of year 2010 is $10 trillion, how much will it be at the end of year 2011?

Answer 24

$10.7 trillion

Question 25

Automatic stabilizers

Answer 25

are probably insufficient to completely offset strong recessionary pressures.