Q: Suppose the government increases its expenditure by $100 billion. If the government expenditure multiplier is 0.8, what is the total increase in real GDP?

$$100$$ billion \times 0.8 = $$80$$ billion additional, so total increase is $$180$$ billion

Q: Which of the following equations correctly represents the federal government's budget balance?

$$\text{Budget Balance} = \text{Receipts} - \text{Outlays}$$

Question 1

Which of the following best describes the primary purposes of the federal budget?

Accepted Answer

To finance federal government programs and achieve macroeconomic objectives

Question 2

Suppose in a given year, federal government receipts are $$3,800 billion and outlays are 4$$,200 billion. What is the budget balance, and what does it represent?

Accepted Answer

A budget deficit of $400 billion

Question 3

Which of the following is classified as a transfer payment in the federal budget?

Accepted Answer

Social Security benefits paid to retirees

Question 4

According to the Laffer curve, what happens to tax revenue if the tax rate increases beyond the rate $$T^*$$ where revenue is maximized?

Accepted Answer

Tax revenue decreases

Question 5

Which of the following best describes an automatic fiscal policy?

Accepted Answer

A policy action triggered by the state of the economy without new government action

Question 6

If real GDP is below potential GDP, which type of fiscal policy is most appropriate to close the recessionary gap?

Accepted Answer

Expansionary fiscal policy

Question 7

Suppose the government increases its expenditure by $100 billion. If the government expenditure multiplier is 0.8, what is the total increase in real GDP?

Accepted Answer

$$100$$ billion 	imes 0.8 = $$80$$ billion additional, so total increase is $$180$$ billion

Question 8

Which of the following is a limitation of discretionary fiscal policy in practice?

Accepted Answer

There are time lags in recognition, law-making, and effectiveness

Question 9

What is the difference between the structural deficit and the cyclical deficit?

Accepted Answer

The structural deficit is the deficit that would exist at full employment; the cyclical deficit is the difference between the actual deficit and the structural deficit

Question 10

If the government enacts a tax cut of $50 billion and the tax multiplier is 0.6, what is the expected change in aggregate demand?

Accepted Answer

$$30$$ billion

Question 11

Which of the following best explains the crowding-out effect in the context of fiscal stimulus?

Accepted Answer

Government borrowing raises the real interest rate, reducing private investment

Question 12

During a recession, which automatic stabilizer is most likely to increase government outlays?

Accepted Answer

Needs-tested transfer payments

Question 13

Which of the following equations correctly represents the federal government's budget balance?

Accepted Answer

$$	ext{Budget Balance} = 	ext{Receipts} - 	ext{Outlays}$$

Question 14

In the long run, why are fiscal policy multipliers considered to be zero?

Accepted Answer

Because real GDP equals potential GDP and changes in aggregate demand only affect the price level

Question 15

Which of the following is an example of a discretionary fiscal policy?

Accepted Answer

A tax cut passed by Congress in response to an economic downturn

Question 16

Suppose the actual budget deficit is $$500 billion and the structural deficit is 350 $$billion. What is the cyclical deficit?

Accepted Answer

$$150$$ billion

Question 17

Which of the following best describes the effect of expansionary fiscal policy on the aggregate demand (AD) curve?

Accepted Answer

It shifts the AD curve rightward

Question 18

If the government wants to lower inflation using fiscal policy, which of the following actions is most appropriate?

Accepted Answer

Decrease government spending and/or increase taxes

Question 19

Which of the following is a key challenge in using fiscal policy to stabilize the economy?

Accepted Answer

There is insufficient empirical evidence to accurately determine the size of fiscal multipliers

Question 20

Which of the following statements about state and local government budgets is correct?

Accepted Answer

Most state expenditures are on public schools, colleges, universities, police, fire services, and roads

Fiscal Policy and the Federal Budget: Principles of Macroeconomics Study Notes

Study Guide - Practice Questions

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