Economics Today The Macro View Canadian 15th Edition Miller Test Bank

Economics Today The Macro View
Canadian 15th Edition Miller Test Bank

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Economics Today: The Macro View, 5Ce (Miller)
Chapter 11 Fiscal Policy and the Public Debt
1) Fiscal policy refers to the

A) manipulation of the money supply so as to increase the amount of paper currency in
circulation.
B) adjustment of government spending and taxes in order to achieve certain national economic
goals.
C) adjustment of national income data for price level changes.
D) adjustment of the manner in which unemployment data is calculated so as to make it appear
that unemployment is lower than it actually is.
Answer: B
Diff: 1 Type: MC Page Ref: 286
Skill: Recall
Objective: L.O. 11.1
Graph: No graph
Numerical: Non-numerical
2) The adjustment of government spending and taxes in order to achieve certain national
economic goals refers to
A) monetary policy.
B) fiscal policy.
C) the national debt.
D) seignorage
Answer: B
Skill: Recall
Graph: No graph
3) Suppose the economy is experiencing a contractionary gap and the government increases
spending to close the gap. In the short run one would expect
A) output and the price level to remain constant.
B) output to increase and the price level to remain constant.
C) output and the price level to rise.
D) output to remain constant and the price level to rise.
Answer: C
Skill: Recall
Graph: No graph
1
Copyright © 2012 Pearson Canada Inc.
4) Suppose the economy is experiencing a inflationary gap and the government increases
C) output and the price level to rise even further .
Answer: C
Skill: Recall
Graph: No graph
5) Suppose the economy is experiencing a contractionary gap and the government decreases
C) output and the price level to fall.
Answer: C
Skill: Recall
Graph: No graph
6) Suppose the economy is experiencing a inflationary gap and the government decreases
C) output and the price level to fall.
Answer: C
Skill: Recall
Graph: No graph
2
7) If the government wants to increase real GDP levels, it could
A) increase government expenditures.
B) increase taxes.
C) decrease government expenditures.
D) decrease government expenditures and increase taxes.
Answer: A
Skill: Applied
Graph: No graph
8) If the government wants to decrease real GDP levels, it could

A) increase government expenditures.
B) increase taxes.
C) wait for inflationary pressure to come.
Answer: B
Skill: Applied
Graph: No graph
9) If the government wants to increase real GDP levels, it could

A) decrease government expenditures.
B) decrease taxes.
C) decrease government expenditures.
Answer: B
Skill: Applied
Graph: No graph
3
10) An inflationary gap is
A) the difference between aggregate supply and aggregate demand.
B) the amount of unwanted inventory accumulation.
C) the amount by which taxes should be increased in order to put the brakes on run-away
inflation.
D) the amount by which the equilibrium level of real GDP exceeds the long-run equilibrium
level as given by LRAS.
Answer: D
Skill: Applied
Graph: No graph
11) A contractionary gap is

A) the difference between aggregate supply and aggregate demand.
B) the amount of unwanted inventory accumulation.
inflation.
D) the amount by which the equilibrium level of real GDP is less than the long-run equilibrium
level as given by LRAS.
Answer: D
Skill: Applied
Graph: No graph
12) The amount by which the equilibrium level of real GDP exceeds the long-run equilibrium
level as given by LRAS is referred to as
A) a contractionary gap.
B) economic growth.
inflation.
D) an inflationary gap.
Answer: D
Skill: Applied
Graph: No graph
4
13) The amount by which the equilibrium level of real GDP is less than the long-run equilibrium
level as given by LRAS is referred to as
A) a contractionary gap.
B) economic growth.
inflation.
D) an inflationary gap.
Answer: A
Skill: Applied
Graph: No graph
14) If the government wants to engage in fiscal policy to close a recessionary gap, it should
A) increase government spending in order to increase aggregate supply.
B) decrease government spending in order to increase aggregate supply.
C) increase government spending in order to increase aggregate demand.
D) decrease government spending in order to decrease aggregate demand.
Answer: C
Skill: Applied
Graph: No graph
15) If the government wants to engage in fiscal policy to close an inflationary gap, it should
A) increase government spending in order to increase aggregate supply.
B) decrease government spending in order to increase aggregate supply.
C) increase government spending in order to increase aggregate demand.
D) decrease government spending in order to decrease aggregate demand.
Answer: D
Skill: Applied
Graph: No graph
5
16) If the government increases spending to move the economy closer to full employment, the
government is most likely trying to
A) close a contractionary gap by increasing aggregate demand.
B) close a contractionary gap by raising the price level.
C) close an expansionary gap by increasing aggregate demand.
D) close an expansionary gap by increasing aggregate supply.
Answer: A
Skill: Applied
Graph: No graph
17) If the government decreases spending to move the economy closer to full employment, the
government is most likely trying to
A) close a contractionary gap by increasing aggregate demand.
B) close a contractionary gap by raising the price level.
C) close an expansionary gap by decreasing aggregate demand.
D) close an expansionary gap by increasing aggregate supply.
Answer: A
Skill: Applied
Graph: No graph
18) Contractionary fiscal policy is designed to

A) reduce real national income and increase the price level.
B) reduce real national income and reduce the price level.
C) raise both real national income and the price level.
D) raise the price level only.
Answer: B
Skill: Recall
Graph: No graph
6
19) Expansionary fiscal policy is designed to
A) increase real national income and increase the price level.
B) reduce real national income and reduce the price level.
C) raise both real national income and the price level.
D) raise the price level only.
Answer: A
Skill: Recall
Graph: No graph
20) Which of the following statements about fiscal policy is TRUE?

A) Real GDP can be increased above its long-run equilibrium only in the short run.
B) Real GDP can never be increased above its long-run equilibrium, even for a brief period of
time.
C) Government can shift the aggregate demand curve inward by increasing spending.
D) Government can shift the aggregate demand curve outward by reducing spending.
Answer: A
Skill: Applied
Graph: No graph
21) Which of the following statements about fiscal policy is FALSE?

A) Real GDP can be increased above its long-run equilibrium only in the short run.
B) Real GDP is expanding over time in the long-run.
C) Government can shift the aggregate demand curve inward by decreasing spending.
D) Government can shift the aggregate demand curve outward by reducing spending.
Answer: D
Skill: Applied
Graph: No graph
7
22) According to traditional Keynesian analysis, fiscal policy operates by
A) informing consumers and business people about its plans for the economy so they will know
how to adjust their behaviour.
B) indirectly affecting aggregate demand through its effect on interest rates.
C) directly affecting aggregate demand.
D) directly affecting aggregate supply.
Answer: C
Skill: Recall
Graph: No graph
23) To close a recessionary gap through fiscal policy, the government should
A) decrease government spending in order to increase aggregate supply.
B) increase government spending in order to increase aggregate demand.
C) reduce taxes in order to stimulate investment, and thus increase aggregate supply.
D) increase government spending and taxes in order to both increase aggregate demand and
aggregate supply.
Answer: B
Skill: Recall
Graph: No graph
24) Suppose the economy is at an equilibrium on the LRAS curve and the government increases
spending. In the short run one would expect
A) output and prices to increase.
B) output to remain constant and prices to increase.
C) output to increase and prices to remain constant.
D) output and prices to remain constant.
Answer: A
Skill: Recall
Graph: No graph
8
25) Suppose the economy is at an equilibrium on the LRAS curve and the government decreases
spending. In the short run one would expect
A) output and prices to decrease.
B) output to remain constant and prices to increase.
C) output to increase and prices to remain constant.
D) output and prices to remain constant.
Answer: A
Skill: Recall
Graph: No graph
26) Suppose the economy is in equilibrium on the LRAS curve and government spending
increases. In the long run
A) prices and output will return to the original levels.
B) prices will increase, but output will return to the original level.
C) prices and output will increase.
D) output will increase and prices will decrease.
Answer: B
Skill: Applied
Graph: No graph
27) Suppose there is a contractionary gap and the economy is in equilibrium on the SRAS at an
output level beyond the economy's long-run real GDP. In the short run, if the government
decreases spending then
A) output will decrease but prices will rise.
B) output will increase but prices will fall.
C) output and prices will fall.
D) output and prices will rise.
Answer: C
Skill: Recall
Graph: No graph
9
28) Suppose there is a contractionary gap and the economy is in equilibrium on the SRAS at an
output level beyond the economy's long-run real GDP. In the short run, if the government
increases spending then
A) output will decrease but prices will rise.
B) output will increase but prices will fall.
C) output and prices will fall.
D) output and prices will rise.
Answer: D
Skill: Recall
Graph: No graph
29) Suppose the economy is at a short run equilibrium and is beyond the economy's long run
potential level of real GDP. Which of the following fiscal policies would reduce output and
prices in the short run?
A) an increase in government spending
B) a reduction in taxes
C) an increase in taxes
D) an increase in interest rates
Answer: C
Skill: Recall
Graph: No graph
30) Suppose the economy is at a short run equilibrium in recession. Which of the following fiscal
policies would increase output and prices in the short run?
A) a decrease in government spending
Answer: B
Skill: Recall
Graph: No graph
10
31) Suppose the economy is at a short run equilibrium and is beyond the economy's long run
potential level of real GDP. Which of the following fiscal policies would increase output and
prices in the short run?
A) a decrease in government spending
Answer: B
Skill: Recall
Graph: No graph
32) Suppose the economy is at a short run equilibrium in recession. Which of the following fiscal
policies would decrease output and prices in the short run?
A) an increase in government spending
Answer: C
Skill: Recall
Graph: No graph
33) To shift the aggregate demand curve inward and thereby reduce an expansionary gap, the
government could
A) increase taxes.
B) increase government spending.
C) decrease government spending.
D) increase Social Security benefits.
Answer: C
Skill: Applied
Graph: No graph
11
34) To shift the aggregate demand curve outward and thereby reduce a contractionary gap, the
government could
A) increase taxes.
B) increase government spending.
C) decrease government spending.
D) increase Social Security benefits.
Answer: B
Skill: Applied
Graph: No graph
35) If the government increases government spending, then the

A) short-run aggregate supply curve shifts to the right.
B) long-run aggregate supply curve shifts to the left.
C) aggregate demand curve shifts to the right.
D) aggregate demand curve shifts to the left.
Answer: C
Skill: Recall
Graph: No graph
36) If the government increases taxes, then the

Answer: D
Skill: Recall
Graph: No graph
12
37) If the government decreases government spending, then the
Answer: D
Skill: Recall
Graph: No graph
38) If the government decreases taxes, then the

Answer: C
Skill: Recall
Graph: No graph
39) If the government increases aggregate demand when the economy is at both short-run and
long-run equilibrium, the full long-run effect of this fiscal policy will be to
A) increase real GDP.
B) increase the price level.
C) increase either the real GDP or the price level, depending on the length of the time lag.
D) decrease both real GDP and the price level.
Answer: B
Skill: Applied
Graph: No graph
13
40) If the government decreases aggregate demand when the economy is at both short-run and
long-run equilibrium, the full long-run effect of this fiscal policy will be to
A) decrease real GDP.
B) decrease the price level.
C) decrease either the real GDP or the price level, depending on the length of the time lag.
D) decrease both real GDP and the price level.
Answer: B
Skill: Applied
Graph: No graph
41) Suppose the government increases lump-sum taxes. This causes

A) disposable income to decrease, which causes consumption spending to decrease and
aggregate demand to decrease.
B) government spending to decrease, which causes aggregate demand to decrease.
C) consumption spending to decrease and spending on imports to increase. The effect on
aggregate demand depends on whether domestic spending or spending on imports decreased the
most.
D) disposable income to decrease, which causes aggregate supply to decrease.
Answer: A
Skill: Applied
Graph: No graph
42) Suppose the government decreases lump-sum taxes. This causes

A) disposable income to increase, which causes consumption spending to increase and aggregate
demand to increase.
B) government spending to increase, which causes aggregate demand to increase.
C) consumption spending to decrease and spending on imports to increase. The effect on
aggregate demand depends on whether domestic spending or spending on imports decreased the
most.
D) disposable income to increase, which causes aggregate supply to increase.
Answer: A
Skill: Applied
Graph: No graph
14
43) When the economy is operating on the LRAS curve, then expansionary fiscal policy will
A) generate higher prices in the short run, but will induce aggregate supply to increase in the
long run.
B) generate an increase in real national income and higher prices in both the short run and the
long run.
C) generate an increase in real national income without higher prices in the short run, but then
real national income will return to its long-run level and the price level will increase.
D) generate an increase in real national income and higher prices in the short run, but then real
national income will decrease to its long-run level and the price level will increase some more.
Answer: D
Skill: Applied
Graph: No graph
44) If the economy is at an output level below the LRAS curve, which of the following fiscal
policies would likely lead to a higher equilibrium level of real GDP in the short run?
A) decrease government spending
B) increase taxes
C) increase government spending and/or reduce taxes
D) decrease government spending and/or increase taxes
Answer: C
Skill: Recall
Graph: No graph
45) If the economy is at an output level above the LRAS curve, which of the following fiscal
policies would likely lead to a lower equilibrium level of real GDP in the short run?
A) increase government spending
B) decrease taxes
C) increase government spending and/or reduce taxes
D) decrease government spending and/or increase taxes
Answer: D
Skill: Recall
Graph: No graph
15
46) To reduce an expansionary gap, the government could
A) decrease taxes.
B) increase taxes.
C) increase spending on goods and services.
D) increase military spending.
Answer: B
Skill: Applied
Graph: No graph
47) When the economy is operating on its long-run aggregate supply curve and the government
initiates an expansionary fiscal policy, the result is
A) a permanent increase in real national income and a permanent increase in the price level.
B) a temporary increase in real national income and a temporary increase in the price level.
C) a temporary increase in real national income and an increase in the price level, followed by a
reduction of real national income to its original level and a further increase in the price level.
D) a temporary increase in real national income and an increase in the price level, followed by a
further increase in the price level.
Answer: C
Skill: Applied
Graph: No graph
48) If the economy is experiencing an inflationary gap and the government wants to speed up the
adjustment to full employment, the government should
A) increase aggregate supply by cutting spending.
B) reduce aggregate supply by cutting spending or raising taxes.
C) reduce aggregate demand by cutting taxes or raising spending.
D) reduce aggregate demand by cutting spending or raising taxes.
Answer: D
Skill: Applied
Graph: No graph
16
49) If the economy is experiencing a recessionary gap and the government wants to speed up the
adjustment to full employment, the government should
A) increase aggregate supply by cutting spending.
B) reduce aggregate supply by cutting spending or raising taxes.
C) increase aggregate demand by cutting taxes or raising spending.
D) reduce aggregate demand by cutting spending or raising taxes.
Answer: C
Skill: Applied
Graph: No graph
Figure 11-1
50) In Figure 11-1, assume that the economy is originally at E2. If the government imposes
contractionary economic policies, it is likely that
A) the new equilibrium will be E3.
B) the new equilibrium will be E1.
C) the price level will rise to 120.
D) aggregate demand will be represented by the AD1 line.
Answer: A
Skill: Applied
Graph: With graph
17
51) In Figure 11-1, assume that the economy is originally at E1. If the government imposes
contractionary economic policies, it is likely that
A) the new equilibrium will be E3.
B) the new equilibrium will be E2.
C) the price level will fall to 110.
D) aggregate demand will be represented by the AD2 line.
Answer: A
Skill: Applied
Graph: With graph
52) If other factors are held constant and the federal government increases its borrowing from the
private sector in order to pay for an increased budget deficit, the result will be
A) an overall increase in the interest rate.
B) an overall decrease in the interest rate.
C) a cancelling of the crowding out effect.
D) an increase in net exports.
Answer: A
Skill: Recall
Graph: No graph
53) If the government increases spending but doesn't raise taxes,

A) aggregate demand will increase without any effect on the price level.
B) borrowing by the government will take place.
C) the government will have to sell some assets, such as oil and national parks.
D) the government will have to either lower expenditures or raise taxes the next year.
Answer: B
Skill: Applied
Graph: No graph
18
54) If the government increases spending while holding taxes constant, we expect
A) an increase in investment spending by businesses too, as they anticipate future economic
growth.
B) a decrease in saving as consumers follow suit and also increase borrowing.
C) investment spending by businesses to increase.
D) interest rates to rise.
Answer: D
Skill: Recall
Graph: No graph
55) If the government holds spending constant while decreasing taxes, we expect
A) an increase in investment spending by businesses too, as they anticipate future economic
growth.
B) a decrease in saving as consumers follow suit and also increase borrowing.
C) investment spending by businesses to increase.
D) interest rates to rise.
Answer: D
Skill: Recall
Graph: No graph
56) If the government began providing free textbooks to college students who were already
buying textbooks from the private sector, the government's action would result in
A) an increase in real GDP.
B) crowding out the private sector.
C) a ricardian dilemma.
D) a reduction of the government deficit.
Answer: B
Skill: Applied
Graph: No graph
19
57) Expansionary fiscal policy falls short of its goal. Some economists claim it is due to indirect
crowding out. What evidence is consistent with this claim?
A) A reduction in consumer spending
B) The interest rate increased
C) Saving increased
D) The price level increased
Answer: B
Skill: Applied
Graph: No graph
58) Three candidates for political office disagree over the benefits of enlarging the federal budget
deficit. Candidate C says the stimulation package is needed to increase employment and national
income; Candidate D says it will only cause higher prices; and Candidate F says it will have no
real effect. How do the three candidates differ with respect to the condition of the economy and
the effects of fiscal policy?
A) Candidate C thinks the simple Keynesian model is applicable, while D thinks the
expansionary policy will crowd out private investment. F believes the economy is at full
employment.
B) Candidate C thinks the simple Keynesian model is applicable; D thinks the short-run
aggregate supply curve is upward sloping; and F thinks the expansionary policy will generate
lower interest rates.
C) Candidate C thinks the economy is at less than full employment and that the short-run
aggregate supply curve is horizontal. Candidate D believes the economy is at full employment,
while Candidate F believes the expansionary policy will be offset completely.
D) Candidate C thinks the short-run aggregate supply curve is upward sloping; D thinks interest
rates will rise; and F thinks the economy is at full employment.
Answer: C
Skill: Applied
Graph: No graph
20
59) "Expansionary fiscal policy is always 100 percent effective when the short-run aggregate
supply curve is horizontal." Is this statement true?
A) Yes
B) Yes, when the long-run aggregate supply curve is horizontal too
C) No, because crowding out could take place
D) No, because the increased spending may cause the price level to increase
Answer: C
Skill: Recall
Graph: No graph
60) The tendency for expansionary fiscal policy to cause a reduction in planned investment
spending by the private sector is called
A) the indirect effect.
B) the interest rate effect.
C) the crowding-out effect.
D) the Laffer effect.
Answer: C
Skill: Recall
Graph: No graph
61) When interest rates increase in Canada, the value of the dollar is likely to
A) increase and net exports are likely to decline.
B) decrease and net exports are likely to decline.
C) increase and net exports are likely to increase.
D) remain constant and net exports are likely to remain unchanged.
Answer: A
Skill: Applied
Graph: No graph
21
62) When interest rates decrease in Canada, the value of the dollar is likely to
A) increase and net exports are likely to decline.
B) decrease and net exports are likely to increase.
C) increase and net exports are likely to increase.
D) remain constant and net exports are likely to remain unchanged.
Answer: B
Skill: Applied
Graph: No graph
63) When private expenditures decrease as a result of increased government spending, it is

known as
A) the stabilizer effect.
B) the crowding out effect.
C) the multiplier effect.
D) government deficit spending.
Answer: B
Skill: Recall
Graph: No graph
64) The crowding out effect is usually associated with

A) a temporary change in taxes.
B) an increase in the rate of interest following government borrowing.
C) the reinforcing impact of provincial tax changes on federal tax changes.
D) the impact of a tax cut when the aggregate supply function is horizontal.
Answer: B
Skill: Recall
Graph: No graph
22
65) The crowding-out effect refers to the tendency of expansionary fiscal policy to
A) cause decreases in planned investment or planned consumption in the private sector.
B) cause households to save less.
C) replace low skilled labour with higher skilled labour.
D) cause firms to produce beyond capacity.
Answer: A
Skill: Recall
Graph: No graph
66) If increased government spending has no effect on either the level of real national income or
the price level, we know that
A) the economy was already at full employment.
B) the crowding out of private sector investment spending and consumption spending was
complete.
C) the interest rate effect was small.
D) the government spending was on goods and services the people didn't value.
Answer: B
Skill: Recall
Graph: No graph
67) The possibility of indirect crowding out suggests that, if the government wants to engage in
expansionary policy, it must
A) increase spending less than the simple Keynesian model would predict.
B) increase spending more than the simple Keynesian model would predict.
C) reduce taxes rather than increase government spending.
D) both reduce taxes and reduce spending to be able to achieve full employment.
Answer: B
Skill: Applied
Graph: No graph
23
Figure 11-2
68) Assume the economy was at E in Figure 11-2 and the government increased spending. If the
aggregate demand curve initially shifted to AD2, but then fell back to AD3, then we know that
A) the multiplier is larger than the government thought.
B) the economy will experience an expansionary gap.
C) some planned private investment spending has been crowded out.
D) planned private investment spending unexpectedly increased.
Answer: C
Skill: Applied
Graph: With graph
69) In Figure 11-2, if the government increases government spending to shift aggregate demand
from AD1 to AD2, but aggregate demand only increases to AD3, then it is likely that
A) price increases are preventing the full multiplier effect from taking place.
B) consumers have increased saving to prepare for higher taxes in the future.
C) investment spending has fallen by an amount equal to the increase in government spending.
D) the government also reduced taxes.
Answer: B
Skill: Applied
Graph: With graph
24
70) If government spending is increased without a raise in taxes, net exports will eventually
decrease due to a rise in interest rates. This phenomenon is known as the
A) supply-side effect.
B) marginal boost.
C) Paris factor.
D) net export effect.
Answer: D
Skill: Recall
Graph: No graph
71) Suppose the government lowered marginal tax rates from 50 percent to 30 percent. This
would be an example of
A) crowding out.
B) demand-side economics.
C) an expansionary fiscal policy.
D) a contractionary fiscal policy.
Answer: C
Skill: Recall
Graph: No graph
72) Suppose the government increased marginal tax rates from 30 percent to 50 percent. This
would be an example of
A) crowding out.
B) demand-side economics.
C) an expansionary fiscal policy.
D) a contractionary fiscal policy.
Answer: D
Skill: Recall
Graph: No graph
25
73) Supply side economics refers to
A) attempts at increasing aggregate demand to coincide with the long-run aggregate supply.
B) attempts at creating incentives that will generate increased productivity and output.
C) selecting fiscal policy so that the revenues of the federal government are maximized.
D) all attempts at increasing government spending and narrowing the budget deficit.
Answer: B
Skill: Applied
Graph: No graph
74) One part of the supply-side economics argument is that

A) lower marginal tax rates are needed to get Parliament to spend less money.
B) lower marginal tax rates can increase total tax revenues.
C) the marginal tax rate should be set at 50 percent.
D) the relevant aggregate supply curve is close to horizontal.
Answer: B
Skill: Recall
Graph: No graph
75) Lower marginal tax rates can increase total tax revenues is a tenet of
A) deficit financing.
B) the supply-side economics argument.
C) the flat -tax proposition.
D) mercantilism.
Answer: B
Skill: Recall
Graph: No graph
26
76) A recent government proposal to increase marginal taxes on those making over $200,000 a
year will generate $100 billion in new tax revenues. A supply-side economist would argue that
the actual revenue raised will be
A) less than $100 billion because some people will respond by working less.
B) exactly $100 billion because there are no offsetting factors to a tax increase.
C) more than $100 billion because lower income people will work harder when they perceive the
tax system is more fair.
D) more than $100 billion because interest rates will also be affected.
Answer: A
Skill: Applied
Graph: No graph
77) According to supply-side economists, lower marginal tax rates will not necessarily lead to
lower tax revenues because
A) the crowding out effect does not apply to taxes.
B) an increase in tax rates increases the opportunity cost of labour.
C) the aggregate supply curve will shift inward to the left if the tax rates are lowered.
D) the lower marginal tax rates will be applied to a growing tax base due to economic growth.
Answer: D
Skill: Recall
Graph: No graph
78) If the economy is below its full-employment level of real national income, a supply-side
economist would argue the appropriate policy is
A) expansionary fiscal policy by lowering marginal tax rates.
B) expansionary fiscal policy of increasing government spending.
C) lowering marginal tax rates on people and raising them on corporations.
D) leaving the economy alone and letting the natural forces bring it into a long-run equilibrium.
Answer: A
Skill: Recall
Graph: No graph
27
79) According to the new classical economists, increases in government spending
unaccompanied by tax increases will not necessarily increase aggregate demand because
A) consumers will consume less and save more to prepare for increased taxes in the future.
B) the private sector is more likely than the public sector to spend any extra income on national
defense.
C) consumers will increase their consumption proportionately more than Keynesian economists
believe they will.
D) consumers will save less than they otherwise would have.
Answer: A
Skill: Applied
Graph: No graph
80) The Ricardian equivalence theorem states that

A) an increase in government spending has no effect on aggregate supply.
B) increases in government spending have a larger impact on real national income than decreases
in taxes.
C) an increase in the government budget deficit created by a current tax cut has no effect on
aggregate demand.
D) an increase in the government budget deficit has no effect on real national income because it
only affects the price index.
Answer: C
Skill: Recall
Graph: No graph
81) The net export effect occurs when

A) increased government spending is used to buy goods made in foreign countries.
B) Canadians invest overseas because they believe the government is spending and taxing too
much.
C) increased borrowing by the government due to expansionary fiscal policy generates a change
in the exchange rate that causes net exports to fall.
D) expansionary fiscal policy induces people to migrate to other countries.
Answer: C
Skill: Recall
Graph: No graph
28
82) The period between the recognition of a problem and the implementation of a policy to solve
the problem is
A) the recognition lag.
B) the action time lag.
C) the effect time lag.
D) the fine tuning lag.
Answer: B
Skill: Recall
Graph: No graph
83) The effect time lag of fiscal policy refers to

A) the time needed for Parliament to enact a policy.
B) the delay in recognizing an economic problem.
C) the time that elapses between the onset of a policy and the results of that policy on the
economy.
D) the difficulty in getting the Prime Minister and Parliament to agree on an appropriate policy.
Answer: C
Skill: Recall
Graph: No graph
84) The time that is required to collect information about the current state of the economy is
known as the
A) recognition time lag.
B) action time lag.
C) effect time lag.
D) fiscal lag.
Answer: A
Skill: Recall
Graph: No graph
29
85) Fiscal policy may end up being destabilizing to an economy because
A) there is never a long enough time lag.
B) the economy is almost always at full employment.
C) the Prime Minister may have different goals than Parliament.
D) various time lags associated with fiscal policy cause the policy changes to take effect too late
to solve the problem that it was supposed to solve.
Answer: D
Skill: Applied
Graph: No graph
86) Multiplier effects take time to work through the economy, which is known as the
A) action time lag.
B) effect time lag.
C) recognition time lag.
D) Ricardian-equivalence time lag.
Answer: B
Skill: Recall
Graph: No graph
87) The various time lags involved with fiscal policy imply that
A) fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long
run.
B) fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups
and downs.
C) fiscal policy may often be destabilizing as the effects of the policy kick in after the need is
over.
D) when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the
full-employment level of real national income.
Answer: C
Skill: Recall
Graph: No graph
30
88) A bill is submitted to Parliament in January 2001 that is designed to stimulate the economy
and increase employment. The legislation is passed in September 2001, and the spending occurs
from October 2001 to March 2002. Consequently
A) the full effect of the fiscal policy change will not be felt until after March 2002 because of the
effect time lag.
B) the full effect of the fiscal policy change will not be felt until after March 2002 because of the
recognition time lag.
C) the full effect of the fiscal policy change will be felt by March 2002 because people anticipate
the spending and change their behaviour accordingly.
D) the full effect of the fiscal policy change will be felt when the last of the monies are spent by
the government.
Answer: A
Skill: Applied
Graph: No graph
89) One characteristic of built-in or automatic stabilizers is that

A) they require no legislative action by Parliament to be made effective.
B) they automatically produce surpluses during recessions and deficits during inflation.
C) they have no effect on the distribution of income.
D) they reduce the size of the public debt during times of recession.
Answer: A
Skill: Recall
Graph: No graph
90) Automatic stabilizers are

A) provisions that cause changes in government spending and taxes that do not take the action of
Parliament.
B) the policies set by certain committees in Parliament.
C) the tools used by the Prime Minister's Council of Economic Advisers.
D) provisions that cause the aggregate supply curve to be upward sloping.
Answer: A
Skill: Recall
Graph: No graph
31
91) Automatic stabilizers
A) shorten the recognition lag of discretionary fiscal policy.
B) often are destabilizing in the economy because of the various lags associated with any kind of
fiscal policy.
C) provide signals to Parliament about changes in fiscal policy that need to be made to keep the
economy operating at its full employment level.
D) moderate changes in disposable income resulting from changes in overall business activity.
Answer: D
Skill: Recall
Graph: No graph
92) An example of an automatic stabilizer is

A) unemployment compensation.
B) a surtax to slow down an overheated economy.
C) a horizontal aggregate supply curve.
D) a change in the marginal tax rates.
Answer: A
Skill: Applied
Graph: No graph
93) An advantage of automatic stabilizers over discretionary fiscal policy is that

A) automatic stabilizers are not subject to all the same time lags that discretionary fiscal policy
is.
B) automatic stabilizers can be easily fine-tuned to move the economy to full employment.
C) only the Prime Minister is involved in implementing automatic stabilizers instead of both the
Prime Minister and Parliament.
D) the Ricardian equivalence theorem applies more readily to automatic stabilizers than to
discretionary fiscal policy.
Answer: A
Skill: Applied
Graph: No graph
32
94) In the Canadian economy, the progressive income tax and employment insurance are both
A) destabilizers.
B) discretionary parliamentary effectors.
C) automatic stabilizers.
D) time lag factors.
Answer: C
Skill: Recall
Graph: No graph
95) A recent government proposal to increase marginal tax rates on the wealthiest 2 percent of
Canadians is supposed to generate an additional $100 million in tax revenues. It is likely that
A) the actual revenue raised will exceed the $100 million as the other 98 percent of the
population will increase their work effort with a more fair tax system.
B) the actual revenue raised will be more than $100 million because the short-run aggregate
supply curve is upward sloping.
C) the actual revenue raised will be less than $100 million because some of the people will
respond by working less and making less income that can be taxed.
D) the actual revenue raised will be close to $100 million because the wealthy don't respond to
work incentives the way poorer workers do.
Answer: C
Skill: Applied
Graph: No graph
96) When national income falls, which of the following will automatically occur?
A) a decrease in tax rates
B) a decrease in tax revenues
C) a decrease in unemployment compensation expenditures
D) an increase in tax revenues
Answer: B
Skill: Applied
Graph: No graph
33
Figure 11-3
97) As the economy expands from Y2 to Y3 in Figure 11-3,

A) a budget surplus is created.
B) a budget deficit is created.
C) tax revenues fall.
D) government transfers rise.
Answer: A
Skill: Applied
Graph: With graph
98) We know that discretionary fiscal policy

A) is never effective.
B) is always effective.
C) is most effective during normal times.
D) is most effective during abnormal times.
Answer: D
Skill: Recall
Graph: No graph
34
99) During which time should the multiplier be largest?
A) Normal times
B) Times of war
C) In the middle of expansions
D) Times of stagflation
Answer: B
Skill: Recall
Graph: No graph
100) Suppose there are two policy options facing a vote in Parliament. In the first, government
spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A
Keynesian economist would argue for
A) the tax option because it also affects the incentives workers face. Long-run aggregate supply
will increase with the tax cut, but not with the spending increase.
B) the tax option because it is easier to pass. The effects on total spending would be identical.
C) the spending option because it won't affect the deficit the way the tax cut would.
D) the spending option because it has a bigger impact on total spending. The spending directly
raises total spending plus it works through the multiplier, while the tax cut only works through
the multiplier.
Answer: D
Skill: Applied
Graph: No graph
101) Explain how fiscal policy can correct a contractionary gap.

Answer: A contractionary gap can be closed by an increase in aggregate demand. By increasing
government spending, aggregate demand increases, closing the gap.
Diff: 1 Type: ES Page Ref: 286
Skill: Recall
Graph: No graph
35
102) Explain what fiscal policy actions could eliminate an inflationary gap.
Answer: An inflationary gap exists when real GDP exceeds potential GDP. To eliminate the
inflationary gap and restore the economy to full employment, the government could decrease its
expenditure on goods and services, raise taxes, or do both. Both a decrease in government
expenditure and a rise in taxes decrease aggregate demand and move the economy back towards
full employment.
Skill: Recall
Graph: No graph
103) Suppose the government believes the economy is operating beyond the full-employment
real GDP. What kind of fiscal policy would it pursue? Would it matter if the belief was correct or
not? How?
Answer: The government would initiate contractionary fiscal policy and either reduce
government spending or increase taxes. The aggregate demand curve shifts to the left. With an
upward-sloping short-run aggregate supply curve, real GDP falls and the price level falls. If the
government was wrong, real GDP falls below the full-employment level until people realize the
actual conditions, when real GDP returns to its original level and price level falls further.
Skill: Applied
Graph: No graph
104) A country reports that its government spending is $950 billion while tax revenues total
$500 billion. Does the country have a budget surplus or deficit and what is the surplus or deficit?
Answer: The deficit equals $450 billion.
Skill: Applied
Graph: No graph
Numerical: Numerical
36
105) What are direct expenditure offsets and what are their effects on the effectiveness of fiscal
policy?
Answer: Direct expenditure offsets are actions on the part of the private sector in spending
money that offset government fiscal policy actions. When government spending competes with
the private sector, direct expenditure offsets may occur. If the government provides lunches for
children in school, families can reduce their expenditures on food to some extent. The
effectiveness of fiscal policy is reduced when private spending varies inversely with government
spending.
Skill: Recall
Graph: No graph
106) Suppose the economy is currently in short-run and long-run equilibrium. Describe the
process of how the government "crowds out" private investment even further than if in a
recession.
Answer: Because the factors of production are in limited supply at potential output, the
increased government expenditures results in prices being bid up even further and the proportion
of resources going to the public sector becomes relatively larger compared to the private sector.
Skill: Applied
Graph: No graph
107) Suppose the government pursues expansionary fiscal policy by lowering tax rates. What are
the expected demand-side effects? What are the possible offsets to the demand-side effect? How
might supply-side effects change these results?
Answer: Aggregate demand increases as consumption spending increases after the increase in
disposable income. Crowding out and the open market effects can offset this if the government
must borrow more and interest rates increase and if people anticipate higher future taxes they
may increase saving. The supply-side effect may be to generate more productivity as people have
a greater incentive to work with the lower tax rates. Tax revenues may not decrease. If the
government doesn't have to borrow more, interest rates don't change and there is no crowding out
or open economy effects.
Skill: Recall
Graph: No graph
37
108) What are the various time lags that affect discretionary fiscal policy, and what are their
effects?
Answer: The recognition lag refers to the time it takes before economic problems can be
identified; the action time lag is the time required between recognizing the problem and putting
policy into effect; and the effect time lag is the time that elapses between the onset of policy and
the results of that policy. The result is that the effects of a change in fiscal policy may take hold
only after the problem no longer exists, and may exacerbate a different problem.
Skill: Recall
Graph: No graph
109) What are automatic stabilizers? How do they help stabilize economic activity?
Answer: Automatic stabilizers are features of fiscal policy that stabilize economic activity
without the need for explicit policy action by the government. Automatic stabilizers include
induced taxes, employment insurance, and induced transfer payments. To see how automatic
stabilizers work, consider a recessionary period in which output is less than potential output.
With lower output, income tax revenue is lessened. As the economy moves into a recession,
transfer payments, such as Employment Insurance benefits, increase. The increase in induced
transfer payments helps keep peoples disposable incomes higher than it otherwise would be so
consumption expenditure does not decrease by as much as it otherwise would, and real output
falls by less than it would have otherwise.
Skill: Recall
Graph: No graph
110) What are the effects of fiscal policy during normal times? What are the effects of fiscal
policy during abnormal times?
Answer: During normal times, discretionary fiscal policy is not very effective and may actually
cause more harm than good. The various time lags and the possible offsets make it fairly
ineffective as a tool. During a major recession, fiscal policy is more likely to be effective, since
the offsets are less likely.
Skill: Recall
Graph: No graph
38
111) Explain why government deficits are related to current account deficits.
Answer: When the government runs a deficit, if Canadians are using their savings to finance the
deficit, business investment must then come from abroad. As a result, the current account goes
into deficit the outflow of capital exceeds to a large measure, the capital flowing into Canada.
Skill: Recall
Graph: No graph
112) Explain, along with an appropriate graphical representation, what a fiscal policy is and how
it is implemented through a change in government spending and a change in taxes.
Answer: Fiscal policy is the deliberate, discretionary changes in government expenditures
and/or taxes to achieve certain national economic goals. If the economy is below (above) its
long-run position then increase (decrease) government spending or decrease (increase) taxes for
the desired effect. Graph required.
Skill: Recall
Graph: No graph
113) The size of the federal government debt is astounding! Comment relative to the national
debt and the relative size of the Federal budget balance.
Answer: A proper discussion of the deficits of the government and how they increase the
national debt. Further, the size of the debt relative to GDP should be discussed as well as the
time value of money n terms of repayment of the debt.
Skill: Applied
Graph: No graph
114) List and describe in detail the 5 possible offsets to fiscal policy.
Answer:
1. Crowding out.
2. The net export effect.
3. Combined government spending effect.
4. The supply-side effects of changes in taxes.
5. The Ricardian equivalence theorem.
Along with a proper description of each would suffice.
Skill: Recall
Graph: No graph
39
115) The implementation of government policy is generally considered to be subject to time lags.
If the government were considering adopting a new law in harmony with NAFTA that would
create one currency between Canada, the United States, and Mexico (similar to that of the Euro),
describe each of the time lags in detail in deference to this policy action.
Answer:
1. Recognition time lag - time to notice the problem. Perhaps the felt need of adopting one
currency between the countries.
2. Action time lag - the period between recognition of the problem and the implementation of the
policy to solve it. here it would be the process of getting the Bill through the two houses in
Canada (as well as the other two countries perhaps).
3. Effect time lag - the time for the fiscal policy to affect the economy. In terms of one currency,
it would be the time to reap the benefits (domestically) of such an action.
Skill: Applied
Graph: No graph
116) Describe in detail what automatic stabilizers are and their effect on the economy in times of
recession and boom.
Answer: Define what they are. List those that are known to the student. Explain the impact
relative to the position of GDP in times of recession and boom. Additional note should be
provided about the "soothing" effect of Keynesian fiscal policy.
Skill: Recall
Graph: No graph
40

Economics Today The Macro View Canadian 15th Edition Miller Test Bank

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Economics Today The Macro View Canadian 15th Edition Miller Test Bank

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Economics Today The Macro View

Canadian 15th Edition Miller Test Bank

1) Fiscal policy refers to the

8) If the government wants to decrease real GDP levels, it could

9) If the government wants to increase real GDP levels, it could

11) A contractionary gap is

18) Contractionary fiscal policy is designed to

20) Which of the following statements about fiscal policy is TRUE?

21) Which of the following statements about fiscal policy is FALSE?

35) If the government increases government spending, then the

36) If the government increases taxes, then the

38) If the government decreases taxes, then the

41) Suppose the government increases lump-sum taxes. This causes

42) Suppose the government decreases lump-sum taxes. This causes

53) If the government increases spending but doesn't raise taxes,

63) When private expenditures decrease as a result of increased government spending, it is

64) The crowding out effect is usually associated with

74) One part of the supply-side economics argument is that

80) The Ricardian equivalence theorem states that

81) The net export effect occurs when

83) The effect time lag of fiscal policy refers to

89) One characteristic of built-in or automatic stabilizers is that

90) Automatic stabilizers are

92) An example of an automatic stabilizer is

93) An advantage of automatic stabilizers over discretionary fiscal policy is that

97) As the economy expands from Y2 to Y3 in Figure 11-3,

98) We know that discretionary fiscal policy

101) Explain how fiscal policy can correct a contractionary gap.

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