Question

1. In the beginning of 2017, the U.S. government predicted that economic growth would rise by 2019 and that the government's deficit would also increase. The government, therefore, was predicting that in 2019 the cyclical deficit would _______ and the structural deficit would _______.

A. increase; increase

B. decrease; increase

C. increase; decrease

D. decrease; decrease

E. decrease; unchanged

2. Denmark's government budget was in surplus in 2014, and in deficit in the following year, 2015. We can conclude the

A. government must have raised tax rates or cut spending.

B. government must have cut tax rates or increased spending.

C. government fiscal policy did not change between 2014 and 2015.

D. government spending multiplier decreased.

E. None of the above.

3. Deflation will

A. increase aggregate demand.

B. increase the quantity of real GDP demanded.

C. decrease aggregate demand.

D. decrease the quantity of real GDP demanded.

E. None of the above.

4. According to the classical model, an increase in aggregate demand would

A. lead the economy to recession.

B. lead the economy to a deflationary cycle.

C. cause an adjustment to a higher price level.

D. raise real Gross Domestic Product (GDP) but leave the price level unchanged.

E. None of the above.

Answer 1

1) option B is correct. Cyclical deficit is associated with business cycle and if economy is expected to do well cyclical deficit should decline. structural deficit will be the deficit at full employment level and it may increase if the government mandatory spending is expected to increase.

2) option B is correct. Surplus budget can turn into a deficit budget if government spending is increased or there are tax cuts

3) option B is correct. Aggregate demand curve is downward sloping which means if the price level falls in deflation the real GDP demanded will increase

4) option C is correct.