Fiscal Policy Quiz

Fiscal policy refers to the:

• manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

• manipulation of government spending and taxes to achieve greater equality in the distribution of income.

• altering of the interest rate to change aggregate demand.

• fact that equal increases in government spending and taxation will be contractionary.

An economist who favors smaller government would recommend:

• tax cuts during recession and reductions in government spending during inflation.

• tax increases during recession and tax cuts during inflation.

• tax cuts during recession and tax increases during inflation.

• increases in government spending during recession and tax increases during inflation.

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

• increasing government spending by $4 billion.

• increasing government spending by $40 billion.

• decreasing taxes by $4 billion.

• increasing taxes by $4 billion.

Discretionary fiscal policy will stabilize the economy most when:

• deficits are incurred during recessions and surpluses during inflations.

• the budget is balanced each year.

• deficits are incurred during inflations and surpluses during recessions.

• budget surpluses are continuously incurred.

An appropriate fiscal policy for a severe recession is:

• a decrease in government spending.

• a decrease in tax rates.

• appreciation of the dollar.

• an increase in interest rates.

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

• shift the AD curve to the right.

• increase the equilibrium GDP.

• not affect the AD curve.

• shift the AD curve to the left.

A contractionary fiscal policy is shown as a:

• rightward shift in the economy's aggregate demand curve.

• rightward shift in the economy's aggregate supply curve.

• movement along an existing aggregate demand curve.

• leftward shift in the economy's aggregate demand curve.

A tax reduction of a specific amount will be more expansionary, the:

• smaller is the economy's MPC.

• larger is the economy's MPC.

• smaller is the economy's multiplier.

• less the economy's built-in stability.

Suppose the government cuts taxes to keep the economy's standardized budget in balance when the economy is expanding. The government is engaging in a(n):

• contractionary fiscal policy.

• expansionary fiscal policy.

• low-interest rate policy.

• neutral fiscal policy.

When the economy is at full employment:

• one cannot generalize in comparing the actual and the standardized budgets.

• the standardized budget will show a surplus and the actual budget will show a deficit.

• the actual budget will show a surplus and the standardized budget will show a deficit.

• the actual and the standardized budgets will be equal.