Assignment 5 s2___________________________________________ Government & Fiscal Policy

1. All of the following are instruments of fiscal policy except

A) B) C) D) rebate on payroll taxes. education tax credits. unemployment insurance benefits. an interest rate cut.

AP GOV/ECON

2. Public investment expenditure for highways, schools, and national defense is included in which component of GDP? A) B) C) D) consumption gross private investment government purchases public investment

3. Payments to households that do not require anything in exchange are called A) B) C) D) transfer payments. government purchases. consumption expenditures. investment expenditures.

4. The government has a balanced budget if A) B) C) D) its total revenues are equal to its total expenditures. its total revenues are less than its total expenditures. its total revenues are greater than its total expenditures. the money supply is less than total expenditures.

5. The government has a budget surplus if A) B) C) D) its total revenues are equal to its total expenditures. its total revenues are less than its total expenditures. its total revenues are greater than its total expenditures. the money supply is less than total expenditures.

6. The sum of all past federal deficits minus any surpluses is called the A) B) C) D) 7. A) B) C) D) transfer balance. national deficit. national debt. national budget. If the federal budget is initially balanced and government expenditures remain constant, then an increase in GDP will _________ tax revenues and create a budget _________. increase; surplus increase; deficit decrease; surplus decrease; deficit

8. What is an automatic stabilizer? A) It refers to a discretionary policy that is triggered when actual output is not equal to potential output to improve the economys performance. B) It refers to a stabilization program that keeps inflation in check automatically. C) It refers to any government program that tends to reduce fluctuations in GDP automatically. D) It refers to a government program that is automatically triggered when the economy enters a recession.

9. All of the following are examples of automatic stabilizers except A) B) C) D) personal income taxes. means-tested federal transfer payments. welfare benefits. government emergency spending.

10. A transfer payment that rises automatically during a recession is A) B) C) D) interest payments on the national debt. unemployment compensation. Social Security payments to retired persons. government payments to war veterans.

11. During an expansion, which of the following occur because of automatic stabilizers? I. Income tax revenues tend to rise. II. Government transfer payments tend to rise. III. The governments budget deficit tends to fall or its budget surplus tends to rise. IV. They tend to amplify the rise in real GDP. A) B) C) D) I and III only I, II, and III only I, III, and IV only I, II, III, and IV

12. During a contraction, ______ income tax revenues tend to automatically increase a ______or reduce a _________. A) B) C) D) higher; budget deficit; budget surplus higher; budget surplus; budget deficit lower; budget deficit; budget surplus lower; budget surplus; budget deficit

13. Discretionary fiscal policy refers to A) B) C) D) deliberate government efforts to stabilize the economy through government spending and taxes. the use of automatic stabilizers and intervention policies to stabilize the economy. any government policy that requires a lag period of at least three months. the deliberate use of government spending and taxes to complement the effects of monetary policy in an effort to stabilize the economy.

14. Which of the following describes a discretionary fiscal policy action/program? A) B) C) D) the progressive income tax system the unemployment compensation program Congress authorizes a temporary increase in unemployment insurance benefits for an additional seven weeks. the system of welfare programs

15. In 2003, Congress passed a substantial cut in income taxes. The Federal Reserve also lowered interest rates. How can these two actions be categorized? A) Both actions can be categorized as fiscal policy. B) Both actions can be categorized as monetary policy. C) The tax cut can be categorized as monetary policy and the lowering of interest rates can be categorized as fiscal policy. D) The tax cut can be categorized as fiscal policy and the lowering of interest rates can be categorized as monetary policy.

16. An expansionary fiscal policy I. includes an increase in government spending. II. includes tax cuts. III. increases a government budget deficit or reduces a government budget surplus. A) B) C) D) I, II, and III I and II only I and III only II and III only

17. Contractionary fiscal policy includes A) B) C) D) 18. A) B) C) D) increasing taxes and increasing government purchases. raising interest rates, increasing taxes, and decreasing transfer payments. increasing taxes and decreasing government expenditures. raising interest rates, decreasing taxes, and decreasing government spending. An expansionary fiscal policy shifts the aggregate demand curve to the right and is used to close an inflationary gap. to the right and is used to close a recessionary gap. to the left and is used to close an inflationary gap. to the left and is used to close a recessionary gap.

19. An inflationary gap can be closed with A) B) C) D) using an expansionary monetary policy. using a policy action such as a reduction in government purchases. using a policy action such as a reduction in government purchases. imposing price controls to prevent prices from rising.

20. Suppose fiscal authorities raise state income tax rates. As a result, disposable income falls, thereby ____, and causing __________ A) B) C) D) decreasing consumption spending; the aggregate demand curve to shift to the left. decreasing consumption spending; a movement along a given aggregate demand curve. increasing saving; the aggregate demand curve to shift to the left. increasing saving; a movement along a given aggregate demand curve.

21. An expansionary fiscal policy is likely to A) B) C) D) increase borrowing by the Treasury through the sale of bonds. decrease borrowing by the Treasury through the purchase of bonds. increase borrowing by the Treasury through the purchase of bonds. decrease borrowing by the Treasury through the sale of bonds. borrowing by the

22. A contractionary fiscal policy is likely to ______ a government budget deficit and _______ Treasury. A) B) C) D) reduce; reduce increase; increase reduce; increase increase; reduce

23. Suppose the economy experiences a recessionary gap. Policymakers who believe that government is too big would favor which of the following policies to close the gap? A) B) C) D) decreases in transfer payment decreases in income tax rates increases in government purchases increases in interest rates