Fiscal Policy

Question 1

Crowding out refers to a:
A.fall in interest rates that reduces private investment.
B. rise in private investment that reduces private consumption.
C. rise in government borrowing that reduces the ability of the private sector to access investment funds.

Answer 1

C. rise in government borrowing that reduces the ability of the private sector to access investment funds.

Question 2

A contractionary fiscal policy will always involve which of the following?
A. Balanced budget
B. Reduction in government spending
C. Fall in the budget deficit or rise in the surplus

Answer 2

C. Fall in the budget deficit or rise in the surplus

Question 3

Which one of the following statements is most accurate?
A. Ricardian equivalence refers to individuals having no idea of future tax
liabilities.
B. Governments do not allow political pressures to influence fiscal policies but do allow voters to affect monetary policies.
C. If there is high unemployment in an economy, then easy monetary and fiscal policies should lead to an expansion in aggregate demand.

Answer 3

C. If there is high unemployment in an economy, then easy monetary and fiscal policies should lead to an expansion in aggregate demand.

Question 4

Which statement regarding fiscal policy is most accurate?
A. Cyclically adjusted budget deficits are appropriate indicators of fiscal policy.
B. To raise business capital spending, personal income taxes should be reduced.
C. An increase in the budget surplus is associated with expansionary fiscal policy.

Answer 4

A. Cyclically adjusted budget deficits are appropriate indicators of fiscal policy.

Question 5

The least likely explanation for why fiscal policy cannot stabilize aggregate demand completely is that:
A. private sector behavior changes over time.
B. policy changes are implemented very quickly.
C. fiscal policy focuses more on inflation than on unemployment.

Answer 5

B. policy changes are implemented very quickly.