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Homework answers / question archive / Bellevue College - ENGL 101 Chapter 13(28) Fiscal Policy 1)All of the following are sources of federal tax revenue EXCEPT:         A) the personal income tax

Bellevue College - ENGL 101 Chapter 13(28) Fiscal Policy 1)All of the following are sources of federal tax revenue EXCEPT:         A) the personal income tax

Economics

Bellevue College - ENGL 101

Chapter 13(28)

Fiscal Policy

1)All of the following are sources of federal tax revenue EXCEPT:

 

 

 

 

A)

the personal income tax.

 

B)

sales taxes.

 

C)

social insurance taxes.

 

D)

the corporate profits tax.

 

 

2.

The federal government's largest source of revenue is:

 

A)

property taxes.

 

B)

personal income and corporate profit taxes.

 

C)

sales taxes.

 

D)

social insurance taxes.

 

 

3.

Social insurance programs are:

 

A)

government programs intended to protect families against economic hardships.

 

B)

private insurance policies to protect families from hardships caused by government actions.

 

C)

private insurance policies that cover gaps in government-provided health care.

 

D)

programs to help unemployed people have a social life.

 

 

4.

Which of the following is a government transfer?

 

A)

wages paid to U.S. senators

 

B)

purchases of tanks for the army

 

C)

Social Security payments to retired auto workers

 

D)

payments to contractors for repairs on interstate highways

 

 

5.

All of the following are sources of state and local revenue EXCEPT:

 

A)

social insurance taxes.

 

B)

property taxes.

 

C)

sales taxes.

 

D)

income taxes.

 

 

6.

Which of the following is NOT an example of government purchases of goods and services?

 

A)

a federal prosecutor's salary

 

B)

new pavement for interstate highway I-95

 

C)

a surgeon's bill reimbursed under the Medicare program

 

D)

equipping U.S. air marshals with electroshock weapons

 

 

7.

Which of the following is NOT an example of government transfers?

 

A)

Medicaid-paid prescription drugs for low-income individuals

 

B)

unemployment insurance

 

C)

a Social Security disability pension

 

D)

a reimbursement of personal income tax withheld from wages

 

 

8.

Government payments to households for which no good or service is provided in return are called:

 

A)

transfer payments.

 

B)

government purchases.

 

C)

consumption expenditures.

 

D)

investment expenditures.

 

 

9.

Medicaid, Medicare, and Social Security are examples of:

 

A)

unilateral payments.

 

B)

transfer payments.

 

C)

monetary policy.

 

D)

taxes.

 

 

10.

The largest source of federal tax revenues is:

 

A)

property taxes.

 

B)

personal income taxes.

 

C)

corporate income taxes.

 

D)

sales taxes.

 

 

11.

Which of the following is the largest source of tax revenue for the U.S. federal government?

 

A)

personal income taxes

 

B)

corporate profit taxes

 

C)

sales taxes

 

D)

social insurance taxes

 

 

12.

Which of the following is NOT a government transfer payment?

 

A)

the federal payroll

 

B)

Social Security

 

C)

Medicare

 

D)

Medicaid

 

 

13.

Spending for Medicare and Medicaid accounts for approximately _____ of federal spending.

 

A)

10%

 

B)

20%

 

C)

30%

 

D)

40%

 

 

14.

The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand.

 

A)

expansionary; increased

 

B)

expansionary; decreased

 

C)

contractionary; increased

 

D)

contractionary; decreased

 

 

15.

In the basic equation of national income accounting, GDP = C + I + G + X – IM, the government directly controls _____ and influences _____ through fiscal policy.

 

A)

G; C and I

 

B)

T; G and C

 

C)

C; X and M

 

D)

I; G and T

 

 

16.

A change in taxes or a change in government transfers affects consumption through its effect on:

 

A)

autonomous consumption.

 

B)

the marginal propensity to save.

 

C)

disposable income.

 

D)

government spending.

 

 

17.

The basic equation of national income accounting is GDP = C + I + G + X – IM. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects:

 

A)

IM.

 

B)

I.

 

C)

C.

 

D)

X.

 

 

18.

Consumer spending will likely rise if:

 

A)

government transfers rise.

 

B)

the government raises tax rates.

 

C)

government transfers fall.

 

D)

the government raises tax rates or government transfers fall.

 

 

19.

Consumer spending will likely fall if:

 

A)

government transfers rise.

 

B)

the government raises tax rates.

 

C)

the government lowers tax rates.

 

D)

government transfers rise or tax rates are lowered.

 

 

20.

Which of the following is NOT a tool of fiscal policy?

 

A)

changing tax rates

 

B)

government transfers

 

C)

government purchases of goods and services

 

D)

changes in the money supply

 

 

21.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

 

A)

decrease government purchases.

 

B)

decrease taxes.

 

C)

decrease government transfers.

 

D)

increase real interest rates.

 

 

22.

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

 

A)

increase government purchases; AD; left

 

B)

increase transfer payments; AS; right

 

C)

increase tax rates; AD; right

 

D)

increase government purchases; AD; right

 

 

23.

Suppose the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

 

A)

lower tax rates.

 

B)

decrease government purchases.

 

C)

increase the investment tax credit.

 

D)

lower the real interest rate.

 

 

24.

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____.

 

A)

decrease government purchases; right

 

B)

increase government purchases; left

 

C)

decrease government purchases; left

 

D)

raise tax rates; right

 

 

Use the following to answer questions 25-29:

 

Figure: Short-Run Equilibrium

 

 

 

 

 

25.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. Appropriate fiscal policy action is:

 

A)

a decrease in transfer payments.

 

B)

an increase in government purchases.

 

C)

a decrease in tax rates.

 

D)

an increase in transfer payments.

 

 

26.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. It reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:

 

A)

P2 – P1.

 

B)

Y1 – YP.

 

C)

P2 – P0.

 

D)

P1 – P0.

 

 

27.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, it is in a(n):

 

A)

recessionary gap.

 

B)

inflationary gap.

 

C)

high level of unemployment.

 

D)

liquidity trap.

 

 

28.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

 

A)

expansionary; right

 

B)

expansionary; left

 

C)

contractionary; right

 

D)

contractionary; left

 

 

29.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the appropriate policy to return the economy to potential output would be a(n):

 

A)

increase in transfer payments.

 

B)

increase in government spending.

 

C)

increase in taxes.

 

D)

decrease in taxes.

 

 

Use the following to answer questions 30-33:

 

Figure: Short- and Long-Run Equilibrium

 

 

 

 

 

30.

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. The government should _____ aggregate demand by _____ taxes to close the _____ gap.

 

A)

expand; increasing; inflationary

 

B)

reduce; cutting; inflationary

 

C)

expand; cutting; recessionary

 

D)

reduce; increasing; recessionary

 

 

31.

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, it is in a(n):

 

A)

recessionary gap.

 

B)

inflationary gap.

 

C)

high level of unemployment.

 

D)

liquidity trap.

 

 

32.

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____ .

 

A)

expansionary; right

 

B)

expansionary; left

 

C)

contractionary; right

 

D)

contractionary; left

 

 

33.

(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n):

 

A)

increase in transfer payments.

 

B)

decrease in transfer payments.

 

C)

increase in taxes.

 

D)

decrease in government spending.

 

 

34.

If the economy is at equilibrium below potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.

 

A)

recessionary; expansionary

 

B)

inflationary; expansionary

 

C)

recessionary; contractionary

 

D)

inflationary; contractionary

 

 

35.

Expansionary fiscal policy:

 

A)

increases long-run aggregate supply.

 

B)

decreases long-run aggregate supply.

 

C)

increases aggregate demand.

 

D)

decreases aggregate demand.

 

 

36.

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

 

A)

a decrease in government transfers.

 

B)

an increase in government spending.

 

C)

a decrease in government spending.

 

D)

an increase in the money supply to decrease interest rates.

 

 

37.

Which of the following is an expansionary fiscal policy?

 

A)

an increase in the money supply that decreases interest rates

 

B)

an increase in taxes that reduces the budget deficit and decreases consumption

 

C)

a decrease in government spending

 

D)

an increase in unemployment benefits

 

 

38.

If the economy is at equilibrium above potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.:

 

A)

recessionary; expansionary

 

B)

inflationary; contractionary

 

C)

recessionary; contractionary

 

D)

inflationary; expansionary

 

 

39.

If overall spending declines and thus the economy contracts, the government could counter this by:

 

A)

raising tax rates.

 

B)

decreasing government transfers.

 

C)

increasing government spending.

 

D)

decreasing government spending.

 

 

Use the following to answer questions 40-43:

 

Figure: Short- and Long-Run Equilibrium II

 

 

 

 

 

40.

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy?

 

A)

Increase government spending to close the recessionary gap.

 

B)

Decrease government spending to close the recessionary gap.

 

C)

Lower tax rates to close the inflationary gap.

 

D)

Raise tax rates to close the inflationary gap.

 

 

41.

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, it is in a(n):

 

A)

recessionary gap.

 

B)

inflationary gap.

 

C)

high level of unemployment.

 

D)

liquidity trap.

 

 

42.

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

 

A)

expansionary; right

 

B)

expansionary; left

 

C)

contractionary; right

 

D)

contractionary; left

 

 

43.

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output would be a(n):

 

A)

increase in government spending.

 

B)

decrease in government spending.

 

C)

increase in transfer payments.

 

D)

decrease in taxes.

 

 

44.

A reduction in government transfers _____, therefore shifting the aggregate demand curve to the _____.

 

A)

increases labor costs to companies, increasing investment; left

 

B)

decreases government purchases of goods and services, decreasing consumption; right

 

C)

increases the marginal propensity to save, decreasing consumption; right

 

D)

decreases disposable income and consumption; left

 

 

45.

A cut in taxes _____, shifting the aggregate demand curve to the _____.

 

A)

decreases government transfers and consumption; right

 

B)

increases disposable income and consumption; right

 

C)

decreases the marginal propensity to save, increasing consumption; left

 

D)

increases corporate profits and investment; left

 

 

46.

An increase in government transfers is an example of _____  fiscal policy because it shifts the aggregate demand curve to the _____ aggregate output.

 

A)

expansionary; left, increasing

 

B)

contractionary; left, decreasing

 

C)

expansionary; right, increasing

 

D)

contractionary; right, decreasing

 

 

47.

To close a recessionary gap with fiscal policy, the government could:

 

A)

increase national savings so that the interest rate falls.

 

B)

lower the annual income exempt from paying the personal income tax.

 

C)

lower the corporate income tax rate.

 

D)

lower the amount of unemployment insurance benefits.

 

 

48.

To close an inflationary gap with fiscal policy, the government could:

 

A)

reduce budget allocations to interstate highway maintenance.

 

B)

increase federal subsidies to state universities.

 

C)

lower the corporate income tax rate.

 

D)

raise the average amount awarded for a disability pension.

 

 

49.

Contractionary fiscal policy includes:

 

A)

increasing government purchases.

 

B)

increasing government transfers.

 

C)

raising tax rates.

 

D)

decreasing money growth.

 

 

Use the following to answer questions 50-56:

 

Figure: Inflationary and Recessionary Gaps

 

 

 

 

 

50.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E1, the economy:

 

A)

is in equilibrium.

 

B)

has an inflationary gap.

 

C)

has a recessionary gap.

 

D)

has low unemployment.

 

 

51.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E2, the economy:

 

A)

is in equilibrium.

 

B)

has an inflationary gap.

 

C)

has a recessionary gap.

 

D)

has high unemployment.

 

 

52.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E3, the economy:

 

A)

is in equilibrium.

 

B)

has an inflationary gap.

 

C)

has a recessionary gap.

 

D)

is stagnating.

 

 

53.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by:

 

A)

increased government purchases.

 

B)

decreased government transfers.

 

C)

higher tax rates.

 

D)

decreased government purchases.

 

 

54.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD3 to AD1 could be caused by:

 

A)

increased government purchases.

 

B)

increased government transfers.

 

C)

higher tax rates.

 

D)

lower tax rates.

 

 

55.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. Which of the following measures an inflationary gap?

 

A)

Y3 – Y1

 

B)

Y3 – Y2

 

C)

Y2 – Y1

 

D)

Y3 – Y0

 

 

56.

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. Which of the following measures a recessionary gap?

 

A)

Y3 – Y1

 

B)

Y3 – Y2

 

C)

Y2 – Y1

 

D)

Y3 – Y0

 

 

57.

A government might want to increase aggregate demand to:

 

A)

close an inflationary gap.

 

B)

close a recessionary gap.

 

C)

reduce prices.

 

D)

reduce employment.

 

 

58.

An inflationary gap occurs when:

 

A)

prices are too low.

 

B)

real output is too low.

 

C)

potential output exceeds actual output.

 

D)

actual output exceeds potential output.

 

 

Use the following to answer questions 59-63:

 

Figure: Fiscal Policy I

 

 

 

 

 

59.

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases,_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1;  right; increase; increase

 

D)

AD1;  right; decrease; increase

 

 

60.

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; right; decrease; increase

 

 

61.

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; right; decrease; increase

 

 

62.

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is an increase in taxes_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; right; decrease; increase

 

 

63.

(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; right; increase; increase

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1;  right; decrease; increase

 

 

Use the following to answer questions 64-70:

 

Figure: Fiscal Policy II

 

 

 

 

 

64.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; left; decrease; decrease

 

 

65.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E2. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; left; decrease; decrease

 

 

66.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; right; increase; increase

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; left; decrease; decrease

 

 

67.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; left; decrease; decrease

 

 

68.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD2; left; increase; decrease

 

B)

AD2; left; decrease; decrease

 

C)

AD1; right; increase; increase

 

D)

AD1; right; decrease; increase

 

 

69.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is an increase in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD1; left; increase; decrease

 

B)

AD1; left; decrease; decrease

 

C)

AD2; right; increase; increase

 

D)

AD2; right; decrease; increase

 

 

70.

(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

 

A)

AD1; right; increase; increase

 

B)

AD1; left; decrease; decrease

 

C)

AD2; right; increase; increase

 

D)

AD2; right; decrease; increase

 

 

71.

Fiscal policy that increases aggregate demand is:

 

A)

balanced.

 

B)

supplemental.

 

C)

contractionary.

 

D)

expansionary.

 

 

72.

Fiscal policy that decreases aggregate demand is:

 

A)

balanced.

 

B)

supplemental.

 

C)

contractionary.

 

D)

expansionary.

 

 

73.

Expansionary fiscal policy includes:

 

A)

increasing taxes.

 

B)

increasing the money supply.

 

C)

decreasing government expenditures.

 

D)

increasing government expenditures.

 

 

74.

Expansionary fiscal policy includes:

 

A)

decreasing taxes.

 

B)

increasing taxes.

 

C)

increasing the money supply.

 

D)

decreasing government expenditures.

 

 

75.

Contractionary fiscal policy includes:

 

A)

decreasing taxes.

 

B)

decreasing the money supply.

 

C)

decreasing government expenditures.

 

D)

increasing government expenditures.

 

 

76.

Contractionary fiscal policy includes:

 

A)

decreasing taxes.

 

B)

increasing taxes.

 

C)

increasing the money supply.

 

D)

increasing government expenditures.

 

 

77.

An expansionary fiscal policy either _____ government spending or _____ taxes.

 

A)

increases; increases

 

B)

decreases; increases

 

C)

increases; decreases

 

D)

decreases; decreases

 

 

78.

A contractionary fiscal policy either _____ government spending or _____ taxes.

 

A)

increases; increases

 

B)

decreases; increases

 

C)

increases; decreases

 

D)

decreases; decreases

 

 

79.

An expansionary fiscal policy:

 

A)

usually decreases a government budget deficit or increases a government budget surplus.

 

B)

may include decreases in government spending.

 

C)

may include increases in taxes.

 

D)

may include decreases in taxes.

 

 

80.

A contractionary fiscal policy:

 

A)

decreases a government budget deficit or increases a government budget surplus.

 

B)

may include increases in government spending.

 

C)

may include reductions in taxes.

 

D)

may include discretionary increases in transfer payments.

 

 

81.

A recessionary gap can be closed with:

 

A)

contractionary monetary policy.

 

B)

an increase in taxes.

 

C)

a decrease in government purchases.

 

D)

expansionary fiscal policy.

 

 

82.

An inflationary gap can be closed with:

 

A)

expansionary monetary policy.

 

B)

a decrease in taxes.

 

C)

a decrease in government purchases.

 

D)

expansionary fiscal policy.

 

 

83.

Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

 

A)

right; inflationary

 

B)

right; recessionary

 

C)

left; inflationary

 

D)

left; recessionary

 

 

84.

Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

 

A)

right; inflationary

 

B)

right; recessionary

 

C)

left; inflationary

 

D)

left; recessionary

 

 

85.

If there is an inflationary gap in the economy, discretionary fiscal policy will likely include action to:

 

A)

shift aggregate demand to the right.

 

B)

prevent the aggregate demand curve from shifting.

 

C)

shift aggregate demand to the left.

 

D)

shift both aggregate demand and short-run aggregate supply to the left.

 

 

86.

If there is a recessionary gap, discretionary fiscal policy would likely include action to:

 

A)

shift aggregate demand to the right.

 

B)

shift aggregate demand to the left.

 

C)

leave aggregate demand alone and shift short-run aggregate supply to the left.

 

D)

shift aggregate demand to the right and shift short-run aggregate supply to the left.

 

 

Use the following to answer questions 87-92:

 

Figure: Fiscal Policy Choices

 

 

 

 

 

87.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output level Y1 and there is:

 

A)

an inflationary gap.

 

B)

a recessionary gap.

 

C)

equilibrium at full employment.

 

D)

no gap.

 

 

88.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (b), if real GDP is equal to Y1, there is:

 

A)

an inflationary gap.

 

B)

a recessionary gap.

 

C)

equilibrium at full employment.

 

D)

no gap.

 

 

89.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.

 

A)

panel (b); AD1 to AD2

 

B)

panel (a); AD2 to AD1

 

C)

panel (a); AD1 to AD2

 

D)

panel (b); AD2 to AD1

 

 

90.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use expansionary fiscal policy to shift aggregate demand in _____ from _____.

 

A)

panel (b); AD1 to AD2

 

B)

panel (a); AD2 to AD1

 

C)

panel (a); AD1 to AD2

 

D)

panel (b); AD2 to AD1

 

 

91.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y1, government spending is likely to be _____ and taxes are likely to be _____.

 

A)

reduced; cut

 

B)

increased; increased

 

C)

reduced; increased

 

D)

increased; cut

 

 

92.

(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the government uses discretionary fiscal policy for the economy in panel (b) when real GDP is Y1, government spending is likely to be _____ and taxes are likely to be _____.

 

A)

reduced; cut

 

B)

increased; increased

 

C)

reduced; increased

 

D)

increased; cut

 

 

Use the following to answer questions 93-99:

 

Figure: Fiscal Policy Options

 

 

 

 

 

93.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

 

A)

decrease; increase

 

B)

decrease; maintain

 

C)

increase; increase

 

D)

increase; maintain

 

 

94.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD', the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

 

A)

increase; increase

 

B)

increase; decrease

 

C)

decrease; increase

 

D)

decrease; maintain

 

 

95.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD?, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

 

A)

increase; decrease

 

B)

increase; maintain

 

C)

decrease; decrease

 

D)

decrease; maintain

 

 

96.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD?, the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates.

 

A)

decrease; increase

 

B)

decrease; decrease

 

C)

increase; maintain

 

D)

increase; decrease

 

 

97.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD:

 

A)

a contractionary fiscal policy may be warranted.

 

B)

an expansionary fiscal policy may be warranted.

 

C)

no change in discretionary fiscal policy is warranted.

 

D)

the economy is in an inflationary gap.

 

 

98.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD':

 

A)

a contractionary fiscal policy may be warranted.

 

B)

an expansionary fiscal policy may be warranted.

 

C)

the economy is in long-run equilibrium.

 

D)

the economy is experiencing an inflationary gap.

 

 

99.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD”:

 

A)

the economy is in long-run equilibrium.

 

B)

an expansionary fiscal policy may be warranted.

 

C)

a contractionary fiscal policy may be warranted.

 

D)

the economy is in a recessionary gap.

 

 

100.

Each of the following is an expansionary fiscal policy EXCEPT:

 

A)

an increase in government transfers.

 

B)

an increase in government purchases.

 

C)

an increase in tax rates.

 

D)

a reduction in marginal tax rates.

 

 

101.

A contractionary fiscal policy is one that reduces aggregate demand by decreasing:

 

A)

government purchases.

 

B)

the money supply.

 

C)

interest rates.

 

D)

taxes.

 

 

102.

Policy makers use a contractionary fiscal policy when they want to close:

 

A)

a recessionary gap.

 

B)

any kind of output gap.

 

C)

an inflationary gap.

 

D)

an open economy.

 

 

Use the following to answer questions 103-104:

 

Figure: AD–AS

 

 

 

 

103.

(Figure: AD–AS) Look at the figure AD–AS. Suppose the economy is producing the output level Yp and a negative demand shock shifts the AD1 curve to AD3. The economy now has a(n) _____ gap, which can be closed by _____ fiscal policy.

 

A)

inflationary; expansionary

 

B)

recessionary; contractionary

 

C)

recessionary; expansionary

 

D)

inflationary; contractionary

 

 

104.

(Figure: AD–AS) Look at the figure AD–AS. Consider an economy that is producing an output level of Y1. The economy has a(n) _____ gap, which can be closed by _____ fiscal policy.

 

A)

recessionary; expansionary

 

B)

inflationary; contractionary

 

C)

inflationary; expansionary

 

D)

recessionary; contractionary

 

 

105.

Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy?

 

A)

Government spending may crowd out private spending.

 

B)

Government borrowing may crowd out private investment spending.

 

C)

Government borrowing may reduce the marginal propensity to consume.

 

D)

Government budget deficits may lead to reduced private spending.

 

 

106.

Government spending will NOT crowd out private spending if:

 

A)

all of the resources in the economy are employed.

 

B)

aggregate income is at its potential level.

 

C)

there is an inflationary gap.

 

D)

there is a recessionary gap.

 

 

107.

If _____, expansionary fiscal policy is most likely to crowd out private spending.

 

A)

the unemployment rate is 15%

 

B)

aggregate income is $500 billion above its potential level

 

C)

aggregate income is $800 billion below its potential level

 

D)

aggregate output is $300 billion below its potential level

 

 

108.

Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate.

 

A)

high; increase; increase

 

B)

high; increase; decrease

 

C)

low; increase; decrease

 

D)

low; decrease; decrease

 

 

109.

After passage of the American Recovery and Reinvestment Act in 2009 government borrowing _____, and interest rates_____.

 

A)

increased; increased to record levels

 

B)

increased; remained very low

 

C)

decreased; increased

 

D)

decreased; decreased

 

 

110.

Some argue that budget deficits will lead to reduced private spending because:

 

A)

the government will purchase so many goods and services that it will lead to a shortage of consumer goods and services.

 

B)

budget deficits will reduce interest rates on savings and decrease consumers' wealth.

 

C)

consumers, anticipating higher taxes, will reduce consumption to save money to pay the future taxes.

 

D)

the government will have to increase transfer payments to finance the deficit.

 

 

111.

The theory of Ricardian equivalence argues that expansionary fiscal policy:

 

A)

will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes.

 

B)

is not effective because it causes higher interest rates and crowds out investment spending.

 

C)

is effective, but contractionary fiscal policy is not.

 

D)

is more effective than expansionary monetary policy.

 

 

112.

If the economy is at full employment, expansionary fiscal policy is most likely to lead to:

 

A)

lower inflation rates.

 

B)

higher inflation rates.

 

C)

increases in unemployment.

 

D)

decreases in interest rates.

 

 

113.

One of the shortcomings of fiscal policy is that:

 

A)

it has significant time lags, which make it more effective.

 

B)

it takes effect immediately, so it is the best policy to use in an economic crisis.

 

C)

it affects aggregate demand indirectly through the interest rate.

 

D)

it has time lags, so sometimes it may end up destabilizing the economy.

 

 

114.

Government's efforts to stabilize the business cycle through fiscal policy can destabilize the economy because of:

 

A)

the time necessary to draw up a budget appropriate to the circumstances.

 

B)

a negative interaction between fiscal and monetary policy due to the multiplier effect.

 

C)

a tendency of prices to change faster than the interest rate.

 

D)

business cycles that are closely synchronized to the political cycle.

 

 

115.

Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:

 

A)

its ineffectiveness.

 

B)

government waste.

 

C)

lags in deciding on and implementing a policy change.

 

D)

the business cycle.

 

 

116.

Time lags associated with policy decision making and implementation suggest that:

 

A)

increases in spending to fight a recessionary gap can be timed correctly.

 

B)

increases in spending to fight a recessionary gap may occur too early.

 

C)

increases in spending to fight a recessionary gap may occur too late.

 

D)

most information is old before the public is aware of it.

 

 

117.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result?

 

A)

Equilibrium real GDP will be more than anticipated.

 

B)

The economy will move into a recession.

 

C)

The economy will generate a larger inflationary gap than anticipated.

 

D)

This will not have any adverse effects on the economy, since inflation has been abated.

 

 

118.

Suppose the government increases spending more than is necessary to close a recessionary gap. What is the most likely result?

 

A)

Inflation will increase.

 

B)

The price level will decline.

 

C)

The equilibrium real GDP will fall.

 

D)

The equilibrium real GDP will fall short of potential GDP.

 

 

119.

Decreasing funding for space exploration will shift the _____ curve to the _____.

 

A)

short-run aggregate supply; left

 

B)

short-run aggregate supply; right

 

C)

aggregate demand; left

 

D)

aggregate demand; right

 

 

120.

The decision to build more aircraft carriers to keep employment high is an example of:

 

A)

prudent defense spending.

 

B)

expansionary fiscal policy.

 

C)

neutral fiscal policy.

 

D)

being prepared to defend our country.

 

 

121.

All of the following are examples of fiscal policy EXCEPT:

 

A)

increasing Medicaid reimbursements.

 

B)

reducing the money supply to raise the interest rate.

 

C)

increasing personal income tax deductions for home ownership.

 

D)

reducing federal subsidies to state universities.

 

 

122.

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

 

A)

expansionary fiscal

 

B)

contractionary fiscal

 

C)

expansionary monetary

 

D)

contractionary monetary

 

 

123.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

 

A)

0.8.

 

B)

1.25.

 

C)

5.

 

D)

4.

 

 

124.

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, _____ government spending by _____ would bring the economy to potential output.

 

A)

increasing; $25 billion

 

B)

increasing; $100 billion

 

C)

increasing; $20 billion

 

D)

decreasing; $100 billion

 

 

125.

The multiplier effect of changes in government purchases of goods and services is equal to:

 

A)

1 / (1 – MPS).

 

B)

1 / (1 – MPC).

 

C)

MPS / (1 – MPC).

 

D)

MPC / (1 – MPS).

 

 

126.

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by:

 

A)

$25 million.

 

B)

$175 million.

 

C)

$400 million.

 

D)

$2,800 million.

 

 

127.

A $100 million increase in government spending increases equilibrium GDP by:

 

A)

$100 million.

 

B)

more than $100 million.

 

C)

less than $100 million.

 

D)

zero.

 

 

128.

If the marginal propensity to consume is 0.9, then the government spending multiplier is:

 

A)

0.1.

 

B)

1.11.

 

C)

9.

 

D)

10.

 

 

129.

If the marginal propensity to consume is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by:

 

A)

$40 million.

 

B)

$50 million.

 

C)

$200 million.

 

D)

$250 million.

 

 

130.

If the government spends an extra $5 billion on goods and services, GDP will:

 

A)

go up by $5 billion.

 

B)

remain unchanged.

 

C)

increase by less than $5 billion.

 

D)

increase by more than $5 billion.

 

 

131.

If the marginal propensity to save is 0.1, then the government spending multiplier has a value of

 

A)

0.1.

 

B)

9.

 

C)

10.

 

D)

0.11.

 

 

Use the following to answer question 132:

 

Figure: Short-Run Equilibrium

 

 

 

 

 

132.

(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. The economy is in short-run equilibrium. To move the economy to potential GDP, the government should reduce its spending by an amount equal to:

 

A)

(Y1 – YP).

 

B)

(Y1 – YP) / (1 – MPC).

 

C)

(Y1 – YP)MPC.

 

D)

(Y1 – YP)(1 – MPC).

 

 

133.

The income expenditure model predicts that if the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, real GDP will increase by:

 

A)

$100 billion.

 

B)

$750 billion.

 

C)

$400 billion.

 

D)

$300 billion.

 

 

134.

The income–expenditure model predicts that if the marginal propensity to consume is 0.8 and the federal government decreases spending by $200 billion, real GDP will fall by:

 

A)

$160 billion.

 

B)

$200 billion.

 

C)

$800 billion.

 

D)

$1,000 billion.

 

 

135.

The marginal propensity to consume is:

 

A)

equal to one.

 

B)

between zero and one.

 

C)

greater than one.

 

D)

often negative.

 

 

136.

If the marginal propensity to consume is 0.75, the multiplier for government purchases of goods and services will be:

 

A)

0.75.

 

B)

1.33.

 

C)

4.

 

D)

7.5.

 

 

137.

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will:

 

A)

increase by $30 billion.

 

B)

increase by $22.5 billion.

 

C)

decrease by $30 billion.

 

D)

decrease by $120 billion.

 

 

138.

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ government purchases of goods and services by _____ .

 

A)

increase; $25 billion

 

B)

increase; $33 billion

 

C)

increase; $100 billion

 

D)

decrease; $100 billion

 

 

139.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____ .

 

A)

decrease; $100 billion

 

B)

decrease; $60 billion

 

C)

decrease; $40 billion

 

D)

increase; $100 billion

 

 

140.

A change in government transfers shifts the aggregate demand curve by _____ than a change in government spending for goods and services and has a _____ effect on real GDP.

 

A)

more; smaller

 

B)

more; larger

 

C)

less; smaller

 

D)

less; larger

 

 

141.

A change in taxes shifts the aggregate demand curve by _____ than a change in government spending for goods and services and has a _____ effect on real GDP.

 

A)

more; smaller

 

B)

more; larger

 

C)

less; smaller

 

D)

less; larger

 

 

142.

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

 

A)

the government pays a higher price than households for the same goods and services.

 

B)

production of the goods and services the government purchases has a bigger impact on real GDP than production of consumer goods.

 

C)

many households fail to file their income tax and claim their refund.

 

D)

in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent.

 

 

143.

If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer payments is:

 

A)

less than 4.

 

B)

equal to 4.

 

C)

greater than 4.

 

D)

equal to 0.75.

 

 

144.

If the marginal propensity to consume is 0.75 and taxes increase by $30 billion, real GDP will:

 

A)

increase by exactly $30 billion.

 

B)

decrease by exactly $30 billion.

 

C)

decrease by less than $120 billion.

 

D)

decrease by more than $120 billion.

 

 

145.

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:

 

A)

increase by exactly $30 billion.

 

B)

decrease by exactly $30 billion.

 

C)

increase by more than $120 billion.

 

D)

increase by less than $120 billion.

 

 

146.

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ taxes by _____ .

 

A)

decrease; more than $25 billion

 

B)

decrease; less than $25 billion

 

C)

increase; more than $25 billion

 

D)

increase; less than $25 billion

 

 

147.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ transfer payments by _____ $40 billion.

 

A)

increase; less than

 

B)

increase; more than

 

C)

decrease; less than

 

D)

decrease; more than

 

 

148.

If the marginal propensity to consume is 0.9, then the tax multiplier will be:

 

A)

impossible to determine.

 

B)

greater than 10.

 

C)

less than 10.

 

D)

zero, because there is no multiplier effect from taxes.

 

 

149.

Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the marginal propensity to consume is equal to 0.80. The government should  _____ taxes by _____ to bring the economy to potential output.

 

A)

raise; $25 billion

 

B)

cut; $33.33 billion

 

C)

raise; $33.33 billion

 

D)

cut; $25 billion

 

 

150.

Consider an economy whose households save 20% of increases in their income. If the government lowers its transfers by $100 billion, then the real GDP will:

 

A)

decrease by $125 billion.

 

B)

decrease by $400 billion.

 

C)

increase by $125 billion.

 

D)

decrease by $500 billion.

 

 

151.

Suppose that marginal propensity to consume is equal to 0.9 and the government increases its spending by $200 billion. This increase in spending is financed by a $200 billion increase in taxes. As a result of this, GDP will:

 

A)

not change at all.

 

B)

decrease by $200 billion.

 

C)

increase by $2,000 billion.

 

D)

increase by $200 billion.

 

 

152.

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion.  Real GDP will _____ by _____.

 

A)

increase; $200 billion

 

B)

decrease; $200 billion

 

C)

increase; $160 billion

 

D)

decrease; $160 billion

 

 

153.

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. The tax multiplier is:

 

A)

exactly 0.8.

 

B)

impossible to determine.

 

C)

greater than 5.

 

D)

less than 5.

 

 

154.

The multiplier effect of changes in government transfers is:

 

A)

greater than the multiplier effect of a change in government spending.

 

B)

zero because transfer payments do not affect aggregate demand.

 

C)

less than the multiplier effect of a change in government spending.

 

D)

impossible to determine.

 

 

155.

If the marginal propensity to save is 0.25, investment spending is $600 million, and the government increases its transfers by $100 million, then real GDP increases by:

 

A)

$25 million.

 

B)

$150 million.

 

C)

$300 million.

 

D)

$1,800 million.

 

 

156.

Changes in taxes and government transfers shift the aggregate demand curve _____ government purchases.

 

A)

by more than

 

B)

by exactly as much as

 

C)

by less than

 

D)

in inverse proportion to

 

 

157.

If the marginal propensity to consume is 0.1, then the tax multiplier is:

 

A)

exactly 0.1.

 

B)

more than 10.

 

C)

less than 10.

 

D)

exactly 10.

 

 

158.

If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:

 

A)

$40 million.

 

B)

$50 million.

 

C)

$200 million.

 

D)

$250 million.

 

 

159.

A cut in taxes will have the most effect on aggregate demand if it is given to:

 

A)

people with a low marginal propensity to consume.

 

B)

people with a high marginal propensity to consume.

 

C)

everyone in the economy.

 

D)

those who hold a large amount of wealth.

 

 

160.

Discretionary fiscal policy entails:

 

A)

changing the money supply to influence interest rates and investment spending.

 

B)

using government spending or tax policy to affect aggregate demand.

 

C)

lifting trade barriers on imports.

 

D)

setting policy to raise the natural rate of unemployment.

 

 

161.

Discretionary fiscal policy refers to changes in:

 

A)

interest rates.

 

B)

the money supply.

 

C)

government spending or taxes to close a recessionary or inflationary gap.

 

D)

taxes to account for externalities and control pollution.

 

 

162.

Suppose the government increases spending to fund tuition assistance for qualified college students.  Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

 

A)

increase; contractionary; decrease

 

B)

decrease; contractionary; increase

 

C)

increase; expansionary; increase

 

D)

decrease; expansionary; increase

 

 

163.

Congress increases personal income tax rates to balance the budget. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

 

A)

increase; contractionary; decrease

 

B)

decrease; contractionary; decrease

 

C)

increase; expansionary; increase

 

D)

decrease; expansionary; increase

 

 

164.

When the economy expands, income tax receipts will:

 

A)

rise, but sales tax revenues will remain the same.

 

B)

fall, but sales tax revenues will rise.

 

C)

stay the same unless the government changes the tax rates.

 

D)

rise, and sales tax revenues will rise.

 

 

165.

The automatic stabilizer in government tax revenue that occurs when GDP rises _____ the multiplier.

 

A)

has no effect on

 

B)

increases

 

C)

decreases

 

D)

may either increase or decrease

 

 

166.

The fact that tax receipts fall during a recession:

 

A)

makes the multiplier stronger.

 

B)

has no impact on the multiplier.

 

C)

reduces the adverse effect of the initial fall in aggregate demand.

 

D)

acts as an automatic contractionary fiscal policy.

 

 

167.

Fiscal policies that require no government action but that are expansionary when the economy contracts and contractionary when the economy expands are known as:

 

A)

discretionary fiscal policy.

 

B)

automatic stabilizers.

 

C)

autonomous spending policies.

 

D)

destabilizing fiscal policies.

 

 

168.

Because the revenue from personal income taxes increases as disposable income increases:

 

A)

the multiplier effect decreases.

 

B)

the marginal propensity to consume decreases as income increases.

 

C)

the multiplier effect increases.

 

D)

the marginal propensity to save increases as income decreases.

 

 

169.

Government tax revenue rises and falls with the business cycle as:

 

A)

the multiplier effect of taxes and government transfers.

 

B)

a discretionary fiscal policy.

 

C)

the multiplier effect of government purchases.

 

D)

an automatic stabilizer.

 

 

170.

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

 

A)

expansionary

 

B)

contractionary

 

C)

neutral

 

D)

ineffective

 

 

171.

An example of an automatic stabilizer is:

 

A)

tax receipts rising when GDP rises.

 

B)

a discretionary increase in taxes.

 

C)

government purchases of goods and services rising when GDP rises.

 

D)

government transfers rising when GDP rises.

 

 

172.

An automatic stabilizer that works when the economy contracts is:

 

A)

a rise in tax receipts.

 

B)

a fall in government purchases.

 

C)

a discretionary decrease in government purchases.

 

D)

a rise in government transfers as more people receive unemployment insurance benefits.

 

 

173.

Which of the following is an automatic stabilizer?

 

A)

military spending

 

B)

unemployment compensation payments

 

C)

disability payments to war veterans

 

D)

Medicare payments

 

 

174.

Which statement is CORRECT?

 

A)

Automatic stabilizers indicate deliberate action by policy makers.

 

B)

Discretionary fiscal policy shows automatic adjustments without any specific effort by policy makers.

 

C)

Discretionary fiscal policy indicates deliberate action by policy makers.

 

D)

Automatic stabilizers are risky to use and sometimes can get the economy destabilized.

 

 

175.

When the economy is in a recession, tax receipts _____ and unemployment insurance payments _____.

 

A)

decrease; increase

 

B)

increase; increase

 

C)

increase; decrease

 

D)

decrease; decrease

 

 

176.

If the government increases its spending when the economy is expanding, automatic stabilizers _____ the government spending multiplier.

 

A)

may or may not affect

 

B)

will increase

 

C)

will not affect

 

D)

will decrease

 

 

177.

Government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as:

 

A)

automatic stabilizers.

 

B)

discretionary fiscal policy.

 

C)

balanced budget policy.

 

D)

deficit reduction policy.

 

 

178.

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

 

A)

Decrease taxes by $100 billion.

 

B)

Increase taxes by $100 billion.

 

C)

Decrease taxes by $25 billion.

 

D)

Decrease government transfers by $25 billion.

 

 

179.

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $850 billion, which of the following policies would bring the economy to potential output?

 

A)

Increase taxes by $50 billion.

 

B)

Increase taxes by $10 billion.

 

C)

Increase taxes by $12.5 billion.

 

D)

Increase transfers by $12.5 billion.

 

 

Use the following to answer questions 180-184:

 

Scenario: Fiscal Policy

Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.

 

 

180.

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose actual real GDP in Arcadia is 500 billion arcs. This economy has:

 

A)

a recessionary gap.

 

B)

production at the full employment level.

 

C)

an inflationary gap.

 

D)

a liquidity trap.

 

 

181.

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. The government spending multiplier is:

 

A)

5.

 

B)

0.75.

 

C)

4.

 

D)

3.

 

 

182.

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs.

 

A)

increase taxes

 

B)

decrease taxes

 

C)

increase spending

 

D)

decrease spending

 

 

183.

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is:

 

A)

greater than the government spending multiplier.

 

B)

less than the government spending multiplier.

 

C)

zero, because changes in taxes have no effect on aggregate demand.

 

D)

impossible to determine.

 

 

184.

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose that actual output is 700 billion arcs, and the government of Arcadia decides to tax its citizens. To bring the economy to potential output, the government should:

 

A)

increase taxes by 33.33 billion arcs.

 

B)

increase taxes by 3.33 billion arcs.

 

C)

keep taxes at zero.

 

D)

increase both taxes and government spending by 0.33 billion arcs.

 

 

185.

Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the largest amount.

 

A)

decrease in taxes

 

B)

increase in government purchases

 

C)

increase in transfer payments

 

D)

increase in government purchases, paid for by a $100 billion increase in taxes

 

 

186.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $700 billion:

 

A)

there is an inflationary gap.

 

B)

there is a recessionary gap.

 

C)

the economy is in long-run equilibrium.

 

D)

government transfers should be decreased.

 

 

187.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If GDP is $850 billion:

 

A)

there is an inflationary gap.

 

B)

there is a recessionary gap.

 

C)

the economy is in long-run equilibrium.

 

D)

taxes should be decreased.

 

 

188.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output the government should:

 

A)

decrease spending by $50 billion.

 

B)

increase spending by $50 billion.

 

C)

decrease transfers by $50 billion.

 

D)

decrease spending by $10 billion.

 

 

189.

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

 

A)

A $25 billion increase in government spending

 

B)

A $25 billion increase in taxes

 

C)

A $250 billion increase in government spending

 

D)

A $1,000 billion increase in government spending

 

 

190.

Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this inflationary gap.

 

A)

A $400 billion tax hike

 

B)

Raising government purchases of goods and services by $400 billion

 

C)

Decreasing government purchases of goods and services by $100 billion

 

D)

Increasing government purchases of goods and services by $100 billion

 

 

191.

Assume that the marginal propensity to consume is  0.8. Government purchases of goods and services increase by $100 billion, financed by a $100 billion tax increase. Real GDP will:

 

A)

expand by $100 billion.

 

B)

contract by $100 billion.

 

C)

expand by $500 billion.

 

D)

expand by $400 billion.

 

 

192.

The federal budget tends to move toward _____ as the economy ____.

 

A)

deficit; contracts

 

B)

deficit; expands

 

C)

surplus; contracts

 

D)

a balanced budget; contracts

 

 

193.

Which of the following represents the government budget balance most accurately?

 

A)

T + G + TR

 

B)

T + G – TR

 

C)

T – G – TR

 

D)

T + TR – G

 

 

194.

A government budget surplus would be contractionary because of all of the following EXCEPT _____ are contractionary.

 

A)

increases in government purchases

 

B)

decreases in government purchases

 

C)

increases in taxes

 

D)

decreases in government transfers

 

 

195.

The budget balance is calculated as:

 

A)

T – G – TR.

 

B)

T + G – TR.

 

C)

T – G + TR.

 

D)

T + G + TR.

 

 

196.

The government budget balance equals taxes _____ purchases _____ transfers.

 

A)

plus; plus

 

B)

minus; minus

 

C)

minus; plus

 

D)

plus; minus

 

 

197.

The effect of a government deficit is:

 

A)

contractionary.

 

B)

expansionary.

 

C)

neutral.

 

D)

biased.

 

 

198.

A government surplus is contractionary because _____ are contractionary.

 

A)

increases in taxation

 

B)

increases in government purchases

 

C)

increases in government transfers

 

D)

decreases in taxation

 

 

199.

Expansionary fiscal policies:

 

A)

make the budget surplus smaller.

 

B)

make the budget deficit smaller.

 

C)

affect only taxes.

 

D)

affect only government purchases of goods and services.

 

 

200.

The government has a budget deficit if:

 

A)

its total revenues are equal to its total expenditures.

 

B)

its total revenues are less than its total expenditures.

 

C)

its total revenues are greater than its total expenditures.

 

D)

the money supply is less than total expenditures.

 

 

201.

The government has a budget surplus if _____ expenditures.

 

A)

its revenues are equal to

 

B)

its revenues are less than

 

C)

its revenues are greater than

 

D)

the money supply is less than

 

 

202.

If the government's revenues are less than its expenditures, then it has a budget:

 

A)

deficit.

 

B)

surplus.

 

C)

balance.

 

D)

equality.

 

 

203.

If the government's revenues are greater than its expenditures, then it has a budget:

 

A)

deficit.

 

B)

surplus.

 

C)

balance.

 

D)

equality.

 

 

204.

Changes in the budget balance:

 

A)

can be the result of fluctuations in the economy.

 

B)

can cause fluctuations in the economy.

 

C)

can be both the result of and the cause of changes in the economy.

 

D)

are always bad idea.

 

 

205.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

 

A)

an increase in government purchases of goods and services

 

B)

lower government transfers

 

C)

higher taxes

 

D)

lower interest rates

 

 

206.

Which of the following fiscal policies would make a budget surplus larger or a budget deficit smaller?

 

A)

an increase in government purchases of goods and services

 

B)

lower government transfers

 

C)

lower taxes

 

D)

higher interest rates

 

 

207.

An increase in government spending of $300 billion and a tax cut of $300 billion will have _____ effects on the budget balance and _____ effects on real GDP.

 

A)

equal; equal

 

B)

equal; unequal

 

C)

unequal; equal

 

D)

unequal; unequal

 

 

208.

An increase in government transfer payments of $250 billion and a tax cut of $250 billion will have _____ effects on the budget balance and _____ effects on real GDP.

 

A)

equal; equal

 

B)

equal; unequal

 

C)

unequal; equal

 

D)

unequal; unequal

 

 

209.

When the unemployment rate increases, the budget:

 

A)

is unaffected.

 

B)

tends to move into deficit.

 

C)

tends to move into a surplus.

 

D)

remains neutral.

 

 

210.

Because of the role of automatic stabilizers and discretionary fiscal policy, the historical record of the United States since 1970 shows that the budget tends to:

 

A)

move into a deficit during expansions.

 

B)

move into a surplus during recessions.

 

C)

move into a deficit during recessions.

 

D)

remain balanced throughout expansions and recessions.

 

 

211.

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

 

A)

more than

 

B)

less than

 

C)

about the same as

 

D)

inversely with

 

 

212.

If the economy is operating well below potential output, the cyclically adjusted budget balance deficit is _____ than the actual budget balance.

 

A)

smaller than

 

B)

larger than

 

C)

unrelated to

 

D)

the same as

 

 

213.

The cyclically adjusted budget balance is an estimate of:

 

A)

the contractionary fiscal policy needed to close an inflationary gap.

 

B)

the tax increase needed to compensate for larger government transfers so that the budget remains balanced.

 

C)

the expansionary fiscal policy needed to close a recessionary gap.

 

D)

what the budget balance would be if real GDP were exactly equal to potential output.

 

 

214.

The cyclically adjusted budget balance refers to:

 

A)

the size of the budget in the current year.

 

B)

the average size of the budget over the long run.

 

C)

the swings in the budget as the business cycle changes.

 

D)

the budget balance if actual output were equal to potential output.

 

 

215.

Over the past few decades in the United States, large federal budget deficits most often have been caused by:

 

A)

decreased spending on welfare payments.

 

B)

excessive spending by the state governments.

 

C)

a depressed economy.

 

D)

excessive tax increases.

 

 

216.

A cyclically adjusted budget balance:

 

A)

shows what the budget balance would be with a significant amount of cyclical unemployment.

 

B)

is an estimate of what the budget balance would be if real GDP were equal to potential output.

 

C)

is a good indicator of the structural deficit in the economy.

 

D)

is the same as the national debt, and it rises as interest cost is accrued.

 

 

217.

The cyclically adjusted budget deficit:

 

A)

is no different from the actual budget deficit.

 

B)

fluctuates less than the actual budget deficit.

 

C)

fluctuates more than the actual budget deficit.

 

D)

remains unchanged throughout the business cycles.

 

 

218.

Budget deficits almost always:

 

A)

decrease with inflation and increase with deflation.

 

B)

increase when unemployment increases and fall when unemployment falls.

 

C)

decrease when unemployment increases and increase when unemployment falls.

 

D)

increase when the aggregate price level increases and fall when the aggregate price level falls.

 

 

219.

When the unemployment rate decreases, the budget:

 

A)

will always be balanced.

 

B)

surplus gets smaller or the deficit gets larger.

 

C)

surplus gets larger or the deficit gets smaller.

 

D)

is unaffected.

 

 

220.

The cyclically balanced budget is important because it:

 

A)

is an estimate of the amount of expansionary fiscal policy necessary to close an inflationary gap.

 

B)

is an estimate of the amount of contractionary fiscal policy necessary to close a recessionary gap.

 

C)

indicates the amount of tax revenue that will be available for implicit liabilities.

 

D)

helps to determine whether the government's taxing and spending policies are sustainable in the long run.

 

 

221.

Since 1964, the budget deficit _____ of GDP.

 

A)

has never been more than 12%

 

B)

has been as high as 50%

 

C)

has usually been 0%

 

D)

has usually been between 0% and –20%

 

 

222.

Do economists believe that the budget should be balanced each fiscal year?

 

A)

Yes, a budget should be balanced annually; otherwise persistent budget deficits can cause havoc in the economy.

 

B)

Yes, as the law states that both the federal and state budgets should always be balanced.

 

C)

Yes, since the balanced budget multiplier is larger, so it makes the economy grow faster.

 

D)

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

 

 

223.

States that are required by their constitution to have annually balanced budgets are likely to _____ than those not required to balance their budget.

 

A)

have less severe business cycles

 

B)

have more severe business cycles

 

C)

grow faster

 

D)

have a better quality of life

 

 

224.

If legislation required the budget to be balanced at all times, _____ as an automatic stabilizer of the business cycle.

 

A)

fiscal policy could not operate

 

B)

it would reduce the effectiveness of monetary policy

 

C)

it would increase the effectiveness of discretionary fiscal policy

 

D)

monetary policy could not operate

 

 

225.

Most economists believe that a balanced budget requirement would:

 

A)

undermine the role of taxes and transfers as automatic stabilizers.

 

B)

enhance the effect of automatic stabilizers.

 

C)

strengthen the ability of policy makers to conduct discretionary fiscal policy.

 

D)

not have any impact on the role of taxes and transfers as automatic stabilizers.

 

 

226.

A law requiring the federal budget to be balanced each year would likely:

 

A)

make business cycles more severe.

 

B)

make business cycles less severe.

 

C)

not affect the severity of business cycles.

 

D)

increase the effectiveness of automatic stabilizers.

 

 

227.

The stability pact signed in 1999 by the European nations that adopted the euro required each country to:

 

A)

balance its budget annually.

 

B)

keep its actual budget deficit below 3% of its GDP.

 

C)

keep its cyclically balanced budget below 3% of its GDP.

 

D)

supply a certain amount of euros each year.

 

 

228.

The new stability pact signed in 2011 by the nations that adopted the euro required each country to:

 

A)

balance its budget annually.

 

B)

keep its actual budget deficit below 3% of its GDP.

 

C)

keep its structural budget balance to 0.5% or less of its GDP.

 

D)

supply a certain amount of euros each year.

 

 

229.

The stability pact signed by many of the countries that adopted the euro limited each member nation's deficit to 3% of GDP. This:

 

A)

enhanced member countries' ability to conduct fiscal policy.

 

B)

enhanced member countries' ability to conduct monetary policy.

 

C)

limited member countries' ability to use fiscal policy.

 

D)

did away with budget deficits altogether.

 

 

230.

What can the federal government do to finance a deficit?

 

A)

cut taxes

 

B)

increase purchases of goods and services

 

C)

increase transfer payments

 

D)

borrow funds

 

 

231.

What was the main financial problem that the government of Greece faced in 2009?

 

A)

It had a large budget surplus that it needed to invest, but it was unable to find investments that offered a high rate of return.

 

B)

It had a large budget surplus, but the president vetoed attempts to use the surplus to give tax refunds to the citizens.

 

C)

It had a large budget deficit, but the parliament refused to raise transfer payments to reduce the deficit.

 

D)

It had a large budget deficit, but most of its creditors were unwilling to make loans to Greece or charged extremely high interest rates to compensate them for the risk of loss.

 

 

232.

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

 

A)

$10.5 trillion.

 

B)

$6.5 trillion.

 

C)

$9 trillion.

 

D)

$7.5 trillion.

 

 

233.

When the government has a deficit, it will most likely finance the deficit by:

 

A)

cutting the salaries of the president and Congress.

 

B)

selling some military bases.

 

C)

borrowing the money.

 

D)

charging higher admission fees at national parks.

 

 

234.

If government spending increases and taxes decrease:

 

A)

implicit liabilities will increase.

 

B)

implicit liabilities will decrease.

 

C)

the public debt will increase.

 

D)

the public debt will decrease.

 

 

235.

According to the text, the public debt of the U.S. federal government at the end of fiscal year 2013 equaled about:

 

A)

$30 trillion.

 

B)

$12 trillion.

 

C)

$7.4 trillion.

 

D)

$4.8 trillion

 

 

236.

When the budget is in deficit, the government generally:

 

A)

raises taxes.

 

B)

increases the public debt.

 

C)

sells public assets like national parks.

 

D)

decreases military spending.

 

 

237.

Public debt is:

 

A)

taxes minus government purchases minus government transfers.

 

B)

government debt held by foreigners.

 

C)

government debt held by individuals and institutions outside the government.

 

D)

the government deficit divided by GDP.

 

 

238.

Suppose that the budget deficit of a country remains level for five years. The federal debt will:

 

A)

remain constant.

 

B)

fall.

 

C)

rise.

 

D)

either remain constant or fall.

 

 

239.

The national debt _____ when the federal government incurs a _____.

 

A)

falls; deficit

 

B)

rises; surplus

 

C)

stays the same; surplus

 

D)

rises; deficit

 

 

240.

The national debt:

 

A)

is the sum of all past federal surpluses.

 

B)

grows when the government runs a deficit.

 

C)

grows when the government runs a surplus.

 

D)

did not exist until 1998.

 

 

241.

The difference between a budget deficit and government debt is that:

 

A)

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

 

B)

debt is the amount by which government spending exceeds tax revenues, whereas a deficit is the sum of money the government owes.

 

C)

a deficit is measured as of a particular time, whereas debt is measured over time.

 

D)

a deficit harms the economy, whereas debt improves the economy.

 

 

242.

In the United States in 2013, public debt accounted for about _____ of GDP.

 

A)

12%

 

B)

18%

 

C)

72%

 

D)

91%

 

 

243.

In Japan during the 1990s _____ policies were put into effect to _____.

 

A)

contractionary tax; counter inflation

 

B)

contractionary spending; counter inflation

 

C)

expansionary tax; counter inflation

 

D)

expansionary spending; prop up aggregate demand

 

 

244.

The U.S. national debt as a percentage of GDP is _____ that of Greece.

 

A)

slightly higher than

 

B)

equivalent to

 

C)

substantially higher than

 

D)

lower than

 

 

245.

When the government borrows funds to pay for budget deficits:

 

A)

planned aggregate spending decreases rather than increases.

 

B)

the multiplier effect of government purchases increases.

 

C)

private investment spending may be crowded out.

 

D)

the interest rate and savings decrease.

 

 

246.

The larger the amount of outstanding public debt:

 

A)

the lower the tax revenue the government must collect.

 

B)

the more spending the government can afford.

 

C)

the smaller the crowding out of private investment spending.

 

D)

the larger the fraction of the federal budget deficit that must be devoted to interest payments.

 

 

247.

A government can pay off its debt if:

 

A)

GDP and the debt grow at the same rate.

 

B)

the ratio of debt to GDP is increasing.

 

C)

GDP grows faster than the debt.

 

D)

the debt grows faster than GDP.

 

 

248.

Consider an economy that already has a sizable budget deficit. If the economy is facing a major downturn, the government should:

 

A)

stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.

 

B)

stimulate the economy by raising expenditure irrespective of the ratio of debt to GDP.

 

C)

not stimulate the economy by raising expenditure because of the burden of debt.

 

D)

not increase government expenditure, since the budget should be balanced.

 

 

249.

Fiscal experts in the United States are most concerned about the country's:

 

A)

implicit liabilities.

 

B)

high ratio of debt to GDP.

 

C)

risk of debt default.

 

D)

low ratio of debt to GDP.

 

 

250.

If the average retirement age decreases:

 

A)

implicit liabilities will increase.

 

B)

implicit liabilities will decrease.

 

C)

implicit liabilities will be unaffected.

 

D)

the public debt will immediately increase.

 

 

251.

Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:

 

A)

implicit liabilities.

 

B)

explicit liabilities.

 

C)

implicit assets.

 

D)

explicit assets.

 

 

252.

Implicit liabilities of a government are:

 

A)

bonds held by foreigners.

 

B)

spending promises, like Social Security benefits, that are effectively debt although no bond is associated with the promise.

 

C)

debt of a country adjusted for the price ratio.

 

D)

the ratio of a country's debt to its GDP.

 

 

253.

Implicit liabilities refers to promises made by the government, such as:

 

A)

aid to foreign countries.

 

B)

building roads and bridges.

 

C)

Social Security and Medicare payments.

 

D)

contributions to the National Endowment for the Arts.

 

 

254.

Social Security spending is projected to:

 

A)

increase as baby boomers retire.

 

B)

decrease as baby boomers retire.

 

C)

stay the same over the next decade.

 

D)

increase for this decade and then decline.

 

 

255.

The Social Security trust fund is the:

 

A)

cash held in a savings account by the government.

 

B)

government bonds held by the Social Security system.

 

C)

money held by the government from the Medicare tax.

 

D)

interest earned over time by the money from Social Security taxes.

 

 

256.

Spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as:

 

A)

burden of debt.

 

B)

structural deficit.

 

C)

implicit liabilities.

 

D)

constructive debt.

 

 

257.

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the expenditure multiplier?

 

A)

1

 

B)

2

 

C)

2.8

 

D)

5

 

 

258.

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

 

A)

$10 billion.

 

B)

$20 billion.

 

C)

$27.8 billion.

 

D)

$50 billion.

 

 

259.

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If potential output equals $255.6 billion, the government could close the _____ gap by increasing government spending by _____.

 

A)

recessionary; $20 billion

 

B)

recessionary; $55.6 billion

 

C)

inflationary; $20 billion

 

D)

inflationary; $55.6 billion

 

 

260.

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the multiplier?

 

A)

1

 

B)

2.5

 

C)

4

 

D)

5

 

 

261.

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government decreases spending by $40 billion, real GDP will decrease by:

 

A)

$40 billion.

 

B)

$80 billion.

 

C)

$100 billion.

 

D)

$200 billion.

 

 

262.

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If potential output equals $250 billion, the government could close the _____ gap by decreasing government spending by _____.

 

A)

recessionary; $30 billion

 

B)

recessionary; $150 billion

 

C)

inflationary; $30 billion

 

D)

inflationary; $60 billion

 

 

263.

Fiscal policy is the use of taxes, government transfers, or government purchases to shift the aggregate demand curve.

 

A)

True

 

B)

False

 

 

264.

Medicare covers much of the cost of medical care for Americans with low incomes.

 

A)

True

 

B)

False

 

 

265.

The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate demand.

 

A)

True

 

B)

False

 

 

266.

When faced with a recessionary gap, the government can increase taxes and cut spending to close it.

 

A)

True

 

B)

False

 

 

267.

Expansionary fiscal policy pushes the aggregate demand curve to the right.

 

A)

True

 

B)

False

 

 

268.

Increased government transfers constitute contractionary fiscal policy.

 

A)

True

 

B)

False

 

 

269.

Lyndon Johnson's tax surcharge was an expansionary fiscal policy that increased aggregate demand.

 

A)

True

 

B)

False

 

 

270.

One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap.

 

A)

True

 

B)

False

 

 

271.

Some economists argue that when a government tries too hard to stabilize the economy through fiscal or monetary policy, it can end up making the economy less stable.

 

A)

True

 

B)

False

 

 

272.

The size of the multiplier increases as the size of the marginal propensity to consume increases.

 

A)

True

 

B)

False

 

 

273.

The marginal propensity to consume is the percentage of a household's income that is used to pay income tax.

 

A)

True

 

B)

False

 

 

274.

If the marginal propensity to consume is 0.80, the multiplier for government purchases of goods and services will be 1.25.

 

A)

True

 

B)

False

 

 

275.

If the marginal propensity to consume is 0.8 and government purchases of goods and services decrease by $30 billion, real GDP will decrease by $24 billion.

 

A)

True

 

B)

False

 

 

276.

An increase in government spending for goods and services is an autonomous increase in aggregate demand.

 

A)

True

 

B)

False

 

 

277.

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government purchases of goods and services by $75 billion.

 

A)

True

 

B)

False

 

 

278.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $40 billion.

 

A)

True

 

B)

False

 

 

279.

A change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP.

 

A)

True

 

B)

False

 

 

280.

A change in taxes shifts the aggregate demand curve by less than a change in government spending for goods and services and has a smaller effect on real GDP.

 

A)

True

 

B)

False

 

 

281.

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.

 

A)

True

 

B)

False

 

 

282.

The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

 

A)

True

 

B)

False

 

 

283.

The tax and government transfer payment multiplier is smaller than the government purchases multiplier because all of an increase in government purchases is spent, only some of tax cuts or increases in government transfers is spent.

 

A)

True

 

B)

False

 

 

284.

Suppose the marginal propensity to consume is 0.8. If the government cut taxes by $100 billion, then real GDP would increase by $400 billion.

 

A)

True

 

B)

False

 

 

285.

The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million.

 

A)

True

 

B)

False

 

 

286.

If the marginal propensity to consume is 0.8, the multiplier for taxes and transfer payments will be more than 5.

 

A)

True

 

B)

False

 

 

287.

If the marginal propensity to consume is 0.8 and government transfers decrease by $30 billion, real GDP will decrease by less than $150 billion.

 

A)

True

 

B)

False

 

 

288.

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government transfers by $75 billion.

 

A)

True

 

B)

False

 

 

289.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should increase taxes by more than $40 billion.

 

A)

True

 

B)

False

 

 

290.

The effect of automatic stabilizers is to increase the size of the multiplier.

 

A)

True

 

B)

False

 

 

291.

If government purchases decrease so the budget may be balanced, some government transfers will automatically increase, reducing the multiplier effect.

 

A)

True

 

B)

False

 

 

292.

Taxes increase as GDP rises. This is an example of an automatic stabilizer.

 

A)

True

 

B)

False

 

 

293.

Discretionary government spending is an automatic stabilizer.

 

A)

True

 

B)

False

 

 

294.

Discretionary fiscal policy is the direct result of deliberate actions by policy makers rather than an automatic adjustment.

 

A)

True

 

B)

False

 

 

295.

The Works Progress Administration, a government program that put millions of unemployed Americans to work building bridges, roads, and parks in the 1930s, was an automatic stabilizer.

 

A)

True

 

B)

False

 

 

296.

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.

 

A)

True

 

B)

False

 

 

297.

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts and automatically expansionary when the economy expands.

 

A)

True

 

B)

False

 

 

298.

Medicaid, food stamps, and sales taxes are all automatic stabilizers.

 

A)

True

 

B)

False

 

 

299.

A lump sum tax is a tax whose rate increases as income increases.

 

A)

True

 

B)

False

 

 

300.

A budget deficit necessarily indicates that fiscal policy is expansionary.

 

A)

True

 

B)

False

 

 

301.

Higher government transfers or lower taxes make a budget surplus smaller or a budget deficit larger.

 

A)

True

 

B)

False

 

 

302.

Lower government transfers or higher taxes make a budget surplus smaller or a budget deficit larger.

 

A)

True

 

B)

False

 

 

303.

Fiscal policy measures of the same dollar amounts will have equal effects on the budget balance but may change real GDP by different amounts.

 

A)

True

 

B)

False

 

 

304.

An increase in government transfer payments of $100 billion and a tax cut of $100 billion will have equal effects on the budget balance and unequal effects on real GDP.

 

A)

True

 

B)

False

 

 

305.

Changes in the budget balance may be the result of economic policy, or they may be caused by fluctuations in the economy.

 

A)

True

 

B)

False

 

 

306.

The business cycle and the budget balance are unrelated.

 

A)

True

 

B)

False

 

 

307.

The budget deficit usually decreases when the unemployment rate increases.

 

A)

True

 

B)

False

 

 

308.

The cyclically balanced budget is an estimate of what the budget balance would be if real GDP were exactly equal to potential output.

 

A)

True

 

B)

False

 

 

309.

The cyclically balanced budget is an estimate of what the budget balance would be during a recessionary gap with real GDP less than potential output.

 

A)

True

 

B)

False

 

 

310.

The cyclically balanced budget deficit doesn't fluctuate as much as the actual budget deficit.

 

A)

True

 

B)

False

 

 

311.

In most years since 1970, the actual budget deficit has been more than 25% of GDP.

 

A)

True

 

B)

False

 

 

312.

Most economists oppose a constitutional amendment requiring the federal budget to be balanced annually.

 

A)

True

 

B)

False

 

 

313.

Most economists believe that the government should balance the budget on average, allowing deficit years when the economy is in recession to be offset by surpluses during years of expansion.

 

A)

True

 

B)

False

 

 

314.

If the government were required to balance the budget during a recession, it would have to decrease taxes and increase government spending.

 

A)

True

 

B)

False

 

 

315.

If the government were required to balance the budget during a recession, it would have to increase taxes and decrease government spending.

 

A)

True

 

B)

False

 

 

316.

Most economists oppose an annually balanced budget because it would undermine automatic stabilizers.

 

A)

True

 

B)

False

 

 

317.

In 1999 many European countries signed a stability pact in which they agreed to accept the dollar as their common currency.

 

A)

True

 

B)

False

 

 

318.

In 1999 many European countries signed a stability pact in which they agreed to limit their actual budget deficits to less than 3% of their country's GDP.

 

A)

True

 

B)

False

 

 

319.

In 2011 many European countries signed a stability pact in which they agreed to keep their structural budget balanced.

 

A)

True

 

B)

False

 

 

320.

The main problem with the European stability pacts of 1999 and 2011 was that they forced countries to follow contractionary fiscal policies during a recession to keep the budget deficit to the required level.

 

A)

True

 

B)

False

 

 

321.

In the United States 49 of the 50 states are required to have an annually balanced budget, which worsens the severity of the business cycle.

 

A)

True

 

B)

False

 

 

322.

The main problem facing the government of Greece in 2009 was that it had a large budget surplus.

 

A)

True

 

B)

False

 

 

323.

In 2009 many lenders refused to make more loans to Greece because they were not confident that Greece was able to repay its debt.

 

A)

True

 

B)

False

 

 

324.

In 2009 Greece received emergency loans from other European countries and the International Monetary Fund. These loans required the Greek government to cut spending, which worsened the Greek recession.

 

A)

True

 

B)

False

 

 

325.

A fiscal year for the federal government runs from January 1 to December 31.

 

A)

True

 

B)

False

 

 

326.

Public debt is government debt held by individuals and institutions outside the government.

 

A)

True

 

B)

False

 

 

327.

If at the beginning of the year the public debt is $12 trillion, government spending and transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the year the public debt is $13 trillion.

 

A)

True

 

B)

False

 

 

328.

If debt increases faster than GDP, the ratio of debt to GDP will fall.

 

A)

True

 

B)

False

 

 

329.

When governments borrow in financial markets to pay for budget deficits, interest rates may increase and crowd out private investment spending.

 

A)

True

 

B)

False

 

 

330.

As a country's public debt grows, the portion of its budget devoted to interest payments on the debt will decrease.

 

A)

True

 

B)

False

 

 

331.

If a country has a very high level of public debt, lenders may insist on austerity measures of raising taxes and decreasing government spending, which worsens economic conditions.

 

A)

True

 

B)

False

 

 

332.

The ratio of debt to GDP is a way to assess the ability of a government to pay its debts because it is an indicator of the taxes that the government can collect to pay the debt.

 

A)

True

 

B)

False

 

 

333.

If the ratio of debt to GDP increases over time, it means that the government's burden of paying the debt is decreasing and default is less likely.

 

A)

True

 

B)

False

 

 

334.

If a government has large consecutive budget deficits and if the public debt is growing faster than GDP, its ratio of debt to GDP will increase.

 

A)

True

 

B)

False

 

 

335.

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.

 

A)

True

 

B)

False

 

 

336.

The promise to pay Social Security benefits to the baby boomers is an example of the implicit liabilities of the U.S. government.

 

A)

True

 

B)

False

 

 

337.

What is meant by the term social insurance? Give an example of a social insurance program.

 

 

338.

The economy is in a recessionary gap. What are the fiscal policy options available to the government?

 

 

339.

The economy is in an inflationary gap. What are the fiscal policy options available to the government?

 

 

340.

Many economists caution against extremely active stabilization policy because of time lags in its use. Explain this rationale.

 

 

341.

Suppose that real GDP is $500, potential GDP is $1,000, and the marginal propensity to consume is 0.9. If the government is going to spend and does not impose taxes, what specific fiscal policy action should policy makers take?

 

 

342.

Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity to consume is 0.8. If the government is going to close the gap by changing government purchases of goods and services and imposes no taxes, what specific fiscal policy action should policy makers take?

 

 

343.

Suppose that real GDP is $1,300, potential GDP is $1,800, and the marginal propensity to consume is 0.6. If the government is going to close the gap by changing government purchases of goods and services and imposes no taxes, what specific fiscal policy action should policy makers take?

 

 

344.

Why does a $1,000 tax cut generate a smaller multiplier effect than a $1,000 increase in government purchases?

 

 

345.

Explain the difference between automatic stabilizers and discretionary fiscal policy measures. Provide examples to clarify the distinctions.

 

 

346.

Suppose that economic policy makers want to increase real GDP by $100 with as little impact on the budget balance as possible. Should they increase government purchases of goods and services, increase transfer payments, or decrease taxes?

 

 

347.

Why does the budget surplus get smaller or the deficit get larger, even without discretionary fiscal policy, when unemployment increases?

 

 

348.

Explain why a constitutional amendment requiring the federal government to balance the budget annually is a bad idea.

 

 

349.

Most economists do not support a law that requires the federal budget to be balanced every year. Explain why.

 

 

350.

The primary taxes at the U.S. federal level are:

 

A)

the property tax, sales taxes, and income taxes.

 

B)

personal income taxes, corporate profit taxes, and social insurance taxes.

 

C)

sales taxes and fees.

 

D)

property taxes and user fees.

 

 

351.

In terms of dollar costs, in the United States the three primary transfer payments are:

 

A)

Social Security, Medicare, and Medicaid.

 

B)

Social Security, education, and welfare.

 

C)

welfare, interest payments on the debt, and military spending.

 

D)

Social Security, interest payments on the debt, and education.

 

 

352.

Sales taxes, property taxes, income taxes, and fees of various kinds:

 

A)

fund government spending at the federal level.

 

B)

provide revenue for state and local governments.

 

C)

are the state governments' least used types of revenue generation.

 

D)

are implicit liabilities.

 

 

353.

Transfer payments are payments that:

 

A)

governments make to households although the government did not receive a good or service from the household.

 

B)

governments make to households when the government receives a good or service.

 

C)

erode the purchasing power of the economy.

 

D)

are essentially tax refunds.

 

 

354.

Social insurance is:

 

A)

essentially any type of spending by the federal government.

 

B)

available only when the economy is in an inflation.

 

C)

a government program designed to protect individuals or families from economic hardship.

 

D)

available only when the economy is below the full employment level.

 

 

355.

If the economy exhibited an inflationary gap, the government should follow a(n) _____ policy, which would shift the AD curve to the _____.

 

A)

expansionary; right

 

B)

contractionary; right

 

C)

expansionary; left

 

D)

contractionary; left

 

 

356.

When potential output is less than actual aggregate output:

 

A)

the economy faces an inflationary gap.

 

B)

the SRAS curve intersects the AD curve to the left of the LRAS curve.

 

C)

the government should follow an expansionary policy to correct the problem.

 

D)

a decrease in taxes would solve the problem.

 

 

357.

When the government decreases spending, the:

 

A)

AD curve will shift to the left.

 

B)

SRAS curve will shift to the left.

 

C)

budget balance will move toward a deficit.

 

D)

government debt will increase.

 

 

358.

An economy is in the midst of a recession. A government policy aimed at moving the economy back to potential GDP is:

 

A)

an increase in taxes.

 

B)

an increase in government purchases for infrastructure improvements.

 

C)

an increase in the property tax.

 

D)

a decrease in unemployment benefits.

 

 

359.

An expansionary fiscal policy:

 

A)

in the presence of a budget deficit would decrease the government debt.

 

B)

would shift AD to the right and increase the government budget deficit.

 

C)

would shift AD to the left and decrease the government budget deficit.

 

D)

would not be effective in the presence of a budget surplus.

 

 

360.

Time lags make:

 

A)

fiscal policy more effective than monetary policy.

 

B)

monetary policy more effective than fiscal policy.

 

C)

correct use of both fiscal and monetary policy challenging.

 

D)

both fiscal and monetary policy more effective.

 

 

361.

Time lags in the implementation of fiscal policy:

 

A)

make use of fiscal policy easier.

 

B)

render such policies useless.

 

C)

must be considered in implementation.

 

D)

are less problematic than those facing monetary policy.

 

 

362.

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

 

A)

the same as

 

B)

less than

 

C)

bigger than

 

D)

not relevant to

 

 

363.

The marginal propensity to consume:

 

A)

is the change in consumption divided by the change in saving.

 

B)

is usually higher for unemployed individuals than for people who are very wealthy.

 

C)

is equal to the marginal propensity to save plus 1.

 

D)

tells policy makers the additional amount of investment spending that would accompany an additional amount of government spending.

 

 

364.

When policy makers make a deliberate fiscal policy decision:

 

A)

it is called discretionary fiscal policy.

 

B)

it is an example of an automatic stabilizer.

 

C)

no lag effects will result.

 

D)

the value of the multiplier will be reduced.

 

 

365.

Automatic stabilizers act like:

 

A)

automatic expansionary fiscal policy when the economy is in inflation.

 

B)

automatic expansionary fiscal policy when the economy is in a recession.

 

C)

an additional multiplier effect.

 

D)

automatic contractionary policy when the economy is in a recession.

 

 

366.

When the government decides to increase taxes to fight an inflationary gap, it is:

 

A)

most likely to increase the budget deficit.

 

B)

an example of discretionary fiscal policy.

 

C)

an example of an automatic stabilizer.

 

D)

likely to dampen the effects of inflation but not to lead to a correction.

 

 

367.

The government's budget balance is:

 

A)

T – G.

 

B)

G – T – TR.

 

C)

T – G – TR.

 

D)

T + TR – G.

 

 

368.

During a recessionary gap:

 

A)

holding everything else constant, the budget deficit would increase.

 

B)

contractionary fiscal policy would help correct this problem.

 

C)

an increase in taxes or a decrease in government purchases would shift the AD curve to the right.

 

D)

unemployment would most likely be falling.

 

 

369.

Holding everything else constant, the government's budget balance during an expansion will:

 

A)

move toward a larger surplus or reduced deficit.

 

B)

remain the same.

 

C)

move toward a reduced deficit or a smaller surplus.

 

D)

be equal to 100.

 

 

370.

Economists generally believe that during an expansion, an economy should:

 

A)

balance its budget.

 

B)

run a budget deficit.

 

C)

run a budget surplus.

 

D)

be able to pay off all of its debt.

 

 

371.

The government deficit:

 

A)

is essentially the same as the government debt.

 

B)

is much higher than the government debt.

 

C)

measures the difference between the amount government spends and the amount it collects in tax revenues in a given period.

 

D)

is the total amount of money a government owes at a particular time.

 

 

372.

Public debt is:

 

A)

the total debt owed by the government to individuals and institutions outside of government.

 

B)

the total amount that the government owes during a given fiscal year.

 

C)

likely to increase when the government uses contractionary fiscal policy.

 

D)

the amount that the government owes itself.

 

 

373.

The public ratio of debt to GDP for the United States in 2013 was:

 

A)

more or less the same as that of other wealthy countries.

 

B)

the largest ratio in the world.

 

C)

less than 5%.

 

D)

over 200%.

 

 

374.

A government encounters a recessionary gap and uses expansionary fiscal policy to correct the problem. It may:

 

A)

find the policy ineffective, especially if the level of public debt is already very high, since additional government borrowing may put pressure on future budgets.

 

B)

find the policy ineffective if it has to borrow to increase government spending.

 

C)

cause its budget balance to move toward a surplus.

 

D)

decrease the level of public debt in the short run.

 

 

375.

_____ occur(s) when government spending results in persistent deficits that necessitate borrowing, leading to a reduction in private investment.

 

A)

Implicit liabilities

 

B)

Transfer payments

 

C)

Crowding out

 

D)

Automatic stabilizers

 

 

376.

If a government's debt is increasing but its GDP is increasing faster, the government's:

 

A)

total debt is falling.

 

B)

ratio of debt to GDP is falling.

 

C)

deficit is falling.

 

D)

ability to pay is falling.

 

 

377.

Social Security and Medicare:

 

A)

are implicit liabilities.

 

B)

are often included in debt statistics.

 

C)

are discretionary types of fiscal policy.

 

D)

result in less spending by government.

 

 

378.

Funding for Social Security and Medicare:

 

A)

must come from government borrowing.

 

B)

comes from dedicated taxes.

 

C)

is likely to increase with the retirement of baby boomers.

 

D)

can be accomplished with lower taxes in the future.

 

 

379.

The multiplier effect of government purchases of goods and services:

 

A)

has a more direct and bigger impact than an equal amount of tax changes.

 

B)

has a less direct and smaller impact than an equal amount of tax changes.

 

C)

is a type of automatic stabilizer.

 

D)

is useful for recessions but not for inflation.

 

 

380.

The 2009 American Recovery and Reinvestment Act was an example of:

 

A)

an automatic stabilizer.

 

B)

a contractionary government policy.

 

C)

a contractionary monetary policy.

 

D)

an expansionary fiscal policy.

 

 

381.

The inclusion of a tax rate in the model results in a new multiplier that is:

 

A)

larger than the original multiplier.

 

B)

the same as the original multiplier if the economy is in a recession.

 

C)

smaller than the original multiplier.

 

D)

not affected by automatic stabilizers.

 

 

382.

If the tax rate is 0.1 and the marginal propensity to consume is 0.5, the multiplier is:

 

A)

2.

 

B)

1.8.

 

C)

2.1.

 

D)

1.

 

 

 

 

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