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C) Bureau of Economic Analysis.
D) Federal Reserve Board of Governors.

Fiscal policy is carried out primarily by:
A) the Federal government.
B) state and local governments working together.
C) state governments alone.
D) local governments alone.
3.
Discretionary fiscal policy refers to:
A) any change in government spending or taxes that destabilizes the economy.
B) the authority that the President has to change personal income tax rates.
C) changes in taxes and government expenditures made by Congress to stabilize the economy.
D) the changes in taxes and transfers that occur as GDP changes.
4.
Countercyclical discretionary fiscal policy calls for:
A) surpluses during recessions and deficits during periods of demand-pull inflation.
B) deficits during recessions and surpluses during periods of demand-pull inflation.
C) surpluses during both recessions and periods of demand-pull inflation.
D) deficits during both recessions and periods of demand-pull inflation.
5.
Fiscal policy refers to the:
A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
B) manipulation of government spending and taxes to achieve greater equality in the distribution of income.
C) altering of the interest rate to change aggregate demand.
D) fact that equal increases in government spending and taxation will be contractionary.
6.
Discretionary fiscal policy is so named because it:
A) is undertaken at the option of the nation's central bank.
B) occurs automatically as the nation's level of GDP changes.
C) involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
D) is invoked secretly by the Council of Economic Advisers.
7.
Expansionary fiscal policy is so named because it:
A) involves an expansion of the nation's money supply.
B) necessarily expands the size of government.
C) is aimed at achieving greater price stability.
D) is designed to expand real GDP.
8.
Contractionary fiscal policy is so named because it:
A) involves a contraction of the nation's money supply.
B) necessarily reduces the size of government.
C) is aimed at reducing aggregate demand and thus achieving price stability.
D) is expressly designed to contract real GDP.
9.
An economist who favors smaller government would recommend:
A) tax cuts during recession and reductions in government spending during inflation.
B) tax increases during recession and tax cuts during inflation.
C) tax cuts during recession and tax increases during inflation.
D) increases in government spending during recession and tax increases during inflation.
10.
If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:
A) increasing government spending by $4 billion.
B) increasing government spending by $40 billion.
C) decreasing taxes by $4 billion.
D) increasing taxes by $4 billion.
11.
If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:
A) increasing government spending by $25 billion.
B) increasing government spending by $80 billion.
C) decreasing taxes by $25 billion.
D) decreasing taxes by $100 billion.
12.
An economist who favored expanded government would recommend:
A) tax cuts during recession and reductions in government spending during inflation.
B) tax increases during recession and tax cuts during inflation.
C) tax cuts during recession and tax increases during inflation.
D) increases in government spending during recession and tax increases during inflation.
13.
If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by:
A) reducing government expenditures by $125 billion.
B) reducing government expenditures by $20 billion.
C) increasing taxes by $50 billion.
D) increasing taxes by $250 billion.
14.
If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:
A) reducing government expenditures by $12 billion.
B) reducing government expenditures by $60 billion.
C) increasing taxes by $15 billion.
D) increasing taxes by $20 billion.
15.
Discretionary fiscal policy will stabilize the economy most when:
A) deficits are incurred during recessions and surpluses during inflations.
B) the budget is balanced each year.
C) deficits are incurred during inflations and surpluses during recessions.
D) budget surpluses are continuously incurred.
16.
The effect of a government surplus on the equilibrium level of GDP is substantially the same as:
A) a decrease in saving.
B) an increase in saving.
C) an increase in consumption.
D) an increase in investment.
17.
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward:
A) an equality of tax receipts and government expenditures.
B) an excess of tax receipts over government expenditures.
C) an excess of government expenditures over tax receipts.
D) a reduction of subsidies and transfer payments and an increase in tax rates.
18.
Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?
A) a Congressional proposal to incur a Federal surplus to be used for the retirement of public debt
B) a reduction in agricultural subsidies and veterans' benefits
C) a postponement of a highway construction program
D) a reduction in Federal tax rates on personal and corporate income
19.
Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?
A) an increase in Federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new school buildings
D) an increase in soil conservation subsidies to farmers
20.
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:
A) increase tax rates and/or reduce government spending.
B) discourage personal saving by reducing the interest rate on government bonds.
C) increase government expenditures.
D) encourage private investment by reducing corporate income taxes.
21.
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should:
A) encourage personal saving by increasing the interest rate on government bonds.
B) decrease government expenditures.
C) reduce tax rates and/or increase government spending.
D) discourage private investment by increasing corporate income taxes.
22.
An appropriate fiscal policy for a severe recession is:
A) a decrease in government spending.
B) a decrease in tax rates.
C) appreciation of the dollar.
D) an increase in interest rates.
23.
An appropriate fiscal policy for severe demand-pull inflation is:
A) an increase in government spending.
B) depreciation of the dollar.
C) a reduction in interest rates.
D) a tax rate increase.
24.
Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP. It could:
A) reduce taxes by $160 billion.
B) increase government spending by $80 billion.
C) reduce taxes by $40 billion.
D) increase government spending by $40 billion.
25.
In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:
A) shift the AD curve to the right.
B) increase the equilibrium GDP.
C) not affect the AD curve.
D) shift the AD curve to the left.
26.
Suppose that in an economy with a MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation. It could:
A) increase taxes by $10 billion.
B) reduce government spending by $40 billion.
C) reduce government spending by $5 billion.
D) increase taxes by $20 billion.
27.
Which of the following represents the most expansionary fiscal policy?
A) a $10 billion tax cut
B) a $10 billion increase in government spending
C) a $10 billion tax increase
D) a $10 billion decrease in government spending
28.
Which of the following represents the most contractionary fiscal policy?
A) a $30 billion tax cut
B) a $30 billion increase in government spending
C) a $30 billion tax increase
D) a $30 billion decrease in government spending
29.
A contractionary fiscal policy is shown as a:
A) rightward shift in the economy's aggregate demand curve.
B) rightward shift in the economy's aggregate supply curve.
C) movement along an existing aggregate demand curve.
D) leftward shift in the economy's aggregate demand curve.
30.
An expansionary fiscal policy is shown as a:
A) rightward shift in the economy's aggregate demand curve.
B) movement along an existing aggregate demand curve.
C) leftward shift in the economy's aggregate supply curve.
D) leftward shift in the economy's aggregate demand curve.
31.
A tax reduction of a specific amount will be more expansionary, the:
A) smaller is the economy's MPC.
B) larger is the economy's MPC.
C) smaller is the economy's multiplier.
D) less the economy's built-in stability.
32.
A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the:
A) smaller is the economy's MPC.
B) flatter is the economy's aggregate supply curve.
C) smaller is the economy's MPS.
D) less the economy's built-in stability.
33.
Picture

Refer to the above diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:
A) AD0.
B) AD1.
C) AD2.
D) AD3.
34.
Picture

Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:
A) AD0.
B) AD2.
C) AD3.
D) None of the above.
35.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2:
A) the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes.
B) the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes.
C) government should undertake neither an expansionary nor a contractionary fiscal policy.
D) the economy is achieving its maximum possible output.
36.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing:
A) a positive GDP gap.
B) a negative GDP gap.
C) inflation.
D) an adverse supply shock.
37.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing:
A) a positive GDP gap.
B) a negative GDP gap.
C) a recession.
D) cost-push inflation.
38.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to:
A) reduce government expenditures and taxes by equal-size amounts.
B) reduce government expenditures or increase taxes.
C) increase government expenditures or reduce taxes.
D) reduce unemployment compensation benefits.
39.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to:
A) reduce government expenditures and taxes by equal-size amounts.
B) reduce government expenditures or increase taxes.
C) increase government expenditures or reduce taxes.
D) reduce unemployment compensation benefits.
40.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to:
A) increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2.
B) reduce taxes on businesses to shift the aggregate supply curve leftward.
C) reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.
D) do nothing since the economy appears to be achieving full-employment real GDP.
41.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to:
A) do nothing since the economy appears to be achieving full-employment real output.
B) increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.
C) increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level.
D) increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1.
42.
Picture

Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to:
A) do nothing since the economy appears to be achieving full-employment real output.
B) increase taxes and reduce government spending to shift the aggregate demand curve rightward from AD2 to AD3.
C) increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level.
D) reduce taxes and increase government spending to shift the aggregate demand curve from AD2 to AD1.
43.
Picture

Refer to the above diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with:
A) an expansionary fiscal policy.
B) a major recession.
C) a contractionary fiscal policy.
D) demand-pull inflation.
44.
Picture

Refer to the above diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with:
A) an expansionary fiscal policy.
B) a major recession.
C) a contractionary fiscal policy.
D) severe demand-pull inflation.
45.
Picture

Refer to the above diagram, in which Qf is the full-employment output. The shift in the aggregate demand curve from AD3 to AD2 could result from which of the following fiscal policy actions?
A) a tax reduction
B) a tax reduction accompanied by an even larger reduction in government spending
C) a tax increase accompanied by an even larger increase in government spending
D) an increase in government spending
46.
Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should:
A) increase government expenditures by $80 billion.
B) reduce government expenditures by $40 billion.
C) reduce taxes by $40 billion.
D) reduce taxes by $80 billion.
47.
Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should:
A) increase government expenditures by $100 billion.
B) increase government expenditures by $50 billion.
C) reduce taxes by $50 billion.
D) reduce taxes by $200 billion.
48.
Suppose the price level is fixed, the MPC is .8, the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should:
A) increase government expenditures by $200 billion.
B) reduce taxes by $200 billion.
C) increase government expenditures by $40 billion.
D) reduce taxes by $160 billion.
49.
Suppose the price level is fixed, the MPC is .8, and the GDP gap is a negative $320 billion. To achieve full-employment output (exactly), government should:
A) increase government expenditures by $320 billion.
B) increase government expenditures by $80 billion.
C) reduce taxes by $320 billion.
D) reduce taxes by $80 billion.
50.
Picture


Refer to the above figure. Suppose that the economy is currently operating at the intersection of AS and AD2, and that the full employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level?
A) Real GDP will fall to Y and the price level will fall to P1, assuming a ratchet effect occurs.
B) Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs.
C) Real GDP will fall to X and the price level will fall to P1, assuming a ratchet effect occurs
D) Real GDP will fall to Y and the price level will remain unchanged, assuming a ratchet effect occurs
51.
Picture


Refer to the above figure. Suppose that the economy is currently operating at the intersection of AS and AD2, and that the full employment level of output is Y. Because of the ratchet effect:
A) it is impossible to enact fiscal policy that will both reduce output to Y and reduce demand-pull inflation.
B) fiscal policy will need to be more contractionary to reduce output to Y than if no ratchet effect occurred.
C) tax increases will be more effective at reducing demand-pull inflation than cuts in government spending.
D) contractionary fiscal policy that shifts aggregate demand to AD1 will cause real GDP to fall below its full employment level.
52.
Picture


Refer to the above figure. Suppose that the economy is currently operating at the intersection of AS and AD2, and that the full employment level of output is Y. If the government wants to move the level of real GDP back to Y and reduce demand-pull inflation, it should:
A) reduce taxes or increase government spending.
B) enact a contractionary fiscal policy that will shift aggregate demand left to AD1.
C) enact a contractionary fiscal policy that will shift aggregate demand to the left, but not as far as AD1.
D) enact a contractionary fiscal policy that will shift aggregate demand to the left, farther left than AD1.
53.
Built-in stability means that:
A) an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy.
B) with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
C) Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.
54.
If Congress adjusted the U.S. tax system so that the MPC was reduced, the
A) economy would become more inflation prone.
B) economy would become less stable.
C) stability of the economy would be unaffected.
D) economy would become more stable.
55.
A major advantage of the built-in or automatic stabilizers is that they:
A) simultaneously stabilize the economy and reduce the absolute size of the public debt.
B) automatically produce surpluses during recessions and deficits during inflations.
C) require no legislative action by Congress to be made effective.
D) guarantee that the Federal budget will be balanced over the course of the business cycle.
56.
Which of the following best describes the built-in stabilizers as they function in the United States?
A) The size of the multiplier varies inversely with the level of GDP.
B) Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
C) Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
D) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
57.
The effectiveness of the built-in or automatic stabilizers is limited because:
A) the stabilizers produce budget surpluses during recessions.
B) transfer payments and subsidies increase during inflation and decrease during recessions.
C) the offset the stabilizers provide to a change in private spending is less than the change in private spending.
D) the stabilizers raise the general price level regardless of the phase of the business cycle.
58.
Which of the following statements is correct?
A) Built-in stability only partially offsets fluctuations in economic activity.
B) Built-in stability works in halting inflation, but it cannot alleviate unemployment.
C) Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.
D) Built-in stability has eliminated the need for discretionary fiscal policy.
59.
Picture

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of:
A) progressive taxation.
B) built-in stability.
C) the multiplier.
D) discretionary fiscal policy.
60.
Picture

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The tax system of this economy is such that:
A) it is regressive.
B) it is progressive.
C) tax revenues equal 50 percent of GDP.
D) it tends to destabilize the economy.
61.
Picture

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The equilibrium level of GDP in this economy:
A) is $400.
B) is greater than $400.
C) is less than $400.
D) cannot be determined from the information given.
62.
Picture

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400:
A) there will be a budget deficit.
B) there will be a budget surplus.
C) the budget will be balanced.
D) the macroeconomy will be in equilibrium.
63.
Picture

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:
A) at all levels of GDP.
B) at any level of GDP above $400.
C) at any level of GDP below $400.
D) only when GDP is stable.
64.
Picture

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. In this economy:
A) tax revenues and government spending both vary directly with GDP.
B) tax revenues vary directly with GDP, but government spending is independent of GDP.
C) tax revenues and government spending both vary inversely with GDP.
D) government spending varies directly with GDP, but tax revenues are independent of GDP.
65.
Picture

Refer to the above diagram. Which tax system has the most built-in stability?
A) T4
B) T3
C) T2
D) T1
66.
Picture

Refer to the above diagram. Which tax system has the least built-in stability?
A) T4
B) T3
C) T2
D) T1
67.
Picture

Refer to the above diagram. Which tax system will generate the largest cyclical deficits?
A) T4
B) T3
C) T2
D) T1
68.
Picture

(Advanced analysis) Refer to the above diagram, in which C3 is the before-tax consumption schedule. The after-tax consumption schedule represented by C2 reflects:
A) a lower MPC than is embodied in C3.
B) a regressive tax system.
C) a proportional tax system.
D) a progressive tax system.
69.
Picture

(Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. The consumption schedule represented by C3 reflects:
A) a progressive tax system.
B) a proportional tax system.
C) a regressive tax system.
D) a higher MPC than is embodied in C1.
70.
Picture

(Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. The consumption schedule represented by C4 reflects:
A) a progressive tax system.
B) a proportional tax system.
C) a regressive tax system.
D) a higher MPC than is embodied in C1.
71.
Picture

(Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. Other things being equal, the economy would enjoy the greatest built-in stability with consumption schedule:
A) C1.
B) C2.
C) C3.
D) C4.
72.
Picture

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is now imposed in this economy, the consumption schedule will be:
A) Picture
B) Picture
C) Picture
D) Picture
73.
Picture

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system:
A) is regressive.
B) is proportional.
C) is progressive.
D) may be either proportional or progressive.
74.
Picture

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is:
A) .8 before taxes and .6 after taxes.
B) .8 both before and after taxes.
C) .6 before taxes and .8 after taxes.
D) .8 before taxes and .4 after taxes.
75.
Picture

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, we can conclude that the tax:
A) enhances the economy's built-in stability.
B) reduces the economy's built-in stability.
C) neither increases nor decreases built-in stability.
D) increases the MPC and therefore increases the size of the multiplier.
76.
Picture

Refer to the above data. If a 10 percent proportional tax on income is imposed, the consumption schedule will now be:
A) Picture
B) Picture
C) Picture
D) Picture
77.
Picture

Refer to the above data. The 10 percent proportional tax on income would cause:
A) both consumption and saving to increase by larger and larger absolute amounts as GDP rises.
B) both consumption and saving to increase by smaller and smaller absolute amounts as GDP rises.
C) consumption to decrease by larger amounts and saving to decrease by smaller amounts as GDP rises.
D) no change in the amounts consumed and saved at each level of GDP.
78.
Picture

Refer to the above data. A 10 percent proportional tax on income would:
A) affect neither the size of the multiplier nor the stability of the economy.
B) increase the size of the multiplier and make the economy more stable.
C) increase the size of the multiplier and make the economy less stable.
D) reduce the size of the multiplier and make the economy more stable.
79.
The standardized budget refers to:
A) the inflationary impact that the automatic stabilizers have in a full-employment economy.
B) that portion of a full-employment GDP that is not consumed in the year it is produced.
C) the size of the Federal government's budgetary surplus or deficit when the economy is operating at full employment.
D) the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.
80.
The standardized budget tells us:
A) that in a full-employment economy the Federal budget should be in balance.
B) that tax revenues should vary inversely with GDP.
C) what the size of the Federal budget deficit or surplus would be if the economy was at full employment.
D) the actual budget deficit or surplus realized in any given year.
81.
Which of the following statements is correct?
A) The standardized budget and the actual budget differ because the latter does not take government transfer payments into account.
B) The standardized budget is less likely to show a deficit than is the actual budget.
C) The standardized budget and the actual budget will show the same size deficit or surplus in any given fiscal year.
D) The standardized budget is more likely to show a deficit than is the actual budget.
82.
If the economy has a standardized budget surplus, this means that:
A) the public sector is exerting an expansionary impact on the economy.
B) tax revenues would exceed government expenditures if full employment were achieved.
C) the actual budget is necessarily also in surplus.
D) the economy is actually operating at full employment.
83.
The actual budget deficit of the Federal government in 1991 was about $269 billion. On the basis of this information it:
A) can be concluded that the economy was faced with serious inflation in 1991.
B) cannot be determined whether fiscal policy had an expansionary or a contractionary impact in 1991.
C) can be concluded that fiscal policy was contractionary in 1991.
D) can be concluded that fiscal policy was expansionary in 1991.
84.
When current government expenditures equal current tax revenues and the economy is achieving full employment:
A) the standardized budget has neither a deficit nor a surplus.
B) the standardized budget may have either a deficit or a surplus.
C) fiscal policy is contractionary.
D) nominal GDP and real GDP are equal.
85.
When current government expenditures exceed current tax revenues and the economy is achieving full employment:
A) the standardized budget has neither a deficit nor a surplus.
B) the standardized budget has a deficit.
C) fiscal policy is contractionary.
D) nominal GDP and real GDP are equal.
86.
When current tax revenues exceed current government expenditures and the economy is achieving full employment:
A) the standardized budget has neither a deficit nor a surplus.
B) the standardized budget may have either a deficit or a surplus.
C) the standardized budget has a surplus.
D) nominal GDP and real GDP are equal.
87.
Suppose the government purposely changes the economy's standardized budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n):
A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) neutral fiscal policy.
D) high-interest rate policy.
88.
Suppose the government purposely changes the economy's standardized budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n):
A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) neutral fiscal policy.
D) low-interest rate policy.
89.
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):
A) contractionary fiscal policy.
B) expansionary fiscal policy.
C) low-interest rate policy.
D) neutral fiscal policy.
90.
Picture

Refer to the above data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect:
A) demand-pull inflation.
B) an expansionary fiscal policy.
C) a recession.
D) a contractionary fiscal policy.
91.
Picture

Refer to the above data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect:
A) demand-pull inflation.
B) an expansionary fiscal policy.
C) a tax increase.
D) a contractionary fiscal policy.
92.
Picture

Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:
A) demand-pull inflation.
B) cost-push inflation.
C) an expansion of real GDP and an automatic increase in tax revenues.
D) a contractionary fiscal policy.
93.
Picture

Refer to the above table for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n):
A) recession.
B) expansionary fiscal policy.
C) tax increase.
D) contractionary fiscal policy.
94.
Picture

Refer to the above diagram. Assume that G and T1 are the relevant curves and that the economy is currently at B, which is its full-employment GDP. This economy has a:
A) standardized budget surplus only.
B) standardized budget deficit only.
C) standardized budget surplus and an actual budget surplus.
D) standardized deficit and an actual budget deficit.
95.
Picture

Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n):
A) standardized budget surplus.
B) standardized budget deficit.
C) actual budget deficit.
D) actual budget surplus.
96.
Picture

Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n):
A) standardized budget deficit.
B) actual budget deficit.
C) actual budget surplus.
D) neither a surplus nor deficit in the actual budget.
97.
Picture

Refer to the above diagram. Assume that G and T2 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n):
A) standardized budget surplus.
B) actual budget deficit.
C) standardized budget deficit.
D) actual budget surplus.
98.
Picture

Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at B, and the full-employment GDP is A. This economy has a(n):
A) standardized budget surplus.
B) actual budget deficit.
C) standardized budget deficit.
D) actual budget surplus.
99.
Picture

Refer to the above diagram. Discretionary fiscal policy designed to slow the economy is illustrated by:
A) the shift of curve T1 to T2.
B) the shift of curve T2 to T1.
C) a movement from a to c along curve T2.
D) a movement from d to b along curve T1.
100.
Picture

Refer to the above diagram. Discretionary fiscal policy designed to expand GDP is illustrated by:
A) the shift of curve T1 to T2.
B) the shift of curve T2 to T1.
C) a movement from a to c along curve T2.
D) a movement from d to b along curve T1.
101.
Picture

If the full-employment GDP for the above economy is at L, the:
A) actual budget will have a deficit.
B) standardized budget will have a deficit.
C) actual budget will have a surplus.
D) standardized budget will have a surplus.
102.
Picture

With the expenditures programs and the tax system shown in the above diagram:
A) the public budget will be expansionary at all GDP levels above K, and contractionary at all GDP levels below K.
B) the public budget will be a destabilizing force at all levels of GDP.
C) deficits will occur at income levels below K, and surpluses above K.
D) deficits will occur at income levels below H, and surpluses above H.
103.
Picture

Refer to the above diagram. The degree of built-in stability in the above economy could be increased by:
A) reducing government purchases so that the purchases line shifts downward but parallel to its present position.
B) changing the tax system so that the tax line is shifted downward but parallel to its present position.
C) changing the tax system so that the tax line has a greater slope.
D) altering the government expenditures line so that it has a positive slope.
104.
An effective expansionary fiscal policy will:
A) reduce a cyclical deficit, but necessarily increase the actual deficit.
B) reduce the standardized deficit.
C) increase the standardized deficit but reduce the cyclical deficit.
D) always result in a balanced actual budget once full-employment is achieved.
105.
Picture

Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the actual budget deficit is:
A) $200 billion.
B) $20 billion.
C) $40 billion.
D) $60 billion.
106.
Picture

Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the standardized budget deficit is:
A) $40 billion.
B) zero.
C) $60 billion.
D) $20 billion.
107.
Picture

Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the cyclical deficit is:
A) $40 billion.
B) $20 billion.
C) zero.
D) $60 billion.
108.
Picture

Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the:
A) actual budget deficit exceeds the standardized budget deficit.
B) actual budget deficit is less than the standardized budget deficit.
C) standardized deficit exceeds the cyclical deficit.
D) cyclical deficit exceeds the standardized deficit.
109.
Picture

Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP and actual GDP are each $400 billion, this economy will realize a:
A) standardized deficit of $20 billion.
B) cyclical deficit of $20 billion.
C) cyclical surplus of $20 billion.
D) standardized deficit of zero.
110.
Picture

Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment and actual GDP are each $400 billion, government can balance its standardized budget by:
A) increasing T by $40 billion.
B) reducing G by $20 billion.
C) reducing T by $20 billion.
D) increasing T by $10 billion and reducing G by $20 billion.
111.
Economists refer to a budget deficit that exists when the economy is achieving full employment as a:
A) cyclical deficit.
B) full-employment deficit.
C) natural deficit.
D) nonrecurring deficit.
112.
When the economy is at full employment:
A) one cannot generalize in comparing the actual and the standardized budgets.
B) the standardized budget will show a surplus and the actual budget will show a deficit.
C) the actual budget will show a surplus and the standardized budget will show a deficit.
D) the actual and the standardized budgets will be equal.
113.
If government increases the size of its standardized surplus, we can:
A) assume that government is causing interest rates to rise.
B) not determine government's impact on the economy without also knowing the status of the actual budget.
C) assume that government is having a contractionary effect on the economy.
D) assume that government is having an expansionary effect on the economy.
114.
The Federal budget deficit is found by:
A) subtracting government tax revenues plus government borrowing from government spending in a particular year.
B) subtracting government tax revenues from government spending in a particular year.
C) cumulating the differences between government spending and tax revenues over all years since the nation's founding.
D) subtracting government revenues from the noninvestment-type government spending in a particular year.
115.
The amount by which government expenditures exceed revenues during a particular year is the:
A) public debt.
B) budget deficit.
C) full-employment.
D) GDP gap.
116.
The amount by which Federal tax revenues exceed Federal government expenditures during a particular year is the:
A) Federal reserve.
B) budget deficit.
C) budget surplus.
D) public debt.
117.
The Federal budget surplus is found by:
A) subtracting government revenue plus government borrowing from government spending in a particular year.
B) cumulating the difference between government spending and tax revenues over all years since the nation's founding.
C) subtracting government revenues from government spending on noninvestment goods in a particular year.
D) subtracting government spending from government tax revenue in a particular year.
118.
Annual budget deficits gave way to annual budget surpluses beginning in:
A) 1982.
B) 1989.
C) 1993.
D) 1998.
119.
Since 2002, the United States has had:
A) large Federal budget surpluses.
B) large Federal budget deficits.
C) modest trade surpluses.
D) a rising natural rate of unemployment.
120.
Which of the following is a true statement?
A) Surpluses in the Federal budget between 1998 and 2001 gave way to a budget deficit in 2002.
B) Surpluses in the Federal budget between 1992 and 1997 gave way to budget deficits between 1998 and 2002.
C) The swing from budget surpluses in the late 1990s to budget deficits in the early 2000s resulted exclusively because of a downturn in the economy.
D) The swing from budget surpluses in the late 1990s to budget deficits in the early 2000s resulted exclusively from deep tax cuts by the Bush administration.
121.
The immediate primary cause of the swing from Federal budget surpluses between 1998 and 2001 to a budget deficit in 2002 was:
A) the tax cuts of 2001.
B) spending increases relating to the war in Afghanistan.
C) the recession of 2001.
D) the acceleration of inflation in 2001 and 2002.
122.
Which of the following did not contribute to the large Federal budget deficits in 2002 and 2003?
A) spending on the wars in Afghanistan and Iraq.
B) low interest rates.
C) Federal tax cuts.
D) the recession of 2001 and its aftermath.
123.
According to Congressional Budget Office projections made in March 2006, the Federal budget is expected to remain in deficit until when?
A) 2010
B) 2012
C) 2015
D) 2020
124.
The true size of Federal budget deficits may be understated because:
A) a portion of government spending is public investment.
B) inflation reduces the real value of the public debt.
C) Social Security surpluses are included as government tax revenues in measuring the budget deficit.
D) foreign holdings of the debt have recently increased.
125.
Which of the following allegedly understates the true size of the Federal budget deficit?
A) inclusion of government spending on the savings and loan (S&L) bailout
B) inclusion of the Social Security surplus
C) inclusion of Federal excise tax receipts
D) inclusion of current transfer payments
126.
If monies added to, or subtracted from, the Social Security trust fund were excluded from Federal budget calculations, the current Federal budget:
A) deficit would nearly disappear.
B) deficit would be substantially larger.
C) surplus would nearly disappear.
D) surplus would be substantially smaller.
127.
The Social Security trust fund currently is in:
A) deficit, and it inclusion in the Federal budget increases the stated size of the budget deficit.
B) deficit, and it inclusion in the Federal budget reduces the stated size of the budget deficit.
C) surplus, and its inclusion in the Federal budget reduces the stated size of the budget deficit.
D) surplus, and it inclusion in the Federal budget increases the stated size of the Federal budget deficit.
128.
The tax cut passed by Congress and the Bush administration in 2001 was motivated primarily by:
A) the recession that began in March 2001.
B) the terrorist attacks on September 11, 2001.
C) the desire to distribute income and wealth more equally.
D) projections that actual budget surpluses would rise to $5 trillion by 2010.
129.
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.

Refer to the above information. The operational lag of fiscal policy is reflected in event(s):
A) 1 and 2.
B) 2 and 3.
C) 3 and 4.
D) 5.
130.
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.

Refer to the above information. The recognition lag of fiscal policy is reflected in events:
A) 1 and 2.
B) 2 and 3.
C) 3 and 4.
D) 4 and 5.
131.
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.

Refer to the above information. The administrative lag of fiscal policy is reflected in events:
A) 1 and 2.
B) 2 and 3.
C) 3 and 4.
D) 4 and 5.
132.
Which of the following best describes the idea of a political business cycle?
A) Politicians are more willing to cut taxes and increase government spending than they are to do the reverse.
B) Fiscal policy will result in alternating budget deficits and surpluses.
C) Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
D) Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.
133.
The political business cycle refers to the possibility that:
A) incumbent politicians will be reelected regardless of the state of the economy.
B) politicians will manipulate the economy to enhance their chances of being reelected.
C) there is more inflation during Democratic administrations than during Republican administrations.
D) recessions coincide with election years.
134.
The crowding-out effect of expansionary fiscal policy suggests that:
A) tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B) increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C) it is very difficult to have excessive aggregate spending in the U.S. economy.
D) consumer and investment spending always vary inversely.
135.
The crowding-out effect of expansionary fiscal policy suggests that:
A) government spending is increasing at the expense of private investment.
B) imports are replacing domestic production.
C) private investment is increasing at the expense of government spending.
D) saving is increasing at the expense of investment.
136.
Assume the government purposely incurs a budget deficit that is financed by borrowing. As a result, interest rates rise and the amount of private investment spending declines. This illustrates:
A) the equation-of-exchange effect.
B) the paradox of thrift.
C) the crowding-out effect.
D) the wealth effect.
137.
The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:
A) the supply-side effects of fiscal policy.
B) built-in stability.
C) the crowding-out effect.
D) the net export effect.
138.
The crowding-out effect is:
A) strongest when the economy is at full employment.
B) strongest when the economy is in a deep recession.
C) weakest when there is demand-pull inflation.
D) equally strong, regardless of the state of the macroeconomy.
139.
Which of the following fiscal policy actions is most likely to increase aggregate supply?
A) An increase in personal income tax rates.
B) A reduction in interest rates that encourages consumers to purchase more durable goods.
C) An increase in transfer payments to unemployed workers.
D) An increase in government spending on infrastructure that increases private sector productivity.
140.
Picture

Suppose real GDP is X, as shown in graph A. Appropriate government fiscal policy would be to:
A) increase taxes.
B) reduce government spending.
C) reduce government spending and taxes by equal-sized amounts.
D) reduce taxes or increase government spending.
141.
Picture

Suppose real GDP is X, as shown in graph A. If the economy's MPC is .75, X is $100 billion and full-employment real GDP Y is $140 billion, an appropriate fiscal policy would be to:
A) reduce taxes by $100 billion.
B) increase government expenditures by $100 billion.
C) reduce taxes by $10 billion.
D) increase government expenditures by $10 billion.
142.
Picture

Suppose real GDP is X, as shown in graph A. If the economy's MPC is .8, X is $200 billion and full-employment real GDP Y is $300 billion, an appropriate fiscal policy would be to reduce taxes by:
A) $100 billion.
B) $20 billion.
C) $25 billion.
D) $164 billion.
143.
Picture

Refer to the above diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?
A) inflation
B) an increase in stock prices
C) offsetting state and local finance
D) a ratchet effect
144.
Picture

Refer to the above diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?
A) depreciation of the dollar.
B) reduction in tariffs imposed by our trading partners.
C) decrease in the saving schedule.
D) crowding-out effect.
145.
Picture

Refer to the above diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal policy for government to:
A) decrease spending and increase taxes.
B) decrease spending and decrease taxes.
C) increase spending and increase taxes.
D) increase spending and decrease taxes.
146.
Picture

Refer to the above diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to:
A) decrease spending and increase taxes.
B) decrease spending and decrease taxes.
C) increase spending and increase taxes.
D) increase spending and decrease taxes.
147.
Picture

In the above diagram it is assumed that investment, net exports, and government purchases:
A) are leakages from the circular flow.
B) are independent of the level of GDP.
C) vary inversely with GDP.
D) vary directly with GDP.
148.
Picture

Refer to the above diagram. The equilibrium level of GDP is:
A) Y5.
B) Y4.
C) Y3.
D) Y2.
149.
Picture

Refer to the above diagram. If the full-employment GDP is Y5, government should:
A) incur neither a deficit nor a surplus.
B) cut taxes and government spending by equal amounts.
C) reduce taxes and increase government spending.
D) increase taxes and reduce government spending.
150.
Picture

Refer to the above diagram. If the full-employment GDP is Y3, government should:
A) incur neither a deficit nor a surplus.
B) increase taxes and government spending by equal amounts.
C) reduce taxes and increase government spending.
D) increase taxes and reduce government spending.
151.
The U.S. public debt:
A) refers to the debts of all units of government—Federal, state, and local.
B) consists of the total debt of U.S. households, businesses, and government.
C) refers to the collective amount that U.S. citizens and businesses owe to foreigners.
D) consists of the historical accumulation of all Federal government deficits less surpluses.
152.
The public debt is the amount of money that:
A) state and local governments owe to the Federal government.
B) Americans owe to foreigners.
C) the Federal government owes to holders of U.S. securities.
D) the Federal government owes to taxpayers.
153.
The public debt is held as:
A) U.S. securities, corporate bonds, and common stock.
B) Federal Reserve Notes.
C) U.S. gold certificates.
D) Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
154.
Picture

The public debt for the above economy is:
A) $540 billion.
B) $400 billion.
C) $580 billion.
D) $460 billion.
155.
Picture

Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the above economy would:
A) not change the size of the public debt.
B) increase the public debt from $460 billion to $480 billion.
C) increase the public debt from $400 billion to $420 billion.
D) decrease the public debt by $20 billion.
156.
Picture

Other things equal, an increase of corporate bonds from $140 billion to $150 billion in the above economy would:
A) not change the size of the public debt.
B) increase the public debt from $460 billion to $470 billion.
C) increase the public debt from $600 billion to $610 billion.
D) decrease the public debt by $20 billion.
157.
Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:
A) increased by $90 billion.
B) increased by $20 billion.
C) decreased by $70 billion.
D) decreased by $20 billion.
158.
Suppose the Federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:
A) increased by $50 billion.
B) increased by $150 billion.
C) decreased by $200 billion.
D) decreased by $150 billion.
159.
Answer the next question(s) using the following budget information for a hypothetical economy. Assume that all budget surpluses are use to pay down the public debt.

Picture

Refer to the above data. If year 1 is the first year of this nation's existence and year 6 is the present year, this nation's public debt is:
A) $275 billion.
B) $100 billion.
C) $3540 billion.
D) $230 billion.
160.
Answer the next question(s) using the following budget information for a hypothetical economy. Assume that all budget surpluses are use to pay down the public debt.

Picture

Refer to the above data. The budget deficit in year 3 is:
A) $175 billion.
B) $3050 billion.
C) $100 billion.
D) $295 billion.
161.
Answer the next question(s) using the following budget information for a hypothetical economy. Assume that all budget surpluses are use to pay down the public debt.

Picture

Refer to the above data. If year 1 is the first year of this nation's existence and year 4 is the present year, the public debt as a percentage of GDP in year 4 is:
A) 7.5 percent.
B) 1.39 percent.
C) 2.5 percent.
D) 3.9 percent.
162.
Answer the next question(s) using the following budget information for a hypothetical economy. Assume that all budget surpluses are use to pay down the public debt.

Picture

Refer to the above data. A budget surplus occurred in year:
A) 2.
B) 3.
C) 4.
D) 6.
163.
Answer the next question(s) using the following budget information for a hypothetical economy. Assume that all budget surpluses are use to pay down the public debt.

Picture

Refer to the above data. The public debt declined in year:
A) 6.
B) 5.
C) 4.
D) 3.
164.
Answer the next question(s) using the following budget information for a hypothetical economy. Assume that all budget surpluses are use to pay down the public debt.

Picture

Refer to the above data. As a percentage of GDP, the:
A) budget deficit was 3.9 percent in year 4.
B) budget surplus was less than 1 percent in year 6.
C) public debt was 3 percent in year 6.
D) public debt was 12.5 percent in year 1.
165.
Which of the following statements is not correct?
A) State and local governments in the aggregate have realized budget surpluses in some years.
B) A Federal deficit of $20 billion in 2010 would increase the public debt by $20 billion.
C) The public debt is the accumulation of all the Federal government's deficits and surpluses.
D) The public debt refers to the debts of all units of government—Federal, state, and local.
166.
Which of the following is not a significant contributor to the U.S. public debt?
A) war financing
B) tax cuts and expenditure increases in the 1980s
C) recessions
D) demand-pull inflation
167.
Recessions have contributed to the public debt by:
A) reducing national income and therefore tax revenues.
B) increasing real interest rates.
C) increasing the international value of the dollar.
D) increasing national saving.
168.
Which of the following statements is correct?
A) Federal deficits were larger in the late 1990s than in the early 1990s.
B) Deep tax cuts always expand tax revenues and reduce the public debt.
C) The public debt has usually declined during wartime.
D) There is a tendency for the public debt to grow during recessions.
169.
In 2007, the U.S. Federal debt held by the public was:
A) held largely by foreign governments.
B) about four times as large as the GDP.
C) about twice as large as the GDP.
D) about a third as large as the GDP.
170.
In 2007, the public debt was about:
A) $9 trillion.
B) $7.9 trillion.
C) $470 billion.
D) $184 billion.
171.
The average tax rate required to service the public debt is roughly measured by:
A) the absolute size of the debt.
B) the debt as a fraction of the GDP.
C) interest on the debt as a percentage of the GDP.
D) the ratio of government spending to the GDP.
172.
As a percent of GDP, the United States public debt is:
A) the highest among major industrial nations.
B) the lowest among major industrial nations.
C) lower than the public debts of several other major industrial nations.
D) higher than the percentages for Canada, Germany, and Italy.
173.
What percentage of the U.S. public debt is held by Federal agencies and the Federal Reserve?
A) 53 percent
B) 58 percent
C) 47 percent
D) 26 percent
174.
What percentage of the public debt is held by foreign individuals and institutions?
A) 50 percent
B) 18 percent
C) 42 percent
D) 25 percent
175.
The portion of the public debt held outside Federal agencies and the Federal Reserve is:
A) substantially larger than the portion held by Federal Agencies and the Federal Reserve.
B) smaller than the portion held by Federal Agencies and the Federal Reserve.
C) equally split between U.S. and foreign lenders.
D) all held by foreign lenders.
176.
The largest proportion of the public debt is held by:
A) the U.S. public (individuals, businesses, financial institutions, etc.) and state and local governments.
B) foreign individuals and institutions.
C) the Federal Reserve System.
D) U.S. government agencies.
177.
In 2007, about ____ percent of the U.S. public debt was held by people and institutions abroad.
A) 42
B) 18
C) 25
D) 33
178.
In 2007, about ____ percent of the U.S. public debt was held by the Federal government and Federal Reserve.
A) 10
B) 46
C) 62
D) 53
179.
To say that "the U.S. public debt is also a public credit" is to say that:
A) only interest payments on the public debt are an economic burden.
B) official figures understate the size of the public debt.
C) the bulk of the public debt is owned by U.S. citizens and institutions.
D) the public debt is equal to the land and buildings assets owned by the Federal government.
180.
Payment of interest on the U.S. public debt:
A) increases the current domestic standard of living in the United States.
B) has no effect on the distribution of income.
C) is thought to decrease income inequality.
D) is thought to increase income inequality.
181.
The most likely way the public debt burdens future generations, if at all, is by:
A) reducing the current level of investment.
B) causing future unemployment.
C) causing deflation.
D) reducing real interest rates.
182.
Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:
A) increases during a period of recession, rather than prosperity.
B) is primarily for capital-type goods.
C) is financed by borrowing.
D) is financed by taxation.
183.
The crowding-out effect suggests that:
A) tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B) government borrowing to finance the public debt increases the real interest rate and reduces private investment.
C) it is very difficult to have excessive aggregate spending in a capitalist economy.
D) consumer and investment spending always vary inversely.
184.
The Federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the:
A) equation-of-exchange effect.
B) paradox of thrift.
C) crowding-out effect.
D) net export effect.
185.
The real burden of an increase in the public debt:
A) may be very small or conceivably zero when the economy is in a severe depression.
B) will be smaller when full employment exists than when the economy has large quantities of idle resources.
C) can be shifted to future generations if the debt is internally financed.
D) can best be measured by the dollar increase in the size of the debt.
186.
Which one of the following might offset a crowding-out effect of financing a large public debt?
A) a decline in net exports
B) an increase in public investment
C) a decrease in the money supply
D) a decline in public investment
187.
Picture

Refer to the above diagram. Initially assume that the investment demand curve is ID1. The crowding-out effect of a large public debt would be shown as a(n):
A) shift of the investment demand curve from ID1 to ID2.
B) leftward shift of the investment demand curve.
C) increase in the interest rate from 4 percent to 6 percent and a decline in investment spending of $5 billion.
D) increase in the interest rate from 6 percent to 8 percent and a decline in investment spending of $40 billion.
188.
Picture

Refer to the above diagram. Initially assume that the investment demand curve is ID1. Which of the following effects of financing a large public debt might shift the investment demand curve from ID1 to ID2, wholly offsetting any crowding-out effect?
A) an improvement in profit expectations by businesses
B) a decrease in saving
C) a decline in the interest rate
D) an increase in the marginal propensity to consume
189.
Which of the following is the best example of public investment?
A) salaries of Senators and Representatives
B) government expenditures on food stamps
C) construction of highways
D) funding of regulatory agencies
190.
Which of the following is not considered a legitimate concern of a large public debt?
A) Bankruptcy of the Federal government
B) Disincentives created by higher taxes
C) Crowding-out of private investment
D) Increased income inequality
191.
Which of the following is considered a legitimate concern of a large public debt?
A) Bankruptcy of the Federal government
B) Crowding-out of private investment
C) Burdening future generations
D) Collapse of the financial system
192.
(Last Word) Which of the following is not an item in the list of leading economic indicators?
A) the rate of inflation
B) the length of the average work week
C) the money supply
D) the value of the index of consumer expectations
193.
(Last Word) The composite index of leading indicators is useful for:
A) predicting potential GDP.
B) determining the natural rate of unemployment.
C) developing discretionary fiscal policy.
D) forecasting aggregate supply shocks.
194.
(Last Word) Which one of the following is one of the leading economic indicators?
A) index of consumer expectations
B) the unemployment rate
C) the consumer price index
D) Federal income tax collections
195.
Expansionary fiscal policy is so-named because it involves an expansion of the nation's money supply.
A) True
B) False
196.
If the MPC in the economy is .75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.
A) True
B) False
197.
A contractionary fiscal policy shifts the aggregate demand curve leftward.
A) True
B) False
198.
Demand-pull inflation can be restrained by incre
$15 Eliminate farm subsidies $15 Cut foreign aid in half $15 Eliminate earmarks $15 Reduce federal work force by 10 percent $15 Cut 250,000 government contractors $15 Cut pay of civilian federal workers by 5 percent $30 Other cuts from deficit panel, such as to national parks budget $40 Cut aid to states by 5 percent $15 Tighten eligibility for disability insurance $55 Reduce growth rate of initial Social Security benefits for top 40 percent of lifetime earners $80 Use alternate inflation measure, which would slow cost-of-living increases for Social Security (and also increase income taxes) Choose only one of the next two, or neither option: $70 Raise Social Security retirement age to 68 $245 Raise Social Security retirement age to 70 $25 Raise capital- gains and dividends taxes by 5 percentage points on high-income households (Obama proposal) $45 Raise capital-gains taxes on all house- holds. Tax dividends as ordinary income. (Clinton policy) $95 5.4 percent surtax on income above $1 million $100 Have Social Security payroll tax apply to some income above $106,800 (the current wage ceiling) $155 Gradually reduce tax break for employer-provided health insurance. $115 Allow expiration of Bush tax cuts on income above $250,000 $250 Allow expiration of Bush tax cuts on income below $250,000 $70 Gradually rising tax on carbon emissions (starting at $23 per ton of CO 2 ) $105 Tax on banks, weighted by size and riskiness of holdings $280 5 percent national sales tax, exempting education, charity and housing $20 Cancel or delay some weapons programs, like F-35 $25 Reduce Navy and Air Force fleets $40 Reduce nuclear arsenal and space-based missile defense spending $50 Reduce active military personnel by 200,000, to 1.3 million. Reduce presence in Europe and Asia $50 Reduce noncombat military compensation and overhead Choose only one of the next two, or neither option: $150 Speed up withdrawal of Iraq/Afghanistan troops to a total of 60,000 remaining by 2015 $170 Speed up withdrawal of Iraq/Afghanistan troops to a total of 30,000 remaining by 2013 DOMESTIC PROGRAMS AND FOREIGN AID MILITARY HEALTH CARE ESTATE TAX — Choose one or none INVESTMENT TAXES — Choose one or none INCOME AND EMPLOYER TAXES OTHER NEW TAXES SOCIAL SECURITY Get a Pencil. You’re Tackling the Deficit. An interactive graphic (without all the costly computer equipment): just follow the instructions to right the nation’s finances. By DAVID LEONHARDT and BILL MARSH 1 2 Below is the menu of options for plugging this $1.345 trillion hole. Yes, we know: real-world policymakers have more moves than just these. But we are presenting options that span all major sectors of the budget and many points across the political spectrum. Your options come in two flavors: cutting spending and raising tax revenue . Our menu contains almost triple the cuts and revenue hikes needed to plug the deficit, so you will be able to ignore some choices you don’t like. 3 Scan the options and consider their consequences. Then start making choices. Each option has an amount, in billions of dollars, by which it would reduce the deficit. As you make each choice, fill in that number of squares on the big grid at left. Just 1,345 squares later, presto! Problem solved. To make it easier, estimates listed below are rounded to the nearest $5 billion. The grid is organized the same way: Spending Options These total $1.81 trillion Revenue Options These total $1.955 trillion FIGURES IN BILLIONS KEY $5 BILLION $10 BILLION $100 BILLION This analysis treats Social Security as part of the total federal budget. Social Security is projected to run a deficit by 2015 and to exhaust its trust fund by 2037. (The deficit commission treated the program separately, with its own deficit to close.) Try to cut $1.345 trillion from the 2030 budget. Why 2030? That’s when boomers start to weigh heavily on the budget, and it’s the latest year for which experts have estimated costs for budget items. Each square ( ) in the big grid below represents $1 billion . Your job is to fill in these squares by choosing from our menu of spending cuts and tax hikes. $15 Enact medical malpractice reform $105 Increase the Medicare eligibility age to 70, from 65 $560 Cap Medicare growth at G.D.P. growth plus 1 percentage point, starting in 2013. Among other things, this would crack down on many hospitals and doctors with the highest costs. $20 Exempt first $5 million of estate; 35 percent tax rate $45 Exempt first $3.5 million; rate of 45 percent (2009 level and Obama proposal) $105 Exempt first $1 million; varying tax rate (policy under President Clinton) TIPS As you fill in the boxes at left, you don’t have to mimic the configurations shown below — just get the amounts right. Also, you may want to mark off squares in two colors: one for spending cuts and one for tax revenue, to see how your choices sort out. $55 Reduce mortgage deduction and other tax breaks for high-income households $175 Reduce individual and corporate tax breaks, while also cutting income and corporate tax rates; net effect is to raise taxes $315 Same as previous option, but income and corporate tax rates are cut less, raising more revenue. FILL IN THIS GRID ($1.345 TRILLION) Sources: New York Times analysis of data provided by Alan Auerbach and William Gale; Committee for a Responsible Federal Budget; Tax Policy Center; Congressional Budget Office; Sustainable Defense Task Force; Cato Institute; Economic Policy Institute; National Commission on Fiscal Responsibility and Reform; Joint Committee on Taxation; Centers for Medicare and Medicaid Services; Social Security Administration NOTES These suggested cuts would need to be implemented gradually over the next 20 years, some taking effect well before 2030 in order to keep the deficit, and thus interest payments on the national debt, at a manageable level between now and 2030. (All figures are adjusted for projected inflation and expressed in terms of 2010 dollars.) The baseline for this exercise assumes that all current policies continue, even those scheduled to expire, like the Bush tax cuts. ONLINE: NO PENCIL? Fix the budget in an interactive graphic at nytimes/weekinreview TAX REFORM — Choose one or none
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