Multiple Choice Questions:
1. According to the crowding-out effect, if the federal government borrows to finance deficit spending,
a. The demand for loanable funds will decrease, driving interest rates down.
b. The demand for loanable funds will increase, driving interest rates up.
c. The supply for loanable funds will increase, driving interest rates up.
d. The supply for loanable funds will decrease, driving interest rates down.
2. Automatic stabilizers?
a. Reduce the problems caused by lags, using fiscal policy as a stabilization tool.
b. Are changes in fiscal policy that act to stimulate AD automatically when the economy goes into recession.
c. Are changes in fiscal policy that act to restrain AD automatically when the economy is growing too fast.
d. All of the above are correct.
3. During a recession, government transfer payments automatically _____________ and tax revenue automatically _____________.
a. Fall; falls
b. Increase; falls
c. Increase; increases
d. Fall; increases
4. If U.S. budget deficits (which require the borrowing of funds) raise interest rates and attract investment funds from abroad?
a. The foreign exchange value of the dollar will appreciate, and U.S. net exports will decrease.
b. The foreign exchange value of the dollar will depreciate, and U.S. net exports will decrease.
c. The foreign exchange value of the dollar will depreciate, and U.S. net exports will increase.
d. The foreign exchange value of the dollar will appreciate, and U.S. net exports (X _ M) will increase.
5. When the crowding-out effect of an increase in government purchases is included in the analysis?
a. AD shifts left.
b. AD doesn’t change.
c. AD shifts right, but by more than the simple multiplier analysis would imply.
d. AD shifts right, but by less than the simple multiplier analysis would imply.
6. How does the government finance budget deficits?
a. The Federal Reserve creates new money.
b. It issues debt to government agencies, private institutions, and private investors.
c. It is primarily financed by foreign investors.
d. It does nothing to finance budget deficits.
7. When government debt is financed internally, future generations will?
a. Inherit a lower tax liability.
b. Inherit neither higher taxes nor interest payment liability.
c. Inherit higher taxes.
d. Do none of the above.