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| 1 | |
Refer to Figure 7.9 to answer this question. What is most likely to happen if the level of GDP is Y1 and government reduces its spending from G1 to G2 in an attempt to balance its budget? |
| | A) | The budget would be balanced at the new GDP level, Y2. |
| | B) | GDP would remain at Y1, but the budget would be in deficit. |
| | C) | GDP would be Y2, and the budget would be in deficit. |
| | D) | GDP would be Y2, and the budget would be in surplus. |
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| 2 | |
Refer to Figure 7.9 to answer this question. If government spending is G1 and GDP is Y1, why won’t a reduction in government spending by the size of the budget deficit eliminate the deficit? |
| | A) | Because GDP and NTR will decrease as a result of the decrease in government spending |
| | B) | Because government spending is a function of income |
| | C) | Because GDP will rise as a result of the decrease in government spending |
| | D) | Because NTR will rise as a result of the decrease in government spending |
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| 3 | |
Which of the following statements concerning a budget deficit is true? |
| | A) | It is smaller if the economy is in the midst of a severe recession. |
| | B) | It is smaller if the economy is experiencing strong aggregate demand. |
| | C) | It reduces the size of the national debt. |
| | D) | It can be measured in terms of the amount of unemployment that it causes. |
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| 4 | |
Which of the following is true if government attempts to balance its budget when the economy is in a recession and government is running a budget deficit? |
| | A) | Inflation would result. |
| | B) | The unemployment rate would decrease. |
| | C) | Government spending would have to increase. |
| | D) | GDP would increase. |
| | E) | The action would be procyclical. |
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| 5 | |
What is the effect of countercyclical fiscal policy on price level? |
| | A) | It will increase in the case of a recessionary gap. |
| | B) | It will increase in the case of a inflationary gap. |
| | C) | It will decrease in the case of a recessionary gap. |
| | D) | It will have no effect in the case of a recessionary gap. |
| | E) | It will have no effect in the case of an inflationary gap. |
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| 6 | |
Which of the following is part of the argument that, in the face of a recession, the economy is self adjusting? |
| | A) | The use of countercyclical fiscal policy |
| | B) | The desirability of keeping the national debt privately held |
| | C) | The value of “shovel-ready” public works plans |
| | D) | Flexible prices |
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| 7 | |
All of the following, except one, are arguments against the use of countercyclical fiscal policy to close a recessionary gap. Which is the exception? |
| | A) | Countercyclical fiscal policy can be inflationary. |
| | B) | Countercyclical fiscal policy is subject to serious time lags. |
| | C) | Countercyclical fiscal policy can lead to serious increases in the budget deficit. |
| | D) | Countercyclical fiscal policy can reduce budget deficits, but this would also lower the exchange rate. |
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| 8 | |
What is the result of balanced-budget fiscal policy when both a recessionary gap and a budget deficit exist? |
| | A) | The recessionary gap would be reduced, and the budget deficit would fall. |
| | B) | The recessionary gap would increase, and the budget deficit would fall. |
| | C) | The recessionary gap would be reduced, and the budget deficit would rise. |
| | D) | The recessionary gap would increase, and the budget deficit would rise. |
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