Question 1

As the marginal propensity to consume (MPC)decreases, the spending multiplier:

Accepted Answer

A) increases. 
B) decreases. 
C) remains constant. 
D) becomes undefinable. 
A) increases. 
B) decreases. 
C) remains constant. 
D) becomes undefinable.

Question 2

An expansionary fiscal policy may include:

Accepted Answer

A) increases in government spending. 
B) discretionary increases in transfer payments. 
C) reductions in taxes. 
D) All of these. 
A) increases in government spending. 
B) discretionary increases in transfer payments. 
C) reductions in taxes. 
D) All of these.

Question 3

Unemployment compensation is an example of a(n):

Accepted Answer

A) discretionary stabilizer. 
B) countercyclical stabilizer. 
C) procyclical stabilizer. 
D) seasonal stabilizer. 
E) automatic stabilizer. 
A) discretionary stabilizer. 
B) countercyclical stabilizer. 
C) procyclical stabilizer. 
D) seasonal stabilizer. 
E) automatic stabilizer.

Question 4

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume is 0.75, federal policymakers can follow Keynesian economics and restrain inflation by:

Accepted Answer

A) decreasing tax revenues by $600 billion. 
B) decreasing government spending by $200 billion. 
C) increasing tax revenues by $200 billion. 
D) increasing government purchases by $150 billion. 
A) decreasing tax revenues by $600 billion. 
B) decreasing government spending by $200 billion. 
C) increasing tax revenues by $200 billion. 
D) increasing government purchases by $150 billion.

Question 5

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

A) $240 million. 
B) $200 million. 
C) $180 million. 
D) $40 million. 
A) $240 million. 
B) $200 million. 
C) $180 million. 
D) $40 million.

Question 6

The change in saving divided by the change in income is the:

Accepted Answer

A) propensity to save. 
B) saving function. 
C) average propensity to save. 
D) extra propensity to save. 
E) marginal propensity to save. 
A) propensity to save. 
B) saving function. 
C) average propensity to save. 
D) extra propensity to save. 
E) marginal propensity to save.

Question 7

The balanced budget multiplier is always equal to 1.

Accepted Answer

A) True 
 B)False

Question 8

According to Keynesian economics, fiscal policy should create a deficit during economic contractions.

Accepted Answer

A) True 
 B)False

Question 9

Unemployment compensation payments:

Accepted Answer

A) rise during a recession and thus reduce the severity of the recession. 
B) rise during a recession and thus increase the severity of the recession. 
C) rise during inflationary episodes and thus reduce the severity of the inflation. 
D) fall during a recession and thus increase the severity of the recession. 
A) rise during a recession and thus reduce the severity of the recession. 
B) rise during a recession and thus increase the severity of the recession. 
C) rise during inflationary episodes and thus reduce the severity of the inflation. 
D) fall during a recession and thus increase the severity of the recession.

Question 10

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC)is 0.80, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

Accepted Answer

A) government spending by $200 billion. 
B) taxes by $100 billion. 
C) taxes by $1,000 billion. 
D) government spending by $1,000 billion. 
A) government spending by $200 billion. 
B) taxes by $100 billion. 
C) taxes by $1,000 billion. 
D) government spending by $1,000 billion.

Question 11

The sum of the marginal propensity to consume (MPC)and the marginal propensity to save (MPS)always equals:

Accepted Answer

A) 1. 
B) 0. 
C) the interest rate. 
D) the marginal propensity to invest (MPI). 
A) 1. 
B) 0. 
C) the interest rate. 
D) the marginal propensity to invest (MPI).

Question 12

Assume that an economy's real GDP multiplier is 4. If this economy is in equilibrium at $2,000 billion, then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?

Accepted Answer

A) $500 billion spending cut. 
B) $500 billion spending increase. 
C) $125 billion spending cut. 
D) $125 billion spending increase. 
E) $2,000 billion spending cut. 
A) $500 billion spending cut. 
B) $500 billion spending increase. 
C) $125 billion spending cut. 
D) $125 billion spending increase. 
E) $2,000 billion spending cut.

Question 13

Exhibit 11-6 Aggregate demand and supply model   In Exhibit 11-6, if the aggregate demand curve is at AD1, the government should:

Accepted Answer

A) raise taxes to move to AD2. 
B) cut taxes to move to AD2. 
C) cut taxes to move to AD3. 
D) cut spending to move to AD2. 
E) not change its behavior. 
A) raise taxes to move to AD2. 
B) cut taxes to move to AD2. 
C) cut taxes to move to AD3. 
D) cut spending to move to AD2. 
E) not change its behavior.

Question 14

If the marginal propensity to consume (MPC)is 0.75, and if the goal is to increase real GDP by $400 million, then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

A) $140 million. 
B) $100 million. 
C) $200 million. 
D) $400 million. 
A) $140 million. 
B) $100 million. 
C) $200 million. 
D) $400 million.

Question 15

Keynesian economics focuses on the role of aggregate spending in determining the level of real GDP.

Accepted Answer

A) True 
 B)False

Question 16

If the economy is experiencing demand-pull inflation, then the appropriate government policy would be to shift the:

Accepted Answer

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

Question 17

If the marginal propensity to consume (MPC)is 0.96, the value of the spending multiplier is:

Accepted Answer

A) 25. 
B) 40. 
C) 96. 
D) 100. 
A) 25. 
B) 40. 
C) 96. 
D) 100.

Question 18

A tax multiplier equal to - 4.30 would imply that a $100 tax increase would lead to a:

Accepted Answer

A) $430 decline in real GDP. 
B) $430 increase in real GDP. 
C) 4.3 percent increase in real GDP. 
D) 4.3 percent decrease in real GDP. 
E) 43 percent decrease in real GDP. 
A) $430 decline in real GDP. 
B) $430 increase in real GDP. 
C) 4.3 percent increase in real GDP. 
D) 4.3 percent decrease in real GDP. 
E) 43 percent decrease in real GDP.

Question 19

Exhibit 11-3 Aggregate demand and supply model   Suppose the economy in Exhibit 11-3 is in equilibrium at point E1, and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, to restore full employment, the government should cut taxes by:

Accepted Answer

A) $0.20 trillion. 
B) $1 trillion. 
C) $0.5 trillion. 
D) $0.25 trillion. 
A) $0.20 trillion. 
B) $1 trillion. 
C) $0.5 trillion. 
D) $0.25 trillion.

Question 20

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

Accepted Answer

A) Increased government spending. 
B) Higher taxes. 
C) A balanced-budget reduction in both spending and taxes. 
D) An expansion in the money supply. 
A) Increased government spending. 
B) Higher taxes. 
C) A balanced-budget reduction in both spending and taxes. 
D) An expansion in the money supply.

Exam 11: Fiscal Policy

As the marginal propensity to consume (MPC)decreases, the spending multiplier:

An expansionary fiscal policy may include:

Unemployment compensation is an example of a(n):

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume is 0.75, federal policymakers can follow Keynesian economics and restrain inflation by:

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

The change in saving divided by the change in income is the:

The balanced budget multiplier is always equal to 1.

According to Keynesian economics, fiscal policy should create a deficit during economic contractions.

Unemployment compensation payments:

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC)is 0.80, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

The sum of the marginal propensity to consume (MPC)and the marginal propensity to save (MPS)always equals:

Assume that an economy's real GDP multiplier is 4. If this economy is in equilibrium at $2,000 billion, then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?

Exhibit 11-6 Aggregate demand and supply model In Exhibit 11-6, if the aggregate demand curve is at AD1, the government should:

If the marginal propensity to consume (MPC)is 0.75, and if the goal is to increase real GDP by $400 million, then by how much would government spending have to change to generate this increase in real GDP?

Keynesian economics focuses on the role of aggregate spending in determining the level of real GDP.

If the economy is experiencing demand-pull inflation, then the appropriate government policy would be to shift the:

If the marginal propensity to consume (MPC)is 0.96, the value of the spending multiplier is:

A tax multiplier equal to - 4.30 would imply that a $100 tax increase would lead to a:

Exhibit 11-3 Aggregate demand and supply model Suppose the economy in Exhibit 11-3 is in equilibrium at point E1, and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, to restore full employment, the government should cut taxes by:

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

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 11-6 Aggregate demand and supply model In Exhibit 11-6, if the aggregate demand curve is at AD₁, the government should:

Exhibit 11-3 Aggregate demand and supply model Suppose the economy in Exhibit 11-3 is in equilibrium at point E₁, and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, to restore full employment, the government should cut taxes by: