Core Economics 3e

Fiscal Policy and Debt

Multiple Choice Questions

After watching the Fiscal Policy and Debt video lecture, consider the question(s) below. Then “submit” your response.

Question

1. The primary tools of fiscal policy are:

inflation and growth.

taxation and spending.

banking and currency.

investment and employment.

Question

2. To boost economic activity and employment during a U.S. economic downturn, the government will frequently use expansionary fiscal policy. Such a policy might be composed of:

reducing government spending and transfer payments and increasing taxes.

decreasing the size of the military and leaving taxes unchanged.

increasing government spending and transfer payments and reducing taxes.

increasing foreign aid and reducing unemployment insurance spending.

Question

3. Contractionary fiscal policy is deployed in response to policy makers’ concerns about:

inflation.

deflation.

recession.

contractions.

Question

4. Some policy makers believe crowding out occurs when excessive government spending:

causes higher interest rates, thereby displacing private sector consumption and investment.

forces lower interest rates, thereby attracting more private investment and borrowing that displaces government borrowing.

occurs because consumers attempt to borrow beyond the capacity of banks to lend.

will immediately require higher taxes to fund the higher spending levels.

Question

5. Some critics of expansionary fiscal policy believe that:

helping poor people in a recession produces an incentive to look for a job.

accumulating more government debt is more harmful than the short-run effects of a recession.

a recession should be dealt with by increasing the size of government.

such a policy should be pursued only to support excessive economic growth.

Question

6. A fiscal policy lag is the length of time it takes:

the president to develop a simulative tax and spending program to present to Congress.

the states to identify spending projects that are candidates for federal funding.

the president and Congress to agree on a possibly controversial tax and spending program and to begin implementation.

contractors to hire additional employees required to implement the new federal spending programs.

Question

7. The national debt is the sum of all:

national government debt, worldwide.

consumer and corporate debt.

federal, state, and local governmental borrowing.

prior federal deficits minus prior surpluses.

True/False Questions

After watching the Fiscal Policy and Debt video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Mandatory spending is required by law.

True

False

Question

2. Fewer people collecting unemployment benefits during an economic downturn is an example of an automatic stabilizer that works to ease the effects of the recession.

True

False

Question

3. A deficit occurs when tax revenue exceeds spending in a given year.

True

False

Short Answer/Discussion Questions

After watching the Fiscal Policy and Debt video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Provide examples of discretionary spending and explain how this type of spending is determined.

Suggested solution: Discretionary spending covers programs such as defense, education, transportation, and environmental protection. Discretionary spending is subject to the annual budget and appropriations cycle worked out by the president and the Congress. As a result, the total level of this type of spending and the programs it supports can vary from year to year. (Answers may vary.)

Question

2. Explain the difference between expansionary and contractionary fiscal policies, including when each might be used by policy makers.

Suggested solution: Expansionary fiscal policies are designed to increase aggregate demand during recessions. These policies may include actions such as increased federal spending and lower taxes. Contractionary fiscal policies are designed to restrain aggregate demand when the economy is overheating, resources are scarce, and inflation is growing. These policies may include reduced federal spending and increased taxes. (Answers may vary.)

Question

3. Is the national debt too high?

Suggested solution: As of now, the level of national debt is manageable since the debt’s share of GDP, as well as market interest rates, are low. The future answer to this question depends on interest rates and government spending decisions, especially in response to the mandatory spending commanded by growing programs such as Social Security and Medicare. (Answers may vary.)