Question 1

Given a $500 billion AD shortfall and an MPC of 0.75,the desired fiscal stimulus would be

Accepted Answer

A) A $2 trillion increase in government expenditures. 
B) A $375 billion increase in government expenditures. 
C) A $500 billion increase in government expenditures. 
D) A $125 billion increase in government expenditures. 
A) A $2 trillion increase in government expenditures. 
B) A $375 billion increase in government expenditures. 
C) A $500 billion increase in government expenditures. 
D) A $125 billion increase in government expenditures.

Question 2

The "naïve" Keynesian model is unrealistic because it

Accepted Answer

A) Does not take into account probable changes in the price level as the economy approaches full employment. 
B) Assumes that the price level decreases as AD increases. 
C) Assumes that AS is upward sloping when it is more probably horizontal. 
D) Does not account for changes in output due to the multiplier. 
A) Does not take into account probable changes in the price level as the economy approaches full employment. 
B) Assumes that the price level decreases as AD increases. 
C) Assumes that AS is upward sloping when it is more probably horizontal. 
D) Does not account for changes in output due to the multiplier.

Question 3

A tax increase of $250 will exactly offset a $250 increase in government purchases,leaving aggregate demand unaffected.

Accepted Answer

A) True 
 B)False

Question 4

Income transfers become part of aggregate demand as soon as they occur.

Accepted Answer

A) True 
 B)False

Question 5

The inflationary GDP gap differs from the AD excess when

Accepted Answer

A) The aggregate supply curve slopes upward. 
B) The multiplier effect raises spending. 
C) The aggregate supply curve is horizontal. 
D) There is a time lag in the implementation of fiscal policy. 
A) The aggregate supply curve slopes upward. 
B) The multiplier effect raises spending. 
C) The aggregate supply curve is horizontal. 
D) There is a time lag in the implementation of fiscal policy.

Question 6

Refer to Figure 11.3.Assume aggregate demand is represented by AD3 and full-employment output is $5.6 trillion.The equilibrium level of income is

Accepted Answer

A) $0.8 trillion. 
B) $5.2 trillion. 
C) $5.6 trillion. 
D) $6.0 trillion. 
A) $0.8 trillion. 
B) $5.2 trillion. 
C) $5.6 trillion. 
D) $6.0 trillion.

Question 7

Assume the MPC is 0.75.To eliminate an AD shortfall of $200 billion,the government should

Accepted Answer

A) Decrease spending by $50 billion. 
B) Increase spending by $50 billion. 
C) Increase taxes by $66.7 billion. 
D) Increase spending by $800 billion. 
A) Decrease spending by $50 billion. 
B) Increase spending by $50 billion. 
C) Increase taxes by $66.7 billion. 
D) Increase spending by $800 billion.

Question 8

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward-sloping,

Accepted Answer

A) The economy will move to full employment. 
B) An AD surplus will occur. 
C) A recessionary GDP gap will still exist. 
D) An inflationary GDP gap will develop. 
A) The economy will move to full employment. 
B) An AD surplus will occur. 
C) A recessionary GDP gap will still exist. 
D) An inflationary GDP gap will develop.

Question 9

Refer to Figure 11.1.Assume aggregate demand is represented by AD1 and full employment output is $6.0 trillion.The equilibrium level of income is

Accepted Answer

A) $5.0 trillion. 
B) $5.8 trillion. 
C) $6.0 trillion. 
D) $6.2 billion. 
A) $5.0 trillion. 
B) $5.8 trillion. 
C) $6.0 trillion. 
D) $6.2 billion.

Question 10

How does the slope of the AS curve affect the closure of the GDP gap?

Accepted Answer

The AS curve is typically upward-sloping

Question 11

Payments for unemployment benefits sent to unemployed people are considered government purchases.

Accepted Answer

A) True 
 B)False

Question 12

When there is excess aggregate demand in the economy,

Accepted Answer

A) Desired fiscal restraint equals the AD excess divided by the multiplier. 
B) The GDP gap is positive. 
C) Full-employment output is higher than equilibrium output. 
D) Full-employment output is less than equilibrium output. 
A) Desired fiscal restraint equals the AD excess divided by the multiplier. 
B) The GDP gap is positive. 
C) Full-employment output is higher than equilibrium output. 
D) Full-employment output is less than equilibrium output.

Question 13

The use of government taxes and spending to alter macroeconomic outcomes is known as

Accepted Answer

A) Monetary policy. 
B) Fiscal policy. 
C) Income policy. 
D) Foreign trade policy. 
A) Monetary policy. 
B) Fiscal policy. 
C) Income policy. 
D) Foreign trade policy.

Question 14

Refer to Figure 11.3.Assume aggregate demand is represented by AD3 and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

Accepted Answer

A) $200 billion. 
B) $400 billion. 
C) $600 billion. 
D) $800 billion. 
A) $200 billion. 
B) $400 billion. 
C) $600 billion. 
D) $800 billion.

Question 15

The balanced budget multiplier says that

Accepted Answer

A) An increase in government spending paid for by a tax increase of equal size has no effect on aggregate demand. 
B) An increase in government spending must be paid for by a tax cut of equal size. 
C) An increase in government spending paid for by a tax increase of equal size shifts aggregate demand rightward. 
D) An increase in government spending paid for by a tax increase of equal size shifts aggregate demand leftward. 
A) An increase in government spending paid for by a tax increase of equal size has no effect on aggregate demand. 
B) An increase in government spending must be paid for by a tax cut of equal size. 
C) An increase in government spending paid for by a tax increase of equal size shifts aggregate demand rightward. 
D) An increase in government spending paid for by a tax increase of equal size shifts aggregate demand leftward.

Question 16

Which of the following is a policy option to eliminate an AD shortfall?

Accepted Answer

A) Decrease government purchases. 
B) Reduce taxes. 
C) Reduce transfer payments. 
D) All of the choices are correct. 
A) Decrease government purchases. 
B) Reduce taxes. 
C) Reduce transfer payments. 
D) All of the choices are correct.

Question 17

The ranking of the size of tax revenues received by the federal government (from highest to lowest)would be corporate taxes,income taxes,and Social Security payroll taxes.

Accepted Answer

A) True 
 B)False

Question 18

Using Figure 11.1,which fiscal policy action would increase aggregate demand from AD1 to AD3?

Accepted Answer

A) A decrease in transfer payments. 
B) A decrease in taxes. 
C) A decrease in government spending. 
D) A decrease in government spending matched by an equal decrease in taxes. 
A) A decrease in transfer payments. 
B) A decrease in taxes. 
C) A decrease in government spending. 
D) A decrease in government spending matched by an equal decrease in taxes.

Question 19

A tax cut has a smaller impact on aggregate demand than an increase in government purchases of the same size because

Accepted Answer

A) A portion of the tax cut is invested. 
B) A portion of the tax cut is saved. 
C) Tax cuts do not increase disposable income. 
D) The tax cut multiplier is equal to 1. 
A) A portion of the tax cut is invested. 
B) A portion of the tax cut is saved. 
C) Tax cuts do not increase disposable income. 
D) The tax cut multiplier is equal to 1.

Question 20

Which of the following is generally considered a desirable outcome of fiscal policy?

Accepted Answer

A) More jobs. 
B) Higher unemployment rates. 
C) A higher price level. 
D) Greater deficits. 
A) More jobs. 
B) Higher unemployment rates. 
C) A higher price level. 
D) Greater deficits.

Exam 11: Fiscal Policy

Given a $500 billion AD shortfall and an MPC of 0.75,the desired fiscal stimulus would be

The "naïve" Keynesian model is unrealistic because it

A tax increase of $250 will exactly offset a $250 increase in government purchases,leaving aggregate demand unaffected.

Income transfers become part of aggregate demand as soon as they occur.

The inflationary GDP gap differs from the AD excess when

Refer to Figure 11.3.Assume aggregate demand is represented by AD3 and full-employment output is $5.6 trillion.The equilibrium level of income is

Assume the MPC is 0.75.To eliminate an AD shortfall of $200 billion,the government should

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward-sloping,

Refer to Figure 11.1.Assume aggregate demand is represented by AD1 and full employment output is $6.0 trillion.The equilibrium level of income is

How does the slope of the AS curve affect the closure of the GDP gap?

Payments for unemployment benefits sent to unemployed people are considered government purchases.

When there is excess aggregate demand in the economy,

The use of government taxes and spending to alter macroeconomic outcomes is known as

Refer to Figure 11.3.Assume aggregate demand is represented by AD3 and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

The balanced budget multiplier says that

Which of the following is a policy option to eliminate an AD shortfall?

The ranking of the size of tax revenues received by the federal government (from highest to lowest)would be corporate taxes,income taxes,and Social Security payroll taxes.

Using Figure 11.1,which fiscal policy action would increase aggregate demand from AD1 to AD3?

A tax cut has a smaller impact on aggregate demand than an increase in government purchases of the same size because

Which of the following is generally considered a desirable outcome of fiscal policy?

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

Refer to Figure 11.3.Assume aggregate demand is represented by AD₃ and full-employment output is $5.6 trillion.The equilibrium level of income is

Refer to Figure 11.1.Assume aggregate demand is represented by AD₁ and full employment output is $6.0 trillion.The equilibrium level of income is

Refer to Figure 11.3.Assume aggregate demand is represented by AD₃ and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

Using Figure 11.1,which fiscal policy action would increase aggregate demand from AD₁ to AD₃?