Question 1

In a diagram of aggregate demand and supply curves,the AD shortfall is measured as the

Accepted Answer

A) Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment. 
B) Horizontal distance between the equilibrium output and the full-employment output. 
C) Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price. 
D) Vertical distance between the recessionary GDP gap and the inflationary GDP gap. 
A) Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment. 
B) Horizontal distance between the equilibrium output and the full-employment output. 
C) Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price. 
D) Vertical distance between the recessionary GDP gap and the inflationary GDP gap.

Question 2

An increase in government expenditure can crowd out consumption and investment expenditure.

Accepted Answer

A) True 
 B)False

Question 3

An example of fiscal policy occurs when the government makes Social Security payments.

Accepted Answer

A) True 
 B)False

Question 4

Assume the MPC is 0.75,taxes increase by $100 billion,and government spending increases by $100 billion.Aggregate demand will

Accepted Answer

A) Increase by $400 billion. 
B) Increase by $100 billion. 
C) Decrease by $400 billion. 
D) Not change. 
A) Increase by $400 billion. 
B) Increase by $100 billion. 
C) Decrease by $400 billion. 
D) Not change.

Question 5

Government taxes are an example of a policy lever.

Accepted Answer

A) True 
 B)False

Question 6

Outright transfer cuts are frequently used because they have a direct and very visible impact.

Accepted Answer

A) True 
 B)False

Question 7

Ceteris paribus,which of the following is true about the concept of crowding out?

Accepted Answer

A) It increases the private sector's ability to raise the level of output. 
B) It does not affect the private sector's ability to raise the level of output. 
C) It reduces the private sector's ability to raise the level of output. 
D) It occurs when spending increases are matched with tax increases. 
A) It increases the private sector's ability to raise the level of output. 
B) It does not affect the private sector's ability to raise the level of output. 
C) It reduces the private sector's ability to raise the level of output. 
D) It occurs when spending increases are matched with tax increases.

Question 8

An investment tax credit creates jobs mostly for the year in which it is granted.

Accepted Answer

A) True 
 B)False

Question 9

Joan Robinson,the author of The Second Crisis of Economic Theory,argued that the content of fiscal policy is as important as its aggregate impact on the economy.

Accepted Answer

A) True 
 B)False

Question 10

Assuming QF is the full employment equilibrium then in Figure 11.2,if the level of spending is equal to AD1,the AD shortfall would be

Accepted Answer

A) Equal to XY. 
B) Equal to XZ. 
C) Equal to YZ. 
D) Greater than XZ. 
A) Equal to XY. 
B) Equal to XZ. 
C) Equal to YZ. 
D) Greater than XZ.

Question 11

Critics of Keynesian theory object to its apparent endorsement of government growth.

Accepted Answer

A) True 
 B)False

Question 12

Refer to Figure 11.3.Assume aggregate demand is represented by AD2 and full-employment output is $5.8 trillion.If aggregate demand decreases by the amount of the AD Excess,equilibrium will occur at

Accepted Answer

A) Point a. 
B) Point b. 
C) Point c. 
D) Point d. 
A) Point a. 
B) Point b. 
C) Point c. 
D) Point d.

Question 13

If the desired fiscal stimulus is $20 billion and the desired AD increase is $50 billion,we can conclude that

Accepted Answer

A) The MPS is 0.60. 
B) The multiplier is 2.0. 
C) There is an inflationary gap. 
D) The MPC is 0.60. 
A) The MPS is 0.60. 
B) The multiplier is 2.0. 
C) There is an inflationary gap. 
D) The MPC is 0.60.

Question 14

Assume the economy is at full employment and prices are reasonably stable.If the government wants to increase spending for public schools,which of the following policies will have the least inflationary impact?

Accepted Answer

A) An increase in taxes by an amount greater than the increase in spending. 
B) An increase in taxes by an amount smaller than the increase in spending. 
C) An increase in taxes equal to the increase in spending. 
D) No change in taxes when expenditures increase. 
A) An increase in taxes by an amount greater than the increase in spending. 
B) An increase in taxes by an amount smaller than the increase in spending. 
C) An increase in taxes equal to the increase in spending. 
D) No change in taxes when expenditures increase.

Question 15

If the GDP gap is $400 billion and AS is upward-sloping,an effective fiscal policy would be to increase aggregate demand by $400 billion.

Accepted Answer

A) True 
 B)False

Question 16

According to one In the News article,"Defense Cuts Kill Jobs," a decrease in government spending has contributed to the sluggish economy.This would imply that

Accepted Answer

A) The aggregate demand curve has shifted to the right. 
B) The aggregate demand curve has shifted to the left. 
C) Injections into the circular flow have increased. 
D) The aggregate supply curve has shifted to the right. 
A) The aggregate demand curve has shifted to the right. 
B) The aggregate demand curve has shifted to the left. 
C) Injections into the circular flow have increased. 
D) The aggregate supply curve has shifted to the right.

Question 17

A marginal propensity to save (MPS)of 0.25 means a $50 million tax cut ultimately

Accepted Answer

A) Reduces spending by $50 million. 
B) Increases spending by $400 million. 
C) Increases spending by $200 million. 
D) Increases spending by $150 million. 
A) Reduces spending by $50 million. 
B) Increases spending by $400 million. 
C) Increases spending by $200 million. 
D) Increases spending by $150 million.

Question 18

Keynesians would recommend

Accepted Answer

A) Higher taxes when there is excess aggregate demand. 
B) Lower government expenditures when there is a shortfall in aggregate demand. 
C) Reliance on the market rather than the government for adjustment when an undesirable level of aggregate demand occurs. 
D) Lower taxes when there is excess aggregate demand. 
A) Higher taxes when there is excess aggregate demand. 
B) Lower government expenditures when there is a shortfall in aggregate demand. 
C) Reliance on the market rather than the government for adjustment when an undesirable level of aggregate demand occurs. 
D) Lower taxes when there is excess aggregate demand.

Question 19

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion.What effect would there be on aggregate demand?

Accepted Answer

A) No impact. 
B) $50 billion increase. 
C) More than $50 billion increase after the multiplier effect. 
D) $50 billion decrease. 
A) No impact. 
B) $50 billion increase. 
C) More than $50 billion increase after the multiplier effect. 
D) $50 billion decrease.

Question 20

If the economy has an inflationary GDP gap,one possible solution is to increase taxes.

Accepted Answer

A) True 
 B)False

Exam 11: Fiscal Policy

In a diagram of aggregate demand and supply curves,the AD shortfall is measured as the

An increase in government expenditure can crowd out consumption and investment expenditure.

An example of fiscal policy occurs when the government makes Social Security payments.

Assume the MPC is 0.75,taxes increase by $100 billion,and government spending increases by $100 billion.Aggregate demand will

Government taxes are an example of a policy lever.

Outright transfer cuts are frequently used because they have a direct and very visible impact.

Ceteris paribus,which of the following is true about the concept of crowding out?

An investment tax credit creates jobs mostly for the year in which it is granted.

Joan Robinson,the author of The Second Crisis of Economic Theory,argued that the content of fiscal policy is as important as its aggregate impact on the economy.

Assuming QF is the full employment equilibrium then in Figure 11.2,if the level of spending is equal to AD1,the AD shortfall would be

Critics of Keynesian theory object to its apparent endorsement of government growth.

Refer to Figure 11.3.Assume aggregate demand is represented by AD2 and full-employment output is $5.8 trillion.If aggregate demand decreases by the amount of the AD Excess,equilibrium will occur at

If the desired fiscal stimulus is $20 billion and the desired AD increase is $50 billion,we can conclude that

Assume the economy is at full employment and prices are reasonably stable.If the government wants to increase spending for public schools,which of the following policies will have the least inflationary impact?

If the GDP gap is $400 billion and AS is upward-sloping,an effective fiscal policy would be to increase aggregate demand by $400 billion.

According to one In the News article,"Defense Cuts Kill Jobs," a decrease in government spending has contributed to the sluggish economy.This would imply that

A marginal propensity to save (MPS)of 0.25 means a $50 million tax cut ultimately

Keynesians would recommend

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion.What effect would there be on aggregate demand?

If the economy has an inflationary GDP gap,one possible solution is to increase taxes.

Economics: the Core Issues

The Useconomy: a Global View

Supply and Demand

The Role of Government

National Income Accounting

Unemployment

Inflation

The Business Cycle

Aggregate Demand

Self-Adjustment or Instability

Deficits and Debt

Money and Banks

The Federal Reserve System

Monetary Policy

Supply-Side Policy: Short-Run Options

Growth and Productivity: Long-Run Possibilities

Theory Versus Reality

Consumer Choice

Elasticity

The Costs of Production

The Competitive Firm

Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

Natural Monopolies: Deregulation

Environmental Protection

The Farm Problem

The Labor Market

Labor Unions

Financial Markets

Taxes: Equity Versus Efficiency

Transfer Payments: Welfare and Social Security

International Trade

International Finance

Global Poverty

Filters

Assuming Q_F is the full employment equilibrium then in Figure 11.2,if the level of spending is equal to AD₁,the AD shortfall would be

Refer to Figure 11.3.Assume aggregate demand is represented by AD₂ and full-employment output is $5.8 trillion.If aggregate demand decreases by the amount of the AD Excess,equilibrium will occur at