Economics Chapter 12—Fiscal Policy: Incentives, and Secondary Effects

124. Expansionary fiscal policy financed by government borrowing can lead to
|a. |higher interest rates and lower private investment under the crowding-out view. |
|b. |an increase in aggregate demand under the Keynesian view. |
|c. |no change in aggregate demand under the new classical view. |
|d. |all of the above. |

ANS: D PTS: 1 OBJ: Coursebook

125. The crowding-out effect implies that budget deficits will
|a. |increase real interest rates and lower the future stock of private capital. |
|b. |decrease real interest rates and increase the future stock of private capital. |
|c. |increase the productivity of workers in the future. |
|d. |lead to higher levels of income for workers in the future. |

ANS: A PTS: 1 OBJ: Coursebook

126. The crowding-out effect suggests that
|a. |expansionary fiscal policy causes inflation. |
|b. |high marginal tax rates crowd out tax deductions. |
|c. |the demand stimulus effects of a budget deficit will be weak because the borrowing to finance the deficit will lead to |
| |higher interest rates. |
|d. |a budget surplus will cause the economy to slip into a major recession. |

ANS: C PTS: 1 OBJ: Coursebook

127. The new classical model implies that the effect of government increasing expenditures by debt financing
|a. |has the same effect as if it was financed by raising current taxes. |
|b. |is highly expansionary on aggregate demand and the economy. |
|c. |will result in higher real interest rates. |
|d. |will result in lower personal savings. |

ANS: A PTS: 1 OBJ: Coursebook

128. The new classical model implies that a shift to a more expansionary fiscal policy will
|a. |stimulate aggregate demand and employment. |
|b. |retard aggregate demand and employment. |
|c. |increase the real rate of interest. |
|d. |exert little or no impact on the real interest rate, aggregate demand, and employment. |

ANS: D PTS: 1 OBJ: Coursebook

129. According to the new classical view, a $20 billion increase in government expenditures financed by a budget deficit will
|a. |stimulate output by $20 billion. |
|b. |stimulate output more than $20 billion. |
|c. |stimulate output but by less than $20 billion. |
|d. |leave output unchanged.