Identify the correct statement. When interest rates fall, the firm's cost of raising funds through bonds increases.

Identify the correct statement.

When interest rates fall, the firm's cost of raising funds through bonds increases.

It is absolutely compulsory for the government to earn a profitable return on the money it earns by selling bonds.

When government borrowing rises, interest rates decline, thereby driving up private investment.

An increase in interest rate reduces the cost of borrowing by the firms.

When interest rates rise, fewer number of corporations offer new bonds to raise investment funds.

Assume that French budget deficits have raised the French prime interest rate relative to the U.S. T-bill rate. As a result, we would expect the U.S. dollar to depreciate and the U.S. net exports to rise.

True

False

Starting with a situation where there is a substantial budget deficit, when tax revenues grow faster than federal expenditures, the government will experience:

a declining budget deficit.

a declining budget surplus.

a balanced budget.

an increasing budget deficit.

an increasing national debt.

The ratio of U.S. government spending to GDP reached its peak during:

the Great Depression.

the bursting of the stock market bubble.

World War I.

World War II.

the real estate crisis.

When the price level increases, the effect of a change in government spending on real GDP will be understated.

True

False

A decrease in federal income tax rates is an example of fiscal policy that affects GDP through consumption adjustments.

True

False

Which of the following would not be considered an indirect tax?

A tax on the income of a computer manufacturer

A sales tax on cigarettes

A value-added tax

A tax on imported automobiles

A tax on wheat export

Which of the following is true of fiscal policy before the Great Depression of the 1930s?

Fiscal policy was made at the federal level.

The federal budget was determined mostly by economists and not by politicians.

National defense and foreign trade were the focus areas of the federal government while other areas of government policy were dealt by individual states.

Policies associated with national defense were made at the state level.

Environmental degradation and education were the focus areas of the federal government while other areas of government policy were dealt by individual states.

Under a progressive tax system:

the average tax rate remains constant with changes in real GDP.

the average tax rate increases with increases in real GDP.

government tax receipts increase when the economy is in a recession.

the average tax rate falls with increases in real GDP.

government tax receipts decrease when the economy is expanding.

Which of the following is a form of a direct tax?

Personal income tax

Value-added tax

Sales tax

Import tariff

Excise duty

Compared to the government in a typical industrial country, the government in a typical developing country:

plays a larger role in investment spending.

plays the same role in investment spending.

plays a smaller role in investment spending.

plays a more negative role in investment spending.

plays no role in investment spending.

A higher U.S. federal budget deficit may act to raise future U.S. interest payments to foreigners.

True

False

Calculate the government spending multiplier if, an increase in government spending by $5 million increases real GDP by $25 million.

0.2

5

2

0.5

6

Which of the following will be observed if the U.S. federal government reduces fiscal spending, keeping other things constant?

The economy will approach potential GDP.

The aggregate expenditure in the economy will decrease.

The marginal propensity to consume will increase.

The average price level will increase.

The aggregate demand curve will shift to the right.

Which of the following statements is true of government spending?

An increase in government spending shifts the aggregate demand curve downward by a fraction of the rise in government spending.

Government spending is a part of monetary policy, not fiscal policy.

A decline in government spending brings about an expansion in the economy.

An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.

An increase in government spending increases the recessionary gap in the economy.

According to Ricardian equivalence, taxation and government borrowing have the same effect on spending in the private sector.

True

False

If Joe earns $80,000 per year and pays $20,000 in taxes, while Moe earns $100,000 and pays $22,000 in taxes, their tax system would best be described as:

discretionary.

regressive.

progressive.

lump-sum.

proportional.

If crowding out exists, contractionary fiscal policy will cause the aggregate demand curve to shift in by more than indicated by the government spending multiplier.

True

False

Suppose the Congress enacts a 5 percent decrease in annual military expenditures. Other things equal, this can be associated with:

a movement up along the aggregate demand curve.

a movement down along the aggregate demand curve.

a leftward shift of the aggregate demand curve.

a rightward shift of the aggregate demand curve.

a change in the slope of the aggregate demand curve.

_____, the lesser will be the effect of an increase in government spending on real GDP.

The steeper the aggregate supply curve

The smaller the crowding-out effect

The more rapidly money is converted into goods

The smaller the percentage of government spending financed by tax increases

The larger the government budget surplus

The U.S. government deficit as a percentage of GDP was much larger during World War II than it was in the 1980s and 1990s.

True

False

If all U.S. government bonds are held by U.S. citizens, then:

there is no tax liability for funding the U.S. government's debt.

the tax rates are not increased to repay the outstanding debts.

there is no net change in national wealth when the national debt changes.

the bondholders will not earn interest on the bonds.

the tax liability for funding the debt is not offset by the interest earnings of bondholders.