Fiscal Policy

1. 12-a-11 I
Which of the following combinations of changes in government spending and
taxes is necessarily expansionary?
Government Spending Taxes
(A) Increase Increase
(B) Increase Decrease
(C) Decrease Not change
(D) Decrease Increase
(E) Decrease Decrease

2. 12-a-23 E
In the short run, an expansionary monetary policy would most likely result in
which of the following changes in the price level and real gross domestic product
(GDP) ?
Price Level Real GDP
(A) Decrease Increase
(B) No change Decrease
(C) Increase No change
(D) Increase Decrease
(E) Increase Increase

3. 12-a-33 I
Which of the following best explains the increase in national income that results
from equal increases in government spending and taxes?
(A) Consumers do not reduce their spending by the full amount of the tax
increase.
(B) The government purchases some goods that consumers would have
purchased on their own anyway.
(C) Consumers believe all tax cuts are transitory.
(D) The increase in government spending causes a decrease in investment.
(E) Consumers are aware of tax increases but not of increases in government
spending.

4. 12-a-38 E
An increase in the government budget deficit is most likely to result in an
increase in which of the following?
(A) The marginal propensity to consume
(B) Exports
(C) The real interest rate
(D) The money supply
(E) The simple multiplier
5. 12-a-53 I
Which of the following is true about changes in tax rates, changes in the level of
government expenditures, and changes in the money supply?
(A) They are automatic stabilizers.
(B) They are tools of discretionary fiscal policy.
(C) They have different lag times between implementation of a policy and its
effects on aggregate demand.
(D) They are favored equally by both classical and Keynesian economists to fine-
tune the economy.
(E) All are controlled by the Federal Reserve system.

6. 13-a-31 I
Which of the following policy combinations could reduce a government deficit
without changing aggregate demand?
(A) An increase in taxes and a decrease in the money supply
(B) An increase in taxes and an increase in the money supply
(C) A decrease in taxes and a decrease in the money supply
(D) A decrease in government spending and a decrease in the money supply
(E) An increase in government spending and a decrease in the money supply

7. 13-a-34 H
Following a decrease in exports, what fiscal policy would restore the economy to
the original equilibrium?
(A) An increase in the income tax rate
(B) An increase in government transfer payments
(C) A reduction in the government budget deficit
(D) An open-market purchase of bonds by the central bank
(E) An open-market sale of bonds by the central bank

8. 13-a-58 E
Expansionary fiscal policy will most likely result in
(A) A decrease in the money supply
(B) An increase in the marginal propensity to consume
(C) An increase in nominal interest rates
(D) A decrease in the level of output
(E) A decrease in the price level

9. 17-a-4 H
With an expansionary fiscal policy, what will most likely happen to the real gross
domestic product (GDP) and the nominal interest rate in the short run?
Real GDP Nominal Interest Rate
(A) Increase Decerase
(B) Increase Increase
(C) No change No change
 (D) Decrease Increase
(E) Decreaase Decrease

10. 17-a-10 I
Which of the following will happen if a country’s government reduces business
taxes?
(A) The short-run Phillips curve will shift to the right.
(B) The short-run aggregate supply curve will shift to the right.
(C) The long-run aggregate supply curve will shift to the left.
(D) The aggregate demand supply curve will shift to the left.
(E) The demand curve for loanable funds will shift to the left

11. 17-a-18 I
If the policy makers use fiscal policy to reduce inflation, which of the following
will most likely happen in the short run?
(A) The unemployment rate will decrease.
(B) The unemployment rate will increase.
(C) The real interest rate will increase.
(D) The nominal interest rate will increase.
(E) The economy will remain at the natural rate of unemployment.

12. 17-a-55 H
If the government has increased the budget deficit and interest rates have
remained constant, which of the following is true、
(A) Government spending is less than tax revenue, and the central bank increases
the money supply
(B) Government spending is greater than tax revenue, and the central bank keeps
the money supply constant.
(C) Government spending is greater than tax revenue, and the central bank
increases the money supply
(D) Government spending is greater than tax revenue, and the central bank
decreases the money supply
(E) Government spending is less than tax revenue, and the central bank keeps the
money supply constant.

13. 18-a-4 E
Which of the following statements is true about an expansionary fiscal policy?
(A) It decreases demand for loanable funds.
(B) It decreases the equilibrium price level.
(C) It decreases the equilibrium real interest rate.
(D) It increases aggregate demand.
(E) It increases the money supply.

14. 18-a-14 I
 If the United States government increases deficit spending, which of the
following will occur as a result of the change in the interest rate?
(A) The United States dollar will appreciate in foreign exchange markets.
(B) Household savings in the United States will decrease.
(C) The United States exports will increase.
(D) The demand for United States dollars will decrease.
(E) Private investment in plant and equipment in the United States will increase.

15. 18-a-17 I
An increase in government spending financed by increased borrowing will most
likely change the real interest rate and the gross private domestic investment in
which of the following ways?
Real Gross Private Interest Rate Domestic Investment
(A) No change No change
(B) Decrease Increase
(C) Decrease Decrease
(D) Increase Decrease
(E) Increase Increase

16. 18-a-19 E

A country's economy is currently in equilibrium at point R. Which of the

following policy actions could the country's government take to achieve potential
output (Y p)?
(A) Decreasing the money supply
(B) Decreasing investment tax credits
(C) Increasing interest rates
(D) Increasing government expenditures
(E) Increasing the minimum wage

17. 18-a-44 E
Which of the following is an example of fiscal policy?
(A) Decreasing income tax rates
(B) Increasing the money supply
(C) Decreasing the discount rate
(D) Selling government bonds
 (E) Decreasing the required reserve ratio

18. 18-a-47 H
In the short run, how would a government's budget deficit, national debt, and
real output change if government spending increases with no change in taxes?
Deficit Debt Real Outnut
(A) Increase Increase Decrease
(B) Increase Decrease Increase
(C) Increase Increase Increase
(D) Decrease Decrease Increase
(E) Decrease Increase Decrease

19. 18-a-55 I
When the total amount the government spends equals tax revenues in any given
year, which of the following must remain constant?
(A) The real interest rate
(B) The national debt
(C) Real gross domestic product
(D) The price level
(E) The money supply

Answer: 1 B, 2 E, 3 A, 4 C, 5 C, 6 B, 7 B, 8 C, 9 B, 10 B, 11 B, 12 C, 13 D, 14 A, 15 D,
16 D, 17 A, 18 C, 19 B