1) Fiscal policy refers to the a) government's ability to regulate the functioning of financial markets.

b) spending and taxing policies used by the government to influence the level of economy activity. c) techniques used by firms to reduce its tax liability. d) the policy by MAS to affect the cash rate. 2) Which of the following does NOT function as an automatic stabiliser? a) The personal income tax system b) Government expenditure on road building programmes c) Unemployment benefit payments d) The Goods and Services Tax (GST) 3) An automatic stabiliser is a) the tendency for inflation to fall as unemployment rises. b) a monetary or fiscal policy that aims to smooth out the business cycle. c) a tax or form of government expenditure that has the effect of reducing the size of business cycle fluctuations. d) a policy for growth of an economy where the current account of the balance of payments is kept in balance. 4) Which of the following is an example of discretionary fiscal policy? a) An increase in unemployment benefit payments during a recession due to rising unemployment b) The tax increases to combat rising inflation c) A decrease in income tax receipts during a recession because incomes are falling d) An increase in income tax receipts during an expansion because incomes are rising 5) Which of the following may be an appropriate policy if real equilibrium GDP falls below the long-run aggregate supply curve? a) An increase in business income taxes to increase tax fairness b) An increase in government purchases c) An increase in individual income taxes to balance the budget d) Contractionary fiscal policy to increase the budget surplus 6) To help fight a recession, the government could a) lower interest rates by decreasing the cash rate. b) decrease taxes to increase aggregate demand. c) conduct contractionary fiscal policy by raising taxes. d) decrease government spending to balance the budget. 7) If the economy were in recession, we would expect a) government expenditure to be low and tax revenues to be low, probably leading to a budget surplus. b) government expenditure to be high and tax revenues to be low, probably leading to a budget surplus. c) government expenditure to be high and tax revenues to be low, probably leading to a budget deficit. d) government expenditure to be high and tax revenues to be high, probably leading to a budget deficit. 8) If the government wants to try to reduce unemployment, it could ________ spending and/or taxes should be ________. a) decrease; increased b) increase; increased c) decrease; decreased d) increase; decreased

9) Expansionary fiscal policy should shift the a) short run aggregate supply curve to the right. b) aggregate demand curve to the right. c) short run aggregate supply curve to the left. d) aggregate demand curve to the left. 10) Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP. a) increases; increases b) increases; decreases c) decreases; decreases d) decreases; increases 11) If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to a) increase interest rates. b) use expansionary fiscal policy. c) increase government spending. d) increase taxes.

12) Given that the economy has moved from A to B in the Figure above, which of the following would the appropriate fiscal policy to achieve potential GDP? a) Increase interest rates. b) Expansionary fiscal policy c) Increase government spending. d) Increase taxes.

13) In the Figure above, if fiscal policy is successful at moving the economy to equilibrium at potential GDP, which of the following will occur? a) Deflation will occur. b) The price level will rise. c) Unemployment will fall. d) Unemployment will rise.

14) If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then a) the MPC is 0.75. b) the MPC is 0.8. c) the MPC is 0.9. d) the MPC is 0.5. 15) Suppose that the government allocates $1 billion for new roads. It also raises taxes by $1 billion to keep the deficit from growing. If the marginal propensity to consume = 0.9, what is the effect on equilibrium GDP? a) GDP increases by $1 billion. b) GDP does not change. c) GDP increases by $900 000. d) GDP increases by $10 billion. 16) Assume that the federal government gives a $5 billion tax cut and the marginal propensity to consume is 0.75. What happens to equilibrium GDP? a) There is a $15 billion increase in equilibrium GDP. b) There is a $20 billion decrease in equilibrium GDP. c) There is a $20 billion increase in equilibrium GDP. d) There is a $15 billion decrease in equilibrium GDP. 17) Which of the following is a true statement about the multiplier? a) The multiplier is a value between zero and one. b) The smaller the MPC, the smaller the multiplier. c) The multiplier solely depends on the MPC. d) The multiplier effect does not occur when autonomous expenditures decrease. 18) If crowding out occurs, an increase in government spending a) decreases the interest rate and consumption and investment spending rise. b) decreases the interest rate and consumption and investment spending decline. c) increases the interest rate and consumption and investment spending rise. d) increases the interest rate and consumption and investment spending decline. 19) If the federal government's expenditures are less than its tax revenues, then a) the budget is balanced. b) the government is deficit spending. c) a budget deficit results. d) a budget surplus results. 20) A federal budget deficit acts as an automatic stabiliser because a) Medicare payments increase during expansionary periods. b) unemployment benefit payments decrease during a recession. c) government tax revenues decrease during a recession. d) tax receipts decrease during expansionary periods. 21) The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus. a) increases; decreases b) decreases; increases c) increases; increases d) decreases; decreases

22) Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential, a) the budget will remain balanced. b) tax revenues will increase automatically. c) this will result in a budget deficit. d) transfer payments will decrease automatically. 23) To counteract the effect of automatic stabilisers during a recession and keep the budget balanced, the federal government must ________ government spending, or ________ taxes, and which will ________ aggregate demand. a) decrease; increase; reduce b) increase; decrease; increase c) increase; increase; reduce d) decrease; decrease; increase 24) If tax reduction and simplification are effective, then a) saving increases. b) investment decreases. c) less new firms are formed. d) labour supply decreases. 25) Tax reduction and simplification should ________ long run aggregate supply and ________ aggregate demand. a) increase; increase b) decrease; increase c) decrease; decrease d) increase; decrease