Fiscal Policy Today: Sample Quiz

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1. John and Joe both earned $25,000 last year. This year, John has been promoted and will earn $30,000. Joe will still earn $25,000, but will also receive a bonus of $5,000 because his company had an unusually good year. The permanent income hypothesis suggests that:

John and Joe will most likely increase their spending by the same amount.
John will most likely increase his spending by more than Joe.
Joe will most likely increase his spending by more than John.
John and Joe will most likely save the extra $5000 to provide for retirement.

2. During the past 15 years attempts to alter macroeconomic variables have been:

about equally divided between fiscal and monetary policy.
primarily through fiscal policy with relatively little use of monetary policy.
primarily through monetary policy with relatively little use of fiscal policy.
almost nonexistent, since neither fiscal nor monetary policy has been used much.

3. What does the existence of the various sorts of time lags do for stabilization policy?

They increase the effectiveness of both fiscal and monetary policy.
They decrease the effectiveness of both fiscal and monetary policy.
They increase the effectiveness of fiscal policy and decrease the effectiveness of monetary policy.
They decrease the effectiveness of fiscal policy and increase the effectiveness of monetary policy.

4. What is the chief problem of using the government deficit as a measure of monetary policy?

There are no serious problems.
Some sorts of expansionary policy increase the deficit while other sorts decrease it.
It is influenced not just by monetary policy but also by the state of the economy.
It is affected by fiscal policy decisions, not by monetary policy decisions.

5. What is the chief problem of using the government deficit as a measure of fiscal policy?

There are no serious problems.
Some sorts of expansionary policy increase the deficit while other sorts decrease it.
It is influenced not just by fiscal policy but also by the state of the economy.
It is affected by monetary policy decisions, not by fiscal policy decisions.

6. A central assumption in both the permanent-income hypothesis and the life-cycle hypothesis is that:

people want to maintain smooth income streams throughout life.
people seek the highest standard of living that they can maintain.
the government has the responsibility to provide a social "safety net."
changes in investment depend both on income and interest rates.

7. A small college in Indiana recently discovered that it was running a much bigger deficit than it had realized. It is presently trying to decide what sorts of spending should be cut in the next budget. This college:

is no longer in recognition lag, but is now in decision lag.
is no longer in decision lag, but is now in recognition lag.
is no longer in decision lag, but is in impact lag.
does not have to worry about lags because it is not a government.

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Copyright Robert Schenk