Deficit Spending
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AP Macroeconomics › Deficit Spending
According to Keynesian Economics, which of the following would weaken the multiplier effect?
An increase in interest rates
An increase in government spending
High velocity of money
Selling government bonds
Explanation
The correct answer is that an increase in interest rates would weaken the multiplier effect. The reason is that an increase in interest rates would make it more attractive for consumers to save money, so as a result, there would be less of a propensity to consume.
According to Keynesian Economics, which of the following would weaken the multiplier effect?
An increase in interest rates
An increase in government spending
High velocity of money
Selling government bonds
Explanation
The correct answer is that an increase in interest rates would weaken the multiplier effect. The reason is that an increase in interest rates would make it more attractive for consumers to save money, so as a result, there would be less of a propensity to consume.
According to Keynesian Economics, which of the following would weaken the multiplier effect?
An increase in interest rates
An increase in government spending
High velocity of money
Selling government bonds
Explanation
The correct answer is that an increase in interest rates would weaken the multiplier effect. The reason is that an increase in interest rates would make it more attractive for consumers to save money, so as a result, there would be less of a propensity to consume.
Which of these is a negative aspect of a law mandating a balanced budget?
It is pro-cyclical (makes the business cycle more severe)
It creates excess funds for public projects.
It leads to increasingly high taxes.
It leads to fluctuating tax rates.
Explanation
A balanced budget law is pro-cyclical because when the economy enters a recession (GDP decreases), the amount of production the government is able to tax decreases, leading to a decrease in government revenue. The government is unable to spend at a deficit, so the government must decrease expenditures. Government expenditures make up a substantial portion of GDP, so GDP decreases even more.
Which of these is a negative aspect of a law mandating a balanced budget?
It is pro-cyclical (makes the business cycle more severe)
It creates excess funds for public projects.
It leads to increasingly high taxes.
It leads to fluctuating tax rates.
Explanation
A balanced budget law is pro-cyclical because when the economy enters a recession (GDP decreases), the amount of production the government is able to tax decreases, leading to a decrease in government revenue. The government is unable to spend at a deficit, so the government must decrease expenditures. Government expenditures make up a substantial portion of GDP, so GDP decreases even more.
Which of these is a negative aspect of a law mandating a balanced budget?
It is pro-cyclical (makes the business cycle more severe)
It creates excess funds for public projects.
It leads to increasingly high taxes.
It leads to fluctuating tax rates.
Explanation
A balanced budget law is pro-cyclical because when the economy enters a recession (GDP decreases), the amount of production the government is able to tax decreases, leading to a decrease in government revenue. The government is unable to spend at a deficit, so the government must decrease expenditures. Government expenditures make up a substantial portion of GDP, so GDP decreases even more.
If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?
An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.
A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.
An increase in personal income taxes in order to help balance the budget.
A decrease in government transfer payments.
Explanation
The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.
The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.
If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?
An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.
A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.
An increase in personal income taxes in order to help balance the budget.
A decrease in government transfer payments.
Explanation
The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.
The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.
If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?
An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.
A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.
An increase in personal income taxes in order to help balance the budget.
A decrease in government transfer payments.
Explanation
The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.
The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.
The British economist who notably advocated deficit spending in order to pull a nation out of a recession or depression is _________.
John Maynard Keynes
Adam Smith
Alfred Marshall
William Stanley Jevens
Carl Menger
Explanation
John Maynard Keynes began arguing forcefully in the 1920s that spending in a deficit would actually help a country get out of an economic depression. The Great Depression of the 1930s saw many governments put Keynes' theories to the test, often with economic success. This time period is often known as the Keynesian Revolution.