Name: __________________________ Date: _____________
Use the following to answer question 1:
Figure: Fiscal Policy Options
1. (Figure: Fiscal Policy Options) If the aggregate demand curve is AD', of the choices
below, the most appropriate discretionary fiscal policy would be to:
A) decrease government spending and increase income tax rates.
B) decrease government spending and maintain income tax rates.
C) increase government spending and decrease income tax rates.
D) increase government spending and increase income tax rates.
2. Discretionary fiscal policy involves:
A) using government spending or tax policy to affect aggregate demand.
B) policy to raise the natural rate of unemployment.
C) changing the money supply to change interest rates and investment spending.
D) lifting trade barriers on imports.
3. Fiscal experts in the United States are currently most concerned about the country's:
A) high debt-GDP ratio.
B) low debt-GDP ratio.
C) implicit liabilities.
D) risk of debt default.
4. Which of the following is not an example of a government transfer payment?
A) Medicare
B) environmental protection programs
C) Medicaid
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D) Social Security
5. In terms of dollar costs, in the United States the three primary transfer payments are:
A) Social Security, interest payments on the debt, and education.
B) Social Security, Medicare, and Medicaid.
C) Social Security, education, and welfare.
D) welfare, interest payments on the debt, and military spending.
6. Government payments to households for which no good or service is provided in return
are called:
A) investment expenditures.
B) transfer payments.
C) government purchases.
D) consumption expenditures.
7. If government spending increases and taxes decrease:
A) the public debt will increase.
B) the public debt will decrease.
C) implicit liabilities will decrease.
D) implicit liabilities will increase.
8. An inflationary gap occurs when:
A) potential output exceeds actual output.
B) actual output exceeds potential output.
C) real output is too low.
D) we need to increase prices.
9. Government transfer payments rise when the economy is contracting and fall when the
economy is expanding. In this role, transfer payments are described as:
A) balanced budget policy.
B) automatic stabilizers.
C) deficit reduction policy.
D) discretionary fiscal policy.
10. Most economists believe that a balanced budget would:
A) enhance the effect of automatic stabilizers in the economy.
B) not have any impact on the role of taxes and transfers as automatic stabilizers.
C) undermine the role of taxes and transfers as automatic stabilizers.
D) strengthen the ability of policy makers to conduct discretionary fiscal policy.
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Answer Key
1. C
2. A
3. C
4. B
5. B
6. B
7. A
8. B
9. B
10. C
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