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Department
Administrative Studies
Course
ADMS 2400
Professor
Paul Favaro
Semester
Fall

Description
Economics: Canada in the Global Environment, 7e (Parkin) Chapter 29 Fiscal Policy 29.1 Government Budgets 1) If revenues exceed outlays, the government's budget balance is ________, and the government has a budget ________. A) negative; deficit B) positive; surplus C) positive; deficit D) negative; surplus E) zero; deficit Answer: B Diff: 1 Topic: Government Budgets 2) If outlays exceed revenues, the government's budget balance is ________, and the government has a budget ________. A) negative; deficit B) positive; surplus C) positive; deficit D) negative; surplus E) zero; surplus Answer: A Diff: 1 Topic: Government Budgets 3) Government debt is A) equal to revenues minus outlays. B) always increasing. C) a phenomena that occurs only during times of war. D) the total amount of government borrowing. E) the result of a rising price level. Answer: D Diff: 1 Topic: Government Budgets 4) All of the following statements are true except A) total revenues have no strong trends. B) revenues include corporate income taxes, personal income taxes; indirect taxes and investment income. C) the main source of fluctuations in revenues is corporate income taxes. D) indirect taxes decreased during the 1990s due to the introduction of the GST. E) total revenues increased through the 1960s and 1980s. Answer: C Diff: 2 Topic: Government Budgets 1 © 2010 Pearson Education Canada 5) All of the following statements are true except A) the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest. B) debt interest has been steadily increasing since 1960. C) expenditures on goods and services have a downward trend. D) outlays increased steadily from 1971 through 1985. E) transfer payments decreased sharply during the 1990s. Answer: B Diff: 2 Topic: Government Budgets 6) Choose the correct statement A) The federal government debt was 113 percent of GDP in 1945. B) The debt-to-GDP ratio was 18 percent in 1974. C) The debt-to-GDP ration increased dramatically between 1981 and 1986. D) The government debt increases when the government has a budget deficit. E) All of the above. Answer: E Diff: 2 Topic: Government Budgets 7) During the 1980s and 1990s in Canada, A) investment income as a percentage of GDP increased. B) indirect taxes as a percentage of GDP increased steadily. C) personal income taxes as a percentage of GDP decreased. D) total revenues as a percentage of GDP increased by over 5 percent. E) none of the above. Answer: E Diff: 2 Topic: Government Budgets 8) Between 1981 and 1986, the federal government debt A) remained constant. B) fell substantially. C) averaged 80 percent of GDP. D) rose dramatically in value. E) fluctuated widely in value, but exhibited no trend. Answer: D Diff: 2 Topic: Government Budgets 2 © 2010 Pearson Education Canada 9) The main components of government revenues are A) transfer payments, investment income, and indirect taxes. B) personal income taxes, corporate income taxes, indirect taxes, and investment income. C) debt interest, expenditures on goods and services, and income taxes. D) corporate income taxes, indirect taxes, and transfer payments. E) debt interest, corporate income taxes, and income taxes. Answer: B Diff: 2 Topic: Government Budgets 10) The category of federal government revenues that fluctuates the most is A) investment income. B) transfer payments. C) personal income taxes. D) debt interest. E) indirect taxes. Answer: C Diff: 2 Topic: Government Budgets 11) Suppose the government starts with a debt of $0. Then in year 1, there is a deficit of $100 billion, in year 2 there is a deficit of $60 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a deficit of $20 billion. What is government debt at the end of year 4? A) $20 billion. B) $140 billion. C) $180 billion. D) Somewhat greater than $220 billion, depending on the interest rate. E) Somewhat greater than $140 billion, depending on the interest rate. Answer: B Diff: 1 Topic: Government Budgets 12) Which of the following would not increase the budget deficit? A) an increase in interest on the government debt B) an increase in government expenditures on goods and services C) an increase in government transfer payments D) an increase in indirect taxes E) a decrease in investment income Answer: D Diff: 1 Topic: Government Budgets Source: Study Guide 3 © 2010 Pearson Education Canada 13) Fiscal policy is A) the use of the federal budget to achieve macroeconomic objectives. B) any policy by the Bank of Canada. C) budgeting policy by aggregate households. D) any attempt by the federal government or Bank of Canada to control inflation. E) effective only when the federal government has a budget surplus. Answer: A Diff: 1 Topic: Government Budgets 14) Which of the following is not a source of government revenues? A) personal income taxes B) transfer payments C) corporate income taxes D) indirect taxes E) investment income Answer: B Diff: 1 Topic: Government Budgets 15) Which of the following is not a source of government revenues? A) personal income taxes B) investment income C) corporate income taxes D) indirect taxes E) transfer payments Answer: E Diff: 1 Topic: Government Budgets 16) Which of the following is a government outlay? A) personal income taxes B) investment income C) debt interest D) indirect taxes E) corporate income taxes Answer: C Diff: 1 Topic: Government Budgets Source: Study Guide 4 © 2010 Pearson Education Canada 17) As a percentage of provincial GDP, provincial government outlays are highest in A) Alberta. B) Newfoundland and Labrador. C) the Yukon Territory. D) Nunavut. E) Quebec. Answer: D Diff: 2 Topic: Government Budgets 18) What are the main categories of the federal government outlays? A) transfer payments, expenditures on goods and services, and debt interest B) indirect taxes, farmers' subsidies, and debt interest C) personal income taxes, expenditures on goods and services, and debt interest D) investment income, debt interest and transfer payments E) none of the above Answer: A Diff: 2 Topic: Government Budgets 19) Outlays as a percentage of provincial GDP are the highest in ________, whereas the largest transfers from the federal government are made to ________. A) Ontario; Northern Canada and the Atlantic provinces B) British Columbia; Northern Canada and the Atlantic provinces C) Alberta; Northern Canada and the Atlantic provinces D) Northern Canada; Northern Canada and the Atlantic provinces E) Northern Canada and the Atlantic provinces; Quebec Answer: D Diff: 2 Topic: Government Budgets 20) The government of Ricardia's budget lists the following projected revenues and outlays: $25 million in personal income taxes, $15 million in corporate income taxes, $5 million in indirect taxes, $2 million in investment income, $30 million in transfer payments, $12 million in government expenditure, and $8 million in debt interest. Ricardia has a government budget A) surplus of $3 million. B) surplus of $57 million. C) surplus of $13 million. D) deficit of $13 million. E) deficit of $3 million. Answer: E Diff: 2 Topic: Government Budgets Source: Study Guide 5 © 2010 Pearson Education Canada 21) The largest source of revenues for the federal government is A) transfer payments. B) expenditures on goods and services. C) personal income taxes. D) corporate income taxes. E) indirect taxes such as the GST. Answer: C Diff: 2 Topic: Government Budgets Source: Study Guide 29.2 Supply-Side Effects of Fiscal Policy 1) An increase in income taxes A) does not affect potential GDP because the potential GDP depends on technology only. B) does not affect potential GDP as long as the economy's endowments of resources and the state of technology remain unchanged. C) increases potential GDP because workers have to work longer hours to maintain the same standard of living before the tax increase. D) decreases potential GDP because workers' incentives to work are weakened. E) decreases potential GDP because real GDP decreases when households have less disposable income to spend. Answer: D Diff: 3 Topic: Supply Side Effects of Fiscal Policy 2) A tax cut on capital income A) does not affect potential GDP because the interest rate affects aggregate expenditure only. B) does not affect potential GDP because it has no impact on the supply of labour. C) increases potential GDP because workers have greater incentives to work. D) increases potential GDP because the supply of loanable funds increases. E) increases potential GDP because households have more disposable income to spend. Answer: D Diff: 2 Topic: Supply Side Effects of Fiscal Policy 3) Consider all the effects of fiscal policy. A cut in the income tax A) shifts the AD curve rightward but does not shift either the LAS or SAS curve. B) shifts the AD, SAS, and LAS curves rightward. C) shifts the SAS curve rightward but does not shift either the AD or LAS curve. D) shifts both the SAS and LAS curves rightward but does not shift the AD curve. E) shifts the LAS curve rightward but does not shift either the AD or SAS curve. Answer: B Diff: 3 Topic: Supply Side Effects of Fiscal Policy 6 © 2010 Pearson Education Canada 4) Consider all the effects on fiscal policy. A cut in the tax on capital income A) shifts the AD curve rightward. B) shifts the SAS curve rightward. C) shifts the LAS curve rightward. D) all of the above. E) only B and C. Answer: D Diff: 2 Topic: Supply Side Effects of Fiscal Policy 5) Consider all the effects of fiscal policy. An income tax cut A) increases both real GDP and the price level. B) increases real GDP but decreases the price level. C) increases real GDP but leaves the price level unchanged. D) increases real GDP and the price level may rise or fall. E) does not change real GDP or the price level. Answer: D Diff: 3 Topic: Supply Side Effects of Fiscal Policy 6) An income tax cut that provides a greater incentive to work than an alternative tax cut will result in comparatively A) higher long-run real GDP and a higher price level. B) higher long-run real GDP and a lower price level. C) the same level of long-run real GDP and price level. D) the same level of long-run real GDP and a higher price level. E) the same level of long-run real GDP and a lower price level. Answer: B Diff: 2 Topic: Supply Side Effects of Fiscal Policy 7) If the nominal interest rate is 11%, the inflation rate is 4% and the tax rate is 25%, what is the real after-tax interest rate? A) -1.25% B) 4.25% C) 5.25% D) 8% E) 10% Answer: B Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: Study Guide 7 © 2010 Pearson Education Canada 8) The Laffer Curve has been criticized by mainstream economists because A) there is no theoretical possibility of higher tax rates leading to lower tax revenues. B) higher tax rates do not create negative incentive effects. C) tax cuts are just spent, not saved as predicted by the theory. D) savers look only at real interest rates, not nominal interest rates. E) empirically, tax cuts have not led to higher tax revenues. Answer: E Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: Study Guide 9) An income tax ________ potential GDP by shifting the labour ________ curve ________. A) increases; demand; rightward B) decreases; demand; rightward C) increases; supply; rightward D) decreases; supply; leftward E) increases; supply curve and labour demand curve; rightward Answer: D Topic: Supply Side Effects of Fiscal Policy Skill: Conceptual AACSB: Analytical Skills 10) If we compare Canada to France and the United Kingdom, Canada's tax wedge is ________ the French tax wedge and ________ the U.K. tax wedge. A) larger than; smaller than B) equal to; larger than C) smaller than; smaller than D) larger than; larger than E) smaller than; larger than Answer: C Topic: Supply Side Effects of Fiscal Policy Skill: Recognition AACSB: Reflective Thinking 11) The difference between the before-tax and after-tax rates is the A) tax plug. B) deadweight gain. C) tax wedge. D) taxation penalty. E) deadweight loss. Answer: C Topic: Supply Side Effects of Fiscal Policy Skill: Recognition AACSB: Reflective Thinking 8 © 2010 Pearson Education Canada 12) If we compare the United States to France, we see that potential GDP per person in France is ________ than that in the United States because the French tax wedge is ________ than the U.S. tax wedge. A) greater; larger B) greater; smaller C) less; larger D) less; smaller E) none of the above Answer: C Topic: Supply Side Effects of Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking 13) Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. The real after-tax interest rate is A) -0.5 percent. B) 3.5 percent. C) 3.0 percent. D) 4.0 percent. E) -3.5 percent. Answer: A Topic: Supply Side Effects of Fiscal Policy Skill: Analytical AACSB: Analytical Skills 14) Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. The real after-tax interest rate is A) 0.5 percent. B) 3.5 percent. C) 4.0 percent. D) 2.0 percent. E) -0.5 percent. Answer: D Topic: Supply Side Effects of Fiscal Policy Skill: Analytical AACSB: Analytical Skills 15) The Laffer curve is the relationship between A) government expenditure and potential GDP. B) the tax rate and potential GDP. C) tax revenue and potential GDP. D) the tax rate and the amount of tax revenue. E) government outlays and revenues. Answer: D Topic: Supply Side Effects of Fiscal Policy Skill: Recognition AACSB: Reflective Thinking 9 © 2010 Pearson Education Canada 16) According to the Laffer curve, raising the tax rate A) always increases the amount of tax revenue. B) always decreases the amount of tax revenue. C) does not change the amount of tax revenue. D) might increase, decrease, or not change the amount of tax revenue. E) has no effect on the amount of tax revenue. Answer: D Topic: Supply Side Effects of Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking 17) The Laffer curve shows that increasing ________ increases ________ when ________ low. A) tax revenue; potential GDP; tax revenue is B) the tax rate; tax revenue; the tax rate is C) potential GDP; tax revenue; tax revenue is D) government outlays; the budget deficit; government expenditure is E) investment; potential GDP; the interest rate is Answer: B Topic: Supply Side Effects of Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking 18) An increase in the tax on capital income ________ the supply of loanable funds and ________ investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases the demand for loanable funds; decreases or increases Answer: D Topic: Supply Side Effects of Fiscal Policy Skill: Conceptual Source: Study Guide AACSB: Reflective Thinking 10 © 2010 Pearson Education Canada 19) Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. The government budget ________ the supply of loanable funds, which ________ the real interest rate and ________ investment. A) surplus increases; lowers; decreases B) surplus decreases; raises; increases C) surplus increases; lowers; increases D) deficit decreases; raises; decreases E) surplus increases; raises; decreases Answer: C Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: MyEconLab 20) Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. ________ in government expenditure or ________ in taxes will further increase China's budget ________, increase investment and speed economic growth. A) A decrease; an increase; surplus B) An increase; a decreases; deficit C) An increase; an increase; surplus D) A decrease; a decrease; deficit E) A decrease; an increase; deficit Answer: A Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: MyEconLab 21) The government is proposing to increase the tax rate on labour income and asks you to report on the supply-side effects of such an action. According to the research of Edward C. Prescott, cross-country evidence for Canada, the United States, the United Kingdom, and France shows all of the following except ________. A) the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP B) potential GDP per person in France is 14 percent below that of the United States (per person) and the entire difference can be attributed to the difference in the tax wedge in the two countries C) potential GDP per person in the United Kingdom is 41 percent below that of the United States (per person) and about a third of the difference arises from the different tax wedges D) between Canada, the United States, France, and the United Kingdom, the tax wedge is greatest in the United Kingdom, and the country with the smallest tax wedge has the smallest potential GDP E) potential GDP per person in Canada is 16 percent below that of the United States but this difference is due to different productivities Answer: D Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: MyEconLab 11 © 2010 Pearson Education Canada 22) The government increases the tax rate on labour income and at the same time cuts the rate of sales tax to keep the amount of tax collected constant. As a result, the supply of labour ________, the demand for labour ________, and the equilibrium level of employment ________. The before-tax wage rate ________, and the after-tax wage rate ________. Potential GDP ________. A) decreases; does not change; decreases; rises; falls; decreases B) decreases; increases; does not change; rises; falls; does not change C) does not change; does not change; does not change; does not change; does not change; does not change D) decreases; decreases; decreases; rises; falls; decreases E) does not change; increases; increases; does not change; decreases; increases Answer: C Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: MyEconLab 23) The government increases the tax rate on labour income. As a result, the supply of labour ________ and the demand for labour ________. The equilibrium level of employment ________. A) decreases; increases; does not change B) does not change; decreases; decreases C) decreases; does not change; decreases D) decreases; decreases; decreases E) does not change; decreases; decreases Answer: C Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: MyEconLab 24) The government increases the tax rate on labour income. At the equilibrium level of employment, the before-tax wage rate ________ and the after-tax wage rate ________. Potential GDP ________. A) rises; falls; decreases B) falls; rises; does not change C) rises; falls; does not change D) falls; rises; decreases E) rises; falls; increases Answer: A Diff: 2 Topic: Supply Side Effects of Fiscal Policy Source: MyEconLab 12 © 2010 Pearson Education Canada 29.3 Stabilizing the Business Cycle 1) Which one of the following statements is true, using absolute values? The autonomous tax multiplier A) is smaller than the government expenditure multiplier. B) is larger than the government expenditure multiplier. C) has the same value as the government expenditure multiplier except during recessions. D) is larger than the government expenditure multiplier during expansions. E) always equals the government expenditure multiplier. Answer: A Diff: 2 Topic: Stabilizing the Business Cycle 2) Which of the following are automatic stabilizers? A) induced taxes B) transfer payments C) exports D) investment E) A and B Answer: E Diff: 2 Topic: Stabilizing the Business Cycle 3) An automatic stabilizer works by A) decreasing fluctuations in aggregate expenditure and increasing fluctuations in real GDP. B) increasing fluctuations in aggregate expenditure and decreasing fluctuations in real GDP. C) decreasing fluctuations in aggregate expenditure and decreasing fluctuations in real GDP. D) increasing fluctuations in aggregate expenditure and increasing fluctuations in real GDP. E) making the aggregate supply curve steeper which decreases fluctuations in real GDP. Answer: C Diff: 2 Topic: Stabilizing the Business Cycle 4) Due to automatic stabilizers, when income rises A) government outlays fall and revenues rise. B) government outlays rise and revenues fall. C) government outlays equal revenues. D) the economy will automatically move to full employment. E) the economy will automatically return to its original level of real GDP. Answer: A Diff: 2 Topic: Stabilizing the Business Cycle 13 © 2010 Pearson Education Canada 5) Due to automatic stabilizers, when real GDP increases, the A) government budget remains in balance. B) government budget deficit decreases or the government budget surplus increases. C) government budget deficit increases or the government budget surplus decreases. D) the economy will automatically move to full employment. E) the price level remains constant. Answer: C Diff: 2 Topic: Stabilizing the Business Cycle 6) Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP). What are autonomous taxes in Ricardia? A) It depends on the level of real GDP. B) 0.1 C) $2.5 billion D) $250 billion E) $25 billion Answer:
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