1) Which of the following would be an example of expansionary fiscal policy?

a) A reduction in interest rates.

b) A reduction in government subsidies to farmers.

c) A reduction in unemployment benefits.

d) A reduction in income taxes on low-income earners.

2) Appleville is a village that specializes in all forms of apple products. Suppose that each winter, when no apples are being produced, the aggregate output falls below the long-run output level. What type of fiscal policy might be most effective to correct this problem?

a) Reducing taxes in order to decrease aggregate demand.

b) Increasing taxes in order to increase aggregate demand.

c) Increasing government spending in order to increase aggregate demand.

d) Decreasing government spending in order to increase aggregate demand.

3) Which of the following is a common criticism of the use of fiscal policy?

a) Fiscal policy is often enacted too quickly, before the market is ready for it.

b) Expansionary fiscal policy can help pull an economy out of a recession.

c) A government borrowing money to finance fiscal policy can crowd out investments.

d) If no fiscal policy is used, the economy will never be able to correct itself, even partially.

4) Which of the following is an example of an automatic stabilizer?

a) Spending on unemployment benefits falls when the economy enters a recession.

b) The amount of tax revenues collected rises when an economy is booming.

c) Governments debate implementing tax cuts when the economy is in a recession.

d) Low-income households lose their food stamp benefits when unemployment rises.

5) If Northland has a debt of $5 million in 2014, and runs a deficit of $0.3 million in 2015, and a surplus of $0.4 million in 2016, what would its debt be at the end of 2016, assuming no additional interest is added to itsdebt?

a) $4.3 million

b) $4.9 million

c) $5.3 million

d) $5.7 million

6) The government of Happyland collects $100 million in taxes each year, and currently has a public debt of $1.2 billion, which it finances by issuing Treasury bonds that pay 8% per year. Is this a manageable level of debt for the government of Happyland?

a) Yes, the debt is manageable because an interest rate of 8% is relatively low.

b) Yes, the debt manageable because the public debt is only 12 times the size of tax revenues.

c) No, the debt is not manageable because interest payments equal $96 million per year.

d) No, the debt is not manageable because the government must repay the entire $1.2 billion debt at the end of the year.

7) South World has a total debt of $10 million and an annual GDP of $5 million. It currently pays 4% interest on its debt. What percentage of GDP does interest on the debt represent?

a) 4%

b) 8%

c) 15%

d) 50%