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Unformatted text preview: Macro Chapter 12 study guide questions
Identify the choice that best completes the statement or answers the question.
____ 1. Expansionary fiscal policy financed by government borrowing can lead to
a. higher interest rates and lower private investment under the crowding-out view.
b. an increase in aggregate demand under the Keynesian view.
c. no change in aggregate demand under the new classical view.
d. all of the above. ____ 2. The crowding-out effect implies that budget deficits will
a. increase real interest rates and lower the future stock of private capital.
b. decrease real interest rates and increase the future stock of private capital.
c. increase the productivity of workers in the future.
d. lead to higher levels of income for workers in the future. ____ 3. The crowding-out effect suggests that
a. expansionary fiscal policy causes inflation.
b. high marginal tax rates crowd out tax deductions.
c. the demand stimulus effects of a budget deficit will be weak because the borrowing to
finance the deficit will lead to higher interest rates.
d. a budget surplus will cause the economy to slip into a major recession. ____ 4. The new classical model implies that the effect of government increasing expenditures by debt financing
a. has the same effect as if it was financed by raising current taxes.
b. is highly expansionary on aggregate demand and the economy.
c. will result in higher real interest rates.
d. will result in lower personal savings. ____ 5. The new classical model implies that a shift to a more expansionary fiscal policy will
a. stimulate aggregate demand and employment.
b. retard aggregate demand and employment.
c. increase the real rate of interest.
d. exert little or no impact on the real interest rate, aggregate demand, and employment. ____ 6. According to the new classical view, a $20 billion increase in government expenditures financed by a budget
a. stimulate output by $20 billion.
b. stimulate output more than $20 billion.
c. stimulate output but by less than $20 billion.
d. leave output unchanged. ____ 7. Other things constant, an increase in marginal tax rates will
a. decrease the supply of labor and reduce its productive efficiency.
b. decrease the supply of capital and decrease its productive efficiency.
c. encourage individuals to buy goods that are tax deductible instead of those that are more
desired but nondeductible.
d. do all of the above. ____ 8. Which of the following statements is true?
a. The empirical evidence indicates that countries with higher marginal tax rates have higher
economic growth rates.
b. Unlike other policies, supply-side tax cuts have their full impact on an economy
c. The supply-side effects of changes in marginal tax rates take place over lengthy time
d. In the 1960s and 1980s, when the marginal tax rates were reduced, the share of income
taxes paid by high-income taxpayers fell. ____ 9. The modern consensus view of fiscal policy stresses
a. that the federal government should always balance its budget.
b. that offsetting factors make fiscal policy much less effective than the Keynesian view
c. that proper timing of fiscal policy is very difficult to achieve, rendering fiscal policy less
useful as a stabilization tool.
d. that both b and c are true. ____ 10. Which of the following is the best explanation of how expansionary fiscal policy can crowd out net exports?
a. Expansionary fiscal policy leads to high budget deficits. Foreigners become concerned
about the stability of the United States and stop buying American goods as a result.
b. When the government spends more, some of its spending is on foreign goods. As imports
rise, net exports fall.
c. The higher interest rates associated with expansionary fiscal policy attract foreign
investors. To buy U.S. financial assets, foreigners bid up the real exchange rate, which in
turn causes net exports to fall.
d. The cut in taxes associated with expansionary fiscal policy stimulates aggregate supply.
As aggregate supply rises, consumers have a greater incentive to purchase domestic goods,
causing imports to fall and net exports to drop.
____ 11. According to the Keynesian view, expansionary fiscal policy will have its greatest impact
a. when planned aggregate expenditures equal total output.
b. during a strong economic expansion.
c. when widespread unemployment is present.
d. during a period of severe inflation.
____ 12. Keynesian critics would argue that expansion in government debt during a recession would lead to
a. consumer optimism and a substantial increase in private consumption and investment.
b. higher future interest payments and tax rates.
c. lower future interest payments and tax rates.
d. a strong recovery and substantial future economic growth.
____ 13. Why might increases in government spending be ineffective during a recession?
a. The level of aggregate demand will not affect output and employment during a recession.
b. Increases in government spending cannot stimulate aggregate demand.
c. According to the Keynesian view, fiscal policy will be largely ineffective during a
d. Recessions often reflect a coordination problem related to the composition of aggregate
demand, not just its level. ____ 14. Which of the following is a potential drawback of an expansion of government spending projects during a
a. Spending projects are easily reversed once the economy has recovered.
b. Government spending projects are not included in the calculation of GDP.
c. Those benefiting from spending projects will lobby for a continuation of these projects
long after the economy has recovered.
d. Government spending projects will not encourage rent-seeking activity.
____ 15. Which of the following will make it difficult to institute fiscal policy in a stabilizing manner?
a. Politicians will find it more attractive to raise taxes than to increase spending.
b. Politicians will find it attractive to increase taxes during a recession, but they will be
reluctant to reduce them during an expansion.
c. Politicians will find budget deficits attractive during a recession, but they will be reluctant
to run budget surpluses during an expansion.
d. Politicians will find budget surpluses attractive during a recession, but they will be
reluctant to run budget deficits during an expansion.
____ 16. A person's marginal tax rate determines the percentage of
a. taxes that are allocated to the repayment of government debt.
b. additional earnings that the individual is permitted to keep.
c. the individual's total income that must be paid in taxes.
d. additional taxable income allocated to saving rather than investment.
____ 17. Other things constant, a reduction in marginal tax rates will tend to increase aggregate supply because the
lower taxes will increase
a. disposable income, which will induce an increase in consumption and aggregate supply.
b. business optimism, which will increase both investment and aggregate supply.
c. savings, which will lead to lower interest rates, an increase in consumption, and an
increase in aggregate supply.
d. the attractiveness of productive activity relative to leisure and tax avoidance.
____ 18. Increases in government expenditures and large budget deficits are projected for 2010-2019. The crowdingout and new classical views indicate this fiscal policy will lead to
a. lower interest rates and tax rates that will enhance economic growth.
b. higher interest rates and tax rates that will slow economic growth.
c. increases in aggregate demand that will lead to strong economic growth.
d. high rates of future inflation.
Critical Thinking and Application
19. What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?
20. How do new classical economists differ from Keynesian economists in their assumptions about how
government borrowing affects household consumption and borrowing patterns?
21. What effect will expansionary fiscal policy have on the economy, according to new classical economists?
22. What is supply-side economics, and how does it differ from the Keynesian emphasis on fiscal policy?
23. Supply-side economics concentrates on the benefits of reducing marginal tax rates. Describe three ways that
high marginal tax rates are likely to retard output growth. Macro Chapter 12 study guide questions
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