Name: 
 

Unit 10 - PRACTICE - Fiscal Policy & Budget



Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 1. 

Regarding the federal budget, which of the following is true?
a.
A budget deficit will increase the public debt by the amount of the deficit.
b.
The President determines final spending levels for each federal department
c.
A deficit occurs for government when tax revenues exceed the sum of government purchases and transfer payments
d.
Nearly 90% of government expenditures are discretionary and can be changed from year-to-year.
 

 2. 

The multiplier effect of a one billion dollar tax increase differs from the multiplier effect of a one billion dollar decrease in government purchases because
a.
tax increases decrease the deficit; a decrease in government purchases does not.
b.
households generally maintain their level of saving even though taxes rise.
c.
households will partially pay for a tax increase by reducing their level of savings; instead part is saved.
d.
there is no difference. They both have the same effect.
 
 
Figure 202-001
nar001-1.jpg
 

 3. 

If the economy in figure 202-001 is currently operating at the y0 level of aggregate output, then the economy is in a ________ and an appropriate policy response would be to _____________.
a.
recessionary gap; cut taxes.
b.
inflationary gap; cut taxes.
c.
the recessionary gap; cut taxes.
d.
inflationary gap; raise taxes.
 

 4. 

Which of the following is an example of a fiscal policy action to fight recession?
a.
decreasing government spending
b.
increasing government spending without changing taxes
c.
increasing taxes without changing spending
d.
decreasing taxes and spending by the same dollar amount.
 

 5. 

The social security tax is placed
a.
entirely on the employer
b.
entirely on the employee
c.
half on the employer and half on the employee
d.
property owners
 

 6. 

Transfer payments are included in the government budget deficit but not included in the government component of GDP.
a.
True
b.
False
 

 7. 

The federal budget deficit becomes __________ during recessions because __________.
a.
smaller; transfer payments increase and tax revenues decline
b.
larger; transfer payments increase and tax revenues decline
c.
larger; both transfer payments and tax revenues increase
d.
smaller; both transfer payments and tax revenues increase
e.
smaller; both transfer payments and tax revenues decrease
 

 8. 

Because of automatic stabilizers, government budget deficits are
a.
positive during both expansions and contractions
b.
negative during both expansions and contractions
c.
zero if averaged out over the entire business cycle
d.
larger during expansions and smaller during contractions
e.
smaller during expansions and larger during contractions
 

 9. 

President Johnson's use of a temporary 10% "surcharge" on income taxes is a classic example of:
a.
expansionary fiscal policy.
b.
contractionary fiscal policy.
c.
expansionary monetary policy.
d.
contractionary monetary policy.
Ans: B
 

 10. 

Time lags suggest that:
a.
increases in spending to fight a recessionary gap can be timed correctly.
b.
increases in spending to fight a recessionary gay may occur too early.
c.
increases in spending to fight a recessionary gap may occur too late.
d.
none of the above is correct
 

 11. 

The fact that income tax receipts fall during a recession because people’s incomes are declining:
a.
makes the multiplier stronger.
b.
has no impact on the multiplier.
c.
acts as an automatic stabilizer in reducing the adverse effect of the initial fall in aggregate demand.
d.
acts as an automatic contractionary fiscal policy.
 

 12. 

The government budget balance equals:
a.
Taxes + Government purchases + Government transfers.
b.
Taxes -  Government purchases - Government transfers.
c.
Taxes +  Government purchases + Government transfers.
d.
Taxes + Government purchases - Government transfers.
 

 13. 

If government spending increases and taxes decrease:
a.
implicit liabilities will increase.
b.
implicit liabilities will decrease.
c.
the public debt will increase.
d.
the public debt will decrease.
 

 14. 

Suppose that U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion.  At the end of the fiscal year, the debt is:
a.
$10.5 trillion.
b.
$6.5 trillion.
c.
$9 trillion
d.
$7.5 trillion.
 

 15. 

Suppose that the budget deficit of a country remains level for five years. Which of the following would be true concerning the fiscal stance of this government?
a.
The federal debt will remain constant.
b.
The federal debt will fall.
c.
The federal debt will rise.
d.
The federal debt will either remain constant or fall.
 

 16. 

Social security is an example of an intergenerational transfer program. Taxes paid by workers this year are
a.
accumulated and invested, then paid as benefits in future years to those workers when they retire.
b.
used to pay benefits to current retirees and other social security beneficiaries.
c.
invested in stocks and bonds to help finance future retirements.
d.
used to pay off the national debt.
 



 
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