Multiple Choice Answers

As income increases during the recovery from a recession, automatic stabilizers will:
A. increase taxes and increase government spending, increasing the overall size of the government.
B. reduce taxes and increase government spending, accelerating the recovery.
C. increase taxes and decrease government spending, slowing the recovery.
D. reduce taxes on high-income individuals and raise taxes on the poor, increasing economic inequality.

If the economy falls into a recession, automatic stabilizers will cause:
A. tax receipts to fall and government spending to rise.
B. tax receipts to rise and government spending to fall.
C. both tax receipts and government spending to rise.
D. both tax receipts and government spending to fall.

Because automatic stabilizers increase government spending and decrease tax revenue during a recession and have the opposite effect during a recovery, they tend to create budget:

A. deficits throughout the business cycle.
B. surpluses throughout the business cycle.
C. deficits during the recovery phase of the business cycle and budget surpluses during the recession phase.
D. deficits during the recession phase of the business cycle and budget surpluses during the recovery phase.

Even as the U.S. government ran large budget deficits in the early 2000s, the interest rate did not rise substantially. Which of the following is among the reasons that crowding out did not raise interest rates at that time?
A. Americans increased their willingness to save at the same time that the budget deficits appeared.
B. The government spent the borrowed money in such a way that productivity and therefore the availability of savings dramatically increased.
C. The Federal Reserve decreased the money supply.
D. Foreigners were willing to finance the U.S. deficit with their abundant supply of savings.

Crowding out is associated with: 

A. a reduction in business investment resulting from an increase in government borrowing and higher interest rates.
B. an increase in business investment resulting from an increase in government borrowing and higher interest rates.
C. an increase in private savings caused by higher future tax liabilities when government increases borrowing.
D. a decrease in government spending caused by a shortage of available credit.

Crowding out would most likely occur when: 

A. workers lose jobs as a result of anti-inflationary fiscal policies.
B. the federal government engages in bond sales to finance its budget deficit.
C. the Congress enacts budget cuts to balance the budget.
D. tax receipts rise more slowly than anticipated, resulting in the need to cut government spending.
Fine tuning the economy with fiscal policy is:
A. relatively simple because the government has access to the best information available.
B. difficult because the government lacks important information about the economy.
C. relatively simple because the political process usually works smoothly and without significant lags.
D. difficult because economists have not developed any theoretical models of the macroeconomy.

 

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent. If the actual unemployment rate is 11 percent, then most economists would agree that:

A. both expansionary and contractionary policies are appropriate.
B. expansionary monetary and fiscal policies are appropriate.
C. contractionary monetary and fiscal policies are appropriate.
D. neither expansionary nor contractionary policies are appropriate.
In practice, economists:
A. agree about what the level of potential output is but disagree about what policies are appropriate.B. disagree about what the level of potential output is but agree about what policies are appropriate.C. agree about what the level of potential output is and about what policies are appropriate.
D. disagree about what the level of potential output is and about what policies are appropriate.
Which of the following is most representative of the functional finance view of the macroeconomy?
A. The economy is self-regulating and the best thing the government can do to enhance stability is to stay out of the way.
B. Budgets should be balanced. Doing otherwise is morally wrong.
C. The government should decide on tax and spending plans based on their effects on the economy.
D. Crowding out almost completely cancels out any deficit spending, so fiscal policy is likely to be ineffective.

Refer to the graph above. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy that shifts the AD curve from AD0 to AD1 in an attempt to pull the economy out of the recession. Not taking into account shifts in aggregate supply, an economist with a functional finance view who believes there will be no crowding out effect would conclude that the economy will end up at point:
A. A.
B. B.
C. C.
D. D