JAN 25 - ECO1200 FINAL EXAM REVISION

What is the most likely effect of a contractionary fiscal policy on a budget deficit?

• The budget deficit will increase

• It will result in a trade deficit

• It will lead to a trade surplus

• The budget deficit will decrease

The projected budget deficit for Year 1 was $15 million. However, as the year progressed, there was an improvement in economic conditions, leading to an increase in actual revenue by $15 million and a decrease in actual expenditure by $5 million. The budget forecast for Year 2 anticipates a surplus of $5 million. Based on this information, the projected budget for Year 2 can be classified as ____________.

• reflecting a surplus

• indicative of a deficit

• contractionary in nature

• expansionary in nature

Which of the following best describes an expansionary fiscal policy?

• Cutting public sector wages to reduce overall government expenditure

• A reduction in government spending and an increase in taxes to lower the budget deficit

• An increase in government spending and/or a decrease in taxes aimed at stimulating economic activity

• Achieving a budget surplus by raising tax rates

As a person's income (Y) increases, what typically happens to the demand for money?

• It decreases, since individuals tend to save more

• It decreases, as people are more inclined to invest in bonds instead

• It stays the same, as there is no direct relationship between income and money demand

• It increases, as more money is required to carry out a higher volume of transactions
  

Why do critics argue that active monetary and fiscal policies might destabilize the economy?

• Because policymakers tend to prioritize long-term growth while overlooking short-term economic changes

• Because such policies often face delays in implementation, they may take effect after economic conditions have already shifted

• Because active policies automatically adjust interest rates, making government involvement redundant

• Because government intervention consistently results in lower inflation

When an economy faces a drop in aggregate demand, which of the following automatic stabilizers is most likely to be activated?

• Discretionary government spending would likely be reduced

• 
  Welfare payments would rise, helping to boost household spending

• Tax revenues would rise, causing a decline in household spending

• Tax revenues would rise, leading to reduced government expenditure

What does the crowding-out effect refer to?

• When reduced government spending results in lower interest rates and increased private investment

• When increased private sector spending causes a reduction in government expenditure

• When private firms borrow less, causing interest rates to fall and government investment to rise

• When increased government spending leads to higher interest rates, which in turn reduces private investment

What is the likely consequence of the federal government running a consistent budget deficit over several years?

• The national debt will grow as the government continues to borrow funds

• Government tax revenues will rise sharply

• The government will eliminate its debt entirely through privatization

• The national debt will decline

According to the Theory of Liquidity Preference, how does a decline in interest rates affect borrowing and investment?

• It causes an immediate drop in aggregate demand

• It lowers the cost of borrowing, encouraging more investment

• It raises the cost of borrowing, which reduces investment

• It does not affect borrowing costs, so investment remains unchanged

In which situation would a government most likely implement contractionary fiscal policy?

• When the central bank wants to lower interest rates

• When the government wants to increase public sector wages

• When the economy is growing too quickly, and inflation is rising

• When the economy is in a recession and unemployment is high