Question 1

Ceteris paribus,when income increases,federal tax revenues:
A) Decrease as taxpayers experience unemployment.
B) Decrease since income taxes are regressive.
C) Increase because automatic stabilizers work against the cyclical movements of GDP.
D) Increase because Congress typically raises the tax rates during an expansion.

Accepted Answer

Ceteris paribus, when income increases, federal tax revenues increase because automatic stabilizers, such as income taxes, naturally increase with income, helping to moderate the fluctuations of the economy without any new legislative action.

Question 2

A tax cut can best be characterized as:
A) Monetary policy only.
B) Fiscal policy only.
C) Both Monetary and supply-side policy.
D) Both fiscal and supply-side policy.

Accepted Answer

A tax cut involves reducing the amount of taxes that citizens and businesses have to pay, which can both increase disposable income and stimulate spending, as well as encourage investment and economic growth. This makes it primarily a fiscal policy tool, as it involves changes to government revenues and spending. However, a tax cut can also have supply-side effects by improving incentives for work, innovation, and investment, which can boost productivity and potential output. Therefore, a tax cut can be seen as a combination of fiscal and supply-side policies, and not necessarily related to monetary policy.

Question 3

A government spending hike can best be characterized as:
A) Fiscal policy only.
B) Both fiscal and supply-side policy.
C) Both monetary and fiscal policy.
D) Supply-side policy only.

Accepted Answer

A government spending hike is an example of fiscal policy because it involves the government altering its spending levels in order to influence the overall economy. It does not directly impact interest rates or money supply, which are key elements of monetary policy. It also does not necessarily focus on incentivizing production, which is a key element of supply-side policy.

Question 4

Automatic stabilizers include:
A) Changes in the money supply that are initiated by the Fed.
B) Discretionary fiscal policy that must be determined by Congress.
C) Government spending changes that are triggered by the economy,not government decision-makers.
D) Supply-side policies that Congress and the president design to stimulate the economy.

Accepted Answer

Automatic stabilizers refer to government policies that automatically adjust to changes in the economy without requiring explicit action by policymakers. These include changes in government spending (such as unemployment benefits or welfare payments) that increase during recessions or decreases during periods of economic growth, and changes in tax revenue (such as progressive income taxes) that increase during periods of economic growth or decrease during recessions. Automatic stabilizers are different from discretionary fiscal policy, which refers to deliberate changes in government spending or taxes aimed at stabilizing the economy in response to economic conditions. The other options listed are not examples of automatic stabilizers.

Question 5

A decrease in government expenditure shifts the aggregate:
A) Supply curve to the left.
B) Supply curve to the right.
C) Demand curve to the left.
D) Demand curve to the right.

Accepted Answer

A decrease in government expenditure reduces the overall demand in the economy because the government is spending less money on goods and services. This reduction in demand is represented by a leftward shift of the aggregate demand curve.

Question 6

Assume the economy is in a recession and has a budget deficit.Ceteris paribus,if the economy begins to expand,automatic stabilizers will cause:
A) A decrease in tax revenues.
B) An increase in government spending.
C) A decrease in the budget deficit.
D) A decrease in interest rates.

Accepted Answer

Automatic stabilizers work to reduce the severity of economic fluctuations without the need for explicit government intervention. During an economic expansion, tax revenues increase because individuals and businesses earn more, and government spending on social welfare programs (like unemployment benefits) decreases as more people find jobs. These changes naturally lead to a decrease in the budget deficit, making option C correct.

Question 7

Which of the following is an example of fiscal policy?
A) Airline Deregulation Act of 1978.
B) Jobs and Growth Tax Relief Act of 2003.
C) Americans with Disabilities Act 1990.
D) Immigration Act of 1990.

Accepted Answer

Fiscal policy refers to the government's use of taxation and spending to influence the economy. The Jobs and Growth Tax Relief Act of 2003 was a tax cut package introduced by the U.S. government to stimulate economic growth, making it an example of fiscal policy. The other options listed are not related to fiscal policy but instead focus on regulation or social issues.

Question 8

An automatic stabilizer is:
A) A government spending or tax change that automatically responds counter to the business cycle.
B) A tax cut approved by Congress prior to an election year.
C) A monetary supply or interest rate change that automatically responds counter to the business cycle.
D) Supply-side policy designed by Congress to shift aggregate supply to the right.

Accepted Answer

An automatic stabilizer is a government spending or tax change that automatically responds counter to the business cycle. For example, during an economic recession, government spending on unemployment benefits automatically increases, while tax revenue automatically decreases as people earn less income. These automatic stabilizers help stabilize the economy without the need for active government intervention or discretionary policy changes.

Question 9

Which of the following occurs automatically during a recession?
A) Tax revenues increase.
B) The budget deficit becomes greater.
C) Government spending decreases.
D) The money supply increases.

Accepted Answer

During a recession, government tax revenues typically decrease due to lower income and corporate profits, while spending on social welfare programs (like unemployment benefits) often increases. This combination leads to a larger budget deficit, as the government spends more than it collects in revenue.

Question 10

Alternating periods of economic growth and contraction are referred to as:
A) Fiscal policy.
B) The business cycle.
C) A policy lever.
D) The fiscal cycle.

Accepted Answer

Alternating periods of economic growth and contraction are referred to as the business cycle, which is a natural occurrence in the economy. Fiscal policy refers to government spending and taxation measures to stabilize the economy, while a policy lever is a tool used to influence economic activity. The fiscal cycle is not a commonly used term in economics.

Question 11

Which of the following is an example of fiscal policy?
A) The Federal Reserve cuts interest rates sharply in 2007.
B) The use of wage and price controls to curb inflation.
C) The Deficit Reduction Act of 1984.
D) Family Leave Act of 1993.

Accepted Answer

The Deficit Reduction Act of 1984 is an example of fiscal policy because it involved changes to government spending and taxation to reduce the budget deficit. The other options listed are examples of monetary policy (A), price controls (B), and social policy (D).

Question 12

Fiscal policy is determined by:
A) The Federal Reserve system.
B) Congress through government expenditures.
C) Government through regulatory agencies.
D) Businesses through investment.

Accepted Answer

Fiscal policy is determined by the government through its spending and taxation policies, which are determined by Congress. The Federal Reserve system is responsible for implementing monetary policy, which is separate from fiscal policy. Regulatory agencies are also involved in government policy, but they are not the primary determinants of fiscal policy. Businesses can influence the economy through their investment decisions, but they do not determine fiscal policy.

Question 13

Fiscal policy includes:
A) The discount rate.
B) Education and job training.
C) Changes in government spending.
D) Changes in interest rates.

Accepted Answer

Fiscal policy refers to the use of government spending and taxation to influence the economy. Therefore, changes in government spending (option C) are the best choice for fiscal policy. The statement A refers to monetary policy, B refers to human capital development, and D refers to monetary policy.

Question 14

The business cycle is defined as:
A) Alternating periods of economic growth and contraction.
B) Changing wages and prices.
C) An effort to reach full employment.
D) The growth of real GDP.

Accepted Answer

The business cycle refers to the fluctuation of economic activity over time, which includes alternating periods of economic growth and contraction. These fluctuations are observed in various economic indicators such as real GDP, employment, and inflation.

Question 15

Which of the following will increase aggregate demand?
A) Expansionary fiscal policy.
B) A decrease in the growth of the money supply.
C) A policy of laissez faire.
D) Supply-side options,such as deregulation.

Accepted Answer

Expansionary fiscal policy, such as increasing government spending or decreasing taxes, will increase aggregate demand by increasing consumer spending and investment.

Answer: D
 Supply-side options, such as deregulation and tax cuts for businesses, can also increase aggregate demand by promoting economic growth and increasing production, which in turn leads to increased employment and consumer spending.

Question 16

Automatic stabilizers include:
A) Unemployment benefits.
B) Open market operations.
C) Government deregulation.
D) Reserve requirements.

Accepted Answer

Automatic stabilizers refer to government policies that automatically respond to economic changes without the need for additional legislative action. Unemployment benefits are a form of automatic stabilizer as they provide income support to those who lose their jobs during economic downturns, helping to stabilize aggregate demand by maintaining consumer spending levels. Options B, C, and D do not fall under the definition of automatic stabilizers as they either involve the central bank's monetary policy or changes in government regulations, which require specific actions by policymakers.

Question 17

All of the following are an example of an automatic stabilizer except for:
A) A decrease in income tax revenue during a recession.
B) An increase in unemployment benefits during a recession.
C) An increase in interest rates during a period of inflation.
D) A decrease in government welfare spending during an economic expansion.

Accepted Answer

Automatic stabilizers are government programs or policies that automatically counteract economic fluctuations. Options A and B are examples of automatic stabilizers because they provide increased support to individuals during recessions. Option D is the opposite, as it decreases spending during economic expansions. Option C, however, is not an example of an automatic stabilizer as an increase in interest rates would not automatically occur during a period of inflation. It would result from the actions of the central bank or government policy.

Question 18

Which of the following is an example of fiscal policy?
A) An increase in income taxes.
B) Deregulation of financial institutions.
C) Relaxed immigration laws.
D) An increase in the discount rate.

Accepted Answer

Fiscal policy refers to actions taken by the government to manage economic activity through spending and taxation. An increase in income taxes is an example of a fiscal policy action that would impact government revenue and potentially affect economic activity.

B, C, and D are not examples of fiscal policy. Deregulation of financial institutions is an example of regulatory policy, relaxed immigration laws are an example of immigration policy, and an increase in the discount rate is an example of monetary policy.

Question 19

Fiscal policy includes:
A) Immigration policy.
B) Changes in government spending.
C) Changes in the reserve requirement.
D) Government regulation.

Accepted Answer

Fiscal policy refers to the use of government spending and taxation to influence the economy. Therefore, changes in government spending (such as increased infrastructure spending) would be an example of fiscal policy. Immigration policy, changes in the reserve requirement, and government regulation are not directly related to fiscal policy.

Question 20

Which of the following are used as policy tools?
A) Population growth,spending behavior,and invention.
B) Wars,natural disasters,and trade disruptions.
C) Taxes,government spending,and the availability of money.
D) External shocks and internal market forces.

Accepted Answer

Taxes, government spending, and the availability of money are all commonly used policy tools in macroeconomic policy. These tools can be used to control the overall level of economic activity by influencing consumer spending, investment, and overall demand for goods and services. Other options listed, such as population growth, spending behavior, wars, natural disasters, and trade disruptions, are not typically considered policy tools within macroeconomic policy. External shocks and internal market forces may influence economic conditions, but they are not directly controlled by policymakers and are therefore not considered policy tools.

Quiz 16: Theory and Reality

Ceteris paribus,when income increases,federal tax revenues:

A tax cut can best be characterized as:

A government spending hike can best be characterized as:

Automatic stabilizers include:

A decrease in government expenditure shifts the aggregate:

Assume the economy is in a recession and has a budget deficit.Ceteris paribus,if the economy begins to expand,automatic stabilizers will cause:

Which of the following is an example of fiscal policy?

An automatic stabilizer is:

Which of the following occurs automatically during a recession?

Alternating periods of economic growth and contraction are referred to as:

Which of the following is an example of fiscal policy?

Fiscal policy is determined by:

Fiscal policy includes:

The business cycle is defined as:

Which of the following will increase aggregate demand?

Automatic stabilizers include:

All of the following are an example of an automatic stabilizer except for:

Which of the following is an example of fiscal policy?

Fiscal policy includes:

Which of the following are used as policy tools?