Question 1

Supply-siders' policy recommendations include:

Accepted Answer

A) lower tax rates, spending cuts, and increased government regulation. 
B) lower tax rates, lower resource prices, and decreased government regulation. 
C) lower tax rates, spending increases, and decreased government regulation. 
D) lower tax rates, spending increases, and increased government regulation. 
E) higher tax rates, spending cuts, and decreased government regulation. 
A) lower tax rates, spending cuts, and increased government regulation. 
B) lower tax rates, lower resource prices, and decreased government regulation. 
C) lower tax rates, spending increases, and decreased government regulation. 
D) lower tax rates, spending increases, and increased government regulation. 
E) higher tax rates, spending cuts, and decreased government regulation. B

Question 2

The balanced budget multiplier is equal to one.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following is not an automatic stabilizer?

Accepted Answer

A) Personal income tax revenue. 
B) Corporate income tax revenue. 
C) Unemployment compensation benefits. 
D) Property tax revenue. 
A) Personal income tax revenue. 
B) Corporate income tax revenue. 
C) Unemployment compensation benefits. 
D) Property tax revenue. D

Question 4

Exhibit 11-2 Aggregate demand and supply model   Suppose the economy in Exhibit 11-2 is in equilibrium at point E1 and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, the federal government can move the economy to full employment at point E2 by:

Accepted Answer

A) decreasing government spending by $750 billion. 
B) decreasing government spending by $100 billion. 
C) increasing government spending by $25 billion. 
D) decreasing government spending by $25 billion. 
E) None of these. 
A) decreasing government spending by $750 billion. 
B) decreasing government spending by $100 billion. 
C) increasing government spending by $25 billion. 
D) decreasing government spending by $25 billion. 
E) None of these.

Question 5

If your income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC)is:

Accepted Answer

A) 0.20. 
B) 0.40. 
C) 0.50. 
D) 0.80. 
E) 1.00. 
A) 0.20. 
B) 0.40. 
C) 0.50. 
D) 0.80. 
E) 1.00.

Question 6

If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 5.

Accepted Answer

A) True 
 B)False

Question 7

If an inflationary boom exists, the appropriate fiscal policy is to:

Accepted Answer

A) increase the budget deficit. 
B) increase government spending and hold taxes constant. 
C) decrease government spending and\or raise taxes. 
D) hold government spending constant and decrease taxes. 
A) increase the budget deficit. 
B) increase government spending and hold taxes constant. 
C) decrease government spending and\or raise taxes. 
D) hold government spending constant and decrease taxes.

Question 8

If the MPC = .75, the spending multiplier is:

Accepted Answer

A) 4. 
B) 5. 
C) 1.33. 
D) 1.20. 
E) .25. 
A) 4. 
B) 5. 
C) 1.33. 
D) 1.20. 
E) .25.

Question 9

When the federal government is running a budget deficit:

Accepted Answer

A) government tax revenues exceed government expenditures. 
B) government expenditures exceed government tax revenues. 
C) the economy must be in an economic recession. 
D) the size of the national debt will decline. 
A) government tax revenues exceed government expenditures. 
B) government expenditures exceed government tax revenues. 
C) the economy must be in an economic recession. 
D) the size of the national debt will decline.

Question 10

If the economy is experiencing unemployment, then the most appropriate government policy would be to:

Accepted Answer

A) shift the aggregate demand curve by using a tax increase coupled with spending cuts. 
B) shift the aggregate demand curve by using a tax increase coupled with more spending. 
C) shift the aggregate demand curve by using a tax cut coupled with spending cuts. 
D) shift the aggregate demand curve by using a tax cut coupled with more spending. 
E) shift the aggregate supply curve by using a tax cut coupled with spending cuts. 
A) shift the aggregate demand curve by using a tax increase coupled with spending cuts. 
B) shift the aggregate demand curve by using a tax increase coupled with more spending. 
C) shift the aggregate demand curve by using a tax cut coupled with spending cuts. 
D) shift the aggregate demand curve by using a tax cut coupled with more spending. 
E) shift the aggregate supply curve by using a tax cut coupled with spending cuts.

Question 11

When households' marginal propensity to consume (MPC)increases, the size of the spending multiplier:

Accepted Answer

A) also increases. 
B) decreases. 
C) remains unchanged. 
D) reacts unpredictably. 
A) also increases. 
B) decreases. 
C) remains unchanged. 
D) reacts unpredictably.

Question 12

Automatic stabilizers are government programs that:

Accepted Answer

A) exaggerate the ups and downs in aggregate demand without legislative action. 
B) bring expenditures and revenues automatically into balance without legislative action. 
C) shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion. 
D) increase tax collections automatically during a recession. 
A) exaggerate the ups and downs in aggregate demand without legislative action. 
B) bring expenditures and revenues automatically into balance without legislative action. 
C) shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion. 
D) increase tax collections automatically during a recession.

Question 13

According to supply-side fiscal policy, reducing tax rates on wages and profits will:

Accepted Answer

A) create demand-pull inflation. 
B) lower the price level but may trigger a recession. 
C) result in stagflation. 
D) reduce both unemployment and inflation. 
A) create demand-pull inflation. 
B) lower the price level but may trigger a recession. 
C) result in stagflation. 
D) reduce both unemployment and inflation.

Question 14

The Laffer curve is a graph of the relationship between tax rates and:

Accepted Answer

A) real GDP. 
B) total tax revenues. 
C) government spending. 
D) inflation. 
A) real GDP. 
B) total tax revenues. 
C) government spending. 
D) inflation.

Question 15

Supply-side economics is based on the theory that:

Accepted Answer

A) budget deficits will stimulate demand, output, and employment. 
B) budget deficits will lead to higher interest rates, which will weaken their expansionary impact. 
C) higher tax rates will increase tax revenues. 
D) increases in aggregate supply lower the price level. 
A) budget deficits will stimulate demand, output, and employment. 
B) budget deficits will lead to higher interest rates, which will weaken their expansionary impact. 
C) higher tax rates will increase tax revenues. 
D) increases in aggregate supply lower the price level.

Question 16

"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level." This argument is made by the:

Accepted Answer

A) Keynesian economists. 
B) supply-side economists. 
C) classical economists. 
D) monetarists. 
A) Keynesian economists. 
B) supply-side economists. 
C) classical economists. 
D) monetarists.

Question 17

Which economist(s)argued that high tax rates produce less tax revenues and limit the expansion of real GDP and employment?

Accepted Answer

A) Robert Lucas and Thomas Sargent 
B) A. W. Phillips 
C) Robert Barro 
D) Paul Samuelson 
E) Arthur LafferF 
A) Robert Lucas and Thomas Sargent 
B) A. W. Phillips 
C) Robert Barro 
D) Paul Samuelson 
E) Arthur LafferF

Question 18

A decrease in real GDP would affect the U.S. economy by:

Accepted Answer

A) cutting tax revenues and raising government expenditures. 
B) cutting government expenditures and raising tax revenues. 
C) raising both tax revenues and government expenditures. 
D) cutting both government expenditures and tax revenues. 
A) cutting tax revenues and raising government expenditures. 
B) cutting government expenditures and raising tax revenues. 
C) raising both tax revenues and government expenditures. 
D) cutting both government expenditures and tax revenues.

Question 19

Supply-side economics calls for:

Accepted Answer

A) lower taxes on businesses and individuals. 
B) regulatory reforms to increase productivity. 
C) government subsidies to promote technological advance. 
D) All of these. 
A) lower taxes on businesses and individuals. 
B) regulatory reforms to increase productivity. 
C) government subsidies to promote technological advance. 
D) All of these.

Question 20

Automatic stabilizers create ________ during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _________ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

Accepted Answer

A) fiscal stimulus, fiscal contraction 
B) fiscal stimulus, fiscal stimulus 
C) fiscal contraction, fiscal stimulus 
D) fiscal contraction, fiscal contraction 
A) fiscal stimulus, fiscal contraction 
B) fiscal stimulus, fiscal stimulus 
C) fiscal contraction, fiscal stimulus 
D) fiscal contraction, fiscal contraction

Exam 11: Fiscal Policy

Supply-siders' policy recommendations include:

The balanced budget multiplier is equal to one.

Which of the following is not an automatic stabilizer?

Exhibit 11-2 Aggregate demand and supply model Suppose the economy in Exhibit 11-2 is in equilibrium at point E1 and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, the federal government can move the economy to full employment at point E2 by:

If your income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC)is:

If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 5.

If an inflationary boom exists, the appropriate fiscal policy is to:

If the MPC = .75, the spending multiplier is:

When the federal government is running a budget deficit:

If the economy is experiencing unemployment, then the most appropriate government policy would be to:

When households' marginal propensity to consume (MPC)increases, the size of the spending multiplier:

Automatic stabilizers are government programs that:

According to supply-side fiscal policy, reducing tax rates on wages and profits will:

The Laffer curve is a graph of the relationship between tax rates and:

Supply-side economics is based on the theory that:

"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level." This argument is made by the:

Which economist(s)argued that high tax rates produce less tax revenues and limit the expansion of real GDP and employment?

A decrease in real GDP would affect the U.S. economy by:

Supply-side economics calls for:

Automatic stabilizers create ________ during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _________ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Filters

Exhibit 11-2 Aggregate demand and supply model Suppose the economy in Exhibit 11-2 is in equilibrium at point E₁ and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, the federal government can move the economy to full employment at point E₂ by:

Automatic stabilizers create during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.