Question 1

Government programs that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries are called:

Accepted Answer

A) discretionary fiscal policy. 
B) automatic stabilizers. 
C) progressive taxation. 
D) price deflators. 
A) discretionary fiscal policy. 
B) automatic stabilizers. 
C) progressive taxation. 
D) price deflators.

Question 2

Supply-siders believe that high tax rates are a disincentive to labor supply.

Accepted Answer

A) True 
 B)False

Question 3

Automatic stabilizers combine changes in discretionary fiscal policy with changes in government spending and taxes influenced by the business cycle in order to stabilize the economy.

Accepted Answer

A) True 
 B)False

Question 4

The greater the marginal propensity to consume in the economy, the smaller the spending multiplier.

Accepted Answer

A) True 
 B)False

Question 5

An increase in government spending by $100 would, if the MPC = 0.90, result in an increase in real GDP by:

Accepted Answer

A) $1,000. 
B) $9,000. 
C) $900. 
D) $190. 
E) inadequate information is given. 
A) $1,000. 
B) $9,000. 
C) $900. 
D) $190. 
E) inadequate information is given.

Question 6

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 is 0.75, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

Accepted Answer

A) government spending by $250 billion. 
B) taxes by $100 billion. 
C) taxes by $1,000 billion. 
D) government spending by $1,000 billion. 
A) government spending by $250 billion. 
B) taxes by $100 billion. 
C) taxes by $1,000 billion. 
D) government spending by $1,000 billion.

Question 7

Which of the following statements is true ?

Accepted Answer

A) Above the optimal tax rate, a reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues. 
B) According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. 
C) The presence of the automatic stabilizers tends to destabilize the economy. 
D) To combat inflation, Keynesians recommend lower taxes and greater government spending. 
A) Above the optimal tax rate, a reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues. 
B) According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. 
C) The presence of the automatic stabilizers tends to destabilize the economy. 
D) To combat inflation, Keynesians recommend lower taxes and greater government spending.

Question 8

Suppose that the economy is operating in full-employment equilibrium along the vertical section of the aggregate supply curve. If the aggregate demand curve is reduced by $100 billion in order for the price level to decline by 5 percent, and if the marginal propensity to consume (MPC)is 0.75, then what change in taxes would generate the desired price reduction?

Accepted Answer

A) $300 billion. 
B) -$75 billion. 
C) -$33.3 billion. 
D) -$25 billion. 
A) $300 billion. 
B) -$75 billion. 
C) -$33.3 billion. 
D) -$25 billion.

Question 9

Exhibit 11-4 Aggregate demand and supply model   Suppose the economy in Exhibit 11-4 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 point E2 and reduce inflation 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. 
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.

Question 10

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

Accepted Answer

A) $500 billion decrease in aggregate demand. 
B) $500 billion increase in aggregate demand. 
C) $1,000 billion increase in aggregate demand. 
D) $1,000 billion decrease in aggregate demand. 
A) $500 billion decrease in aggregate demand. 
B) $500 billion increase in aggregate demand. 
C) $1,000 billion increase in aggregate demand. 
D) $1,000 billion decrease in aggregate demand.

Question 11

Expansionary fiscal policy consists of:

Accepted Answer

A) increasing government spending. 
B) increasing payroll taxes to finance health care. 
C) decreasing government spending. 
D) raising the minimum wage. 
A) increasing government spending. 
B) increasing payroll taxes to finance health care. 
C) decreasing government spending. 
D) raising the minimum wage.

Question 12

Appropriate supply-side policy (or policies)during a recession would be to do which of the following?

Accepted Answer

A) Cut taxes on business. 
B) Reduce costly regulations on businesses. 
C) Increase government spending. 
D) Both a. and b. above are correct. 
A) Cut taxes on business. 
B) Reduce costly regulations on businesses. 
C) Increase government spending. 
D) Both a. and b. above are correct.

Question 13

The marginal propensity to consume (MPC)is the change in consumption divided by the change in income.

Accepted Answer

A) True 
 B)False

Question 14

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 0.80. Following Keynesian economics, to restore full employment, the government should cut taxes by:

Accepted Answer

A) $0.20 trillion. 
B) $250 billion. 
C) $0.50 trillion. 
D) $1 trillion. 
A) $0.20 trillion. 
B) $250 billion. 
C) $0.50 trillion. 
D) $1 trillion.

Question 15

If the marginal propensity to consume (MPC)is 0.80, the value of the spending multiplier is:

Accepted Answer

A) 2. 
B) 5. 
C) 8. 
D) 10. 
A) 2. 
B) 5. 
C) 8. 
D) 10.

Question 16

The balanced budget multiplier is always equal to:

Accepted Answer

A) 0.50. 
B) 0.75. 
C) 1 \ MPC. 
D) 1. 
A) 0.50. 
B) 0.75. 
C) 1 \ MPC. 
D) 1.

Question 17

The marginal propensity to save is:

Accepted Answer

A) the change in saving induced by a change in consumption. 
B) (change in S)\ (change in Y). 
C) 1 - MPC \ MPC. 
D) (change in Y - bY)\ (change in Y). 
E) 1 - MPC. 
A) the change in saving induced by a change in consumption. 
B) (change in S)\ (change in Y). 
C) 1 - MPC \ MPC. 
D) (change in Y - bY)\ (change in Y). 
E) 1 - MPC.

Question 18

Exhibit 11-5 Aggregate demand and supply model   Suppose the economy in Exhibit 11-5 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 point E2 and reduce inflation by:

Accepted Answer

A) increasing government spending by $50 billion. 
B) decreasing government spending by $6 billion. 
C) decreasing government spending by $100 billion. 
D) decreasing government spending by $50 billion. 
A) increasing government spending by $50 billion. 
B) decreasing government spending by $6 billion. 
C) decreasing government spending by $100 billion. 
D) decreasing government spending by $50 billion.

Question 19

Fiscal policy is the management of aggregate demand through changes in taxes and government spending.

Accepted Answer

A) True 
 B)False

Question 20

In the U.S. economy, the effect on federal tax revenues and spending of a decrease in employment is to:

Accepted Answer

A) cut tax revenues and raise expenditures. 
B) cut spending and raise tax revenues. 
C) raise both tax revenues and expenditures. 
D) cut both spending and tax revenues. 
A) cut tax revenues and raise expenditures. 
B) cut spending and raise tax revenues. 
C) raise both tax revenues and expenditures. 
D) cut both spending and tax revenues.

Exam 11: Fiscal Policy

Government programs that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries are called:

Supply-siders believe that high tax rates are a disincentive to labor supply.

Automatic stabilizers combine changes in discretionary fiscal policy with changes in government spending and taxes influenced by the business cycle in order to stabilize the economy.

The greater the marginal propensity to consume in the economy, the smaller the spending multiplier.

An increase in government spending by $100 would, if the MPC = 0.90, result in an increase in real GDP by:

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 is 0.75, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

Which of the following statements is true ?

Exhibit 11-4 Aggregate demand and supply model Suppose the economy in Exhibit 11-4 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 point E2 and reduce inflation by:

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

Expansionary fiscal policy consists of:

Appropriate supply-side policy (or policies)during a recession would be to do which of the following?

The marginal propensity to consume (MPC)is the change in consumption divided by the change in income.

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 0.80. Following Keynesian economics, to restore full employment, the government should cut taxes by:

If the marginal propensity to consume (MPC)is 0.80, the value of the spending multiplier is:

The balanced budget multiplier is always equal to:

The marginal propensity to save is:

Exhibit 11-5 Aggregate demand and supply model Suppose the economy in Exhibit 11-5 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 point E2 and reduce inflation by:

Fiscal policy is the management of aggregate demand through changes in taxes and government spending.

In the U.S. economy, the effect on federal tax revenues and spending of a decrease in employment is to:

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 11-4 Aggregate demand and supply model Suppose the economy in Exhibit 11-4 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 point E₂ and reduce inflation by:

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 0.80. Following Keynesian economics, to restore full employment, the government should cut taxes by:

Exhibit 11-5 Aggregate demand and supply model Suppose the economy in Exhibit 11-5 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 point E₂ and reduce inflation by: