Author: Henry Carol


1. Ricardian equivalence means that changes in:
A) private savings offset any changes in the government deficit.B) investment offset any changes in the government deficit.C) imports offset any changes in the government deficit.
2. Suppose you are analyzing data for an economy in which Ricardian equivalence holds true. If the budget deficit increases by 50, then:
A) investment will increase by 50 or more.B) private savings will increase by 50 or less.C) investment will decrease by 50 or less.D) private savings will decrease by 50 or more.
3.  Choose ALL that apply. How would Keynesian and Neoclassical economics propose dealing with cyclical unemployment?
A) Both would suggest an increase in aggregate demand by increasing government spending.B) Keynesians would suggest increasing government spending, while Neoclassicals would suggest tax rebates that stimulate productivity growth and labor demand.C) Keynesians would suggest an increase government spending, while Neoclassicals would suggest doing nothing because the labor market will correct itself.
4.  Choose ALL that apply. A limitation of a countercyclical fiscal policy is that: A) there is a long time lag between recognizing a recession and implementing a countercyclical policy. B) it has a longer impact lag than monetary policy. C) higher taxes and lower spending can be politically difficult to achieve during economic booms.
5.  Choose ALL that apply. During a recession, government investment in physical capital:
A) helps increase the output and productivity of an economy.
B) has a risk of crowding out private investment in physical capital.C) always generates positive returns to investment.
6.  The experience of the 1970’s led Keynesian economists to understand that monetary policy was:
A) less effective than previously believed.B) more effective than previously believed.
7.  Government investment in physical capital improvements is likely to cause crowding out if:
A) the economy is in deep recession and savings are sitting idle.B) it is financed by deficit spending.C) the economy is in booming and savings are scarce.
8.  Countercylical fiscal policies that stimulate an economy in a recession do not:
A) increase unemployment above the natural rate without eventually causing inflation. B) reduce unemployment below the natural rate without eventually increasing inflation 

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