Question 1

The change in consumption divided by a change in income is defined as:

Accepted Answer

A) the marginal propensity to consume. 
B) autonomous consumption. 
C) the consumption function. 
D) Keynes' absolute income hypothesis. 
E) transitory consumption. 
A) the marginal propensity to consume. 
B) autonomous consumption. 
C) the consumption function. 
D) Keynes' absolute income hypothesis. 
E) transitory consumption.

Question 2

Assume the marginal propensity to consume (MPC)is 0.75 and the economy is in recession with real GDP $1 trillion below full-employment real GDP. To achieve full employment, aggregate demand (AD)must be increased $2 trillion. Following discretionary fiscal policy, government spending should be increased:

Accepted Answer

A) $0.25 trillion. 
B) $1 trillion. 
C) $0.5 trillion. 
D) $2 trillion. 
A) $0.25 trillion. 
B) $1 trillion. 
C) $0.5 trillion. 
D) $2 trillion.

Question 3

A $10 million increase in government spending has the same economic impact as a $10 million tax cut.

Accepted Answer

A) True 
 B)False

Question 4

If MPC = 0.80, how much should government spending change to increase real GDP by $500?

Accepted Answer

A) -100. 
B) +80. 
C) -80. 
D) +500. 
E) +100. 
A) -100. 
B) +80. 
C) -80. 
D) +500. 
E) +100.

Question 5

Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?

Accepted Answer

A) $300 decrease in taxes. 
B) $75 increase in government spending. 
C) $75 decrease in taxes. 
D) $300 increase in government spending. 
E) $75 decrease in government spending. 
A) $300 decrease in taxes. 
B) $75 increase in government spending. 
C) $75 decrease in taxes. 
D) $300 increase in government spending. 
E) $75 decrease in government spending.

Question 6

The ratio of a change in consumption to a change in income is the:

Accepted Answer

A) consumption function. 
B) propensity to consume. 
C) average propensity to consume. 
D) extra propensity to consume. 
E) marginal propensity to consume. 
A) consumption function. 
B) propensity to consume. 
C) average propensity to consume. 
D) extra propensity to consume. 
E) marginal propensity to consume.

Question 7

If MPC = 0.9, equilibrium real GDP is $1,000, and full-employment real GDP is $2,000, then how much should government spending change to bring about full employment?

Accepted Answer

A) +1,000. 
B) - 100. 
C) +900. 
D) +100. 
E) - 0.9. 
A) +1,000. 
B) - 100. 
C) +900. 
D) +100. 
E) - 0.9.

Question 8

If the marginal propensity to consume (MPC)is 0.75, the value of the spending multiplier is:

Accepted Answer

A) 0. 
B) 1. 
C) 4. 
D) 5. 
A) 0. 
B) 1. 
C) 4. 
D) 5.

Question 9

Find the tax multiplier if the MPC is 0.75.

Accepted Answer

A) - 4. 
B) - 3. 
C) 0.33. 
D) 3. 
E) 4. 
A) - 4. 
B) - 3. 
C) 0.33. 
D) 3. 
E) 4.

Question 10

The Keynesian analysis of fiscal policy argues that:

Accepted Answer

A) fiscal policy should generally be expansionary except during periods of economic recession. 
B) fiscal policy should generally be restrictive except during inflationary booms. 
C) the federal budget should be balanced annually except during war. 
D) the federal budget should be used to maintain aggregate demand at a level consistent with full employment. 
A) fiscal policy should generally be expansionary except during periods of economic recession. 
B) fiscal policy should generally be restrictive except during inflationary booms. 
C) the federal budget should be balanced annually except during war. 
D) the federal budget should be used to maintain aggregate demand at a level consistent with full employment.

Question 11

The change in consumption divided by a change in income is called the:

Accepted Answer

A) consumption function. 
B) marginal propensity to consume. 
C) marginal propensity to spend. 
D) spending function. 
E) changing propensity to consume. 
A) consumption function. 
B) marginal propensity to consume. 
C) marginal propensity to spend. 
D) spending function. 
E) changing propensity to consume.

Question 12

During the Reagan administration, the Laffer curve was used to ague that:

Accepted Answer

A) the supply-side effects of tax cuts are relatively small. 
B) discretionary tax cuts are unwise because they create stagflation. 
C) lower income tax rates could increase tax revenues. 
D) a "flat tax" would simplify the tax code and stimulate economic growth. 
A) the supply-side effects of tax cuts are relatively small. 
B) discretionary tax cuts are unwise because they create stagflation. 
C) lower income tax rates could increase tax revenues. 
D) a "flat tax" would simplify the tax code and stimulate economic growth.

Question 13

The marginal propensity to consume measures the ratio of the:

Accepted Answer

A) average amount of our income that we spend. 
B) average amount of our savings that we spend. 
C) change in consumer spending to a change in money holdings. 
D) change in consumer spending to a change in interest rates. 
E) change in consumer spending to a change in income. 
A) average amount of our income that we spend. 
B) average amount of our savings that we spend. 
C) change in consumer spending to a change in money holdings. 
D) change in consumer spending to a change in interest rates. 
E) change in consumer spending to a change in income.

Question 14

The spending multiplier is defined as:

Accepted Answer

A) the ratio of the change in equilibrium real GDP to the initial change in spending. 
B) the change in initial spending divided by the change in personal income. 
C) 1 \ (marginal propensity to consume). 
D) 1 \ (1 - marginal propensity to save). 
A) the ratio of the change in equilibrium real GDP to the initial change in spending. 
B) the change in initial spending divided by the change in personal income. 
C) 1 \ (marginal propensity to consume). 
D) 1 \ (1 - marginal propensity to save).

Question 15

Describe appropriate discretionary fiscal policy according to Keynesian economics to smooth out the business cycle.

Accepted Answer

The government should increase its spend

Question 16

If the MPC = 1, the spending multiplier is:

Accepted Answer

A) infinite. 
B) zero. 
C) 10. 
D) 100. 
E) 1. 
A) infinite. 
B) zero. 
C) 10. 
D) 100. 
E) 1.

Question 17

Supply-side policy suggests that if we _______ taxes of workers, the _________ labor will increase, causing equilibrium wages to ________.

Accepted Answer

A) raise, supply of, decrease 
B) cut, supply of, increase 
C) raise, demand for, increase 
D) cut, supply of, decrease 
A) raise, supply of, decrease 
B) cut, supply of, increase 
C) raise, demand for, increase 
D) cut, supply of, decrease

Question 18

Income tax collections:

Accepted Answer

A) fall during periods of prosperity, thus increase federal budget deficits. 
B) rise during periods of prosperity, thus reduce federal budget deficits. 
C) fall during recessions, thus increase the problem of unemployment. 
D) rise during recessions, thus increase the problem of unemployment. 
A) fall during periods of prosperity, thus increase federal budget deficits. 
B) rise during periods of prosperity, thus reduce federal budget deficits. 
C) fall during recessions, thus increase the problem of unemployment. 
D) rise during recessions, thus increase the problem of unemployment.

Question 19

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 tax revenue by $100 billion. 
B) decreasing government tax revenue by $750 billion. 
C) increasing government tax revenue by $100 billion. 
D) increasing government tax revenue by approximately $33 billion. 
E) decreasing government tax revenue by approximately $33 billion. 
A) decreasing government tax revenue by $100 billion. 
B) decreasing government tax revenue by $750 billion. 
C) increasing government tax revenue by $100 billion. 
D) increasing government tax revenue by approximately $33 billion. 
E) decreasing government tax revenue by approximately $33 billion.

Question 20

If the economy was about to enter an inflationary boom, which of the following would be the most appropriate policy?

Accepted Answer

A) A tax increase. 
B) A decrease in government spending. 
C) An increase in government spending. 
D) A tax decrease. 
A) A tax increase. 
B) A decrease in government spending. 
C) An increase in government spending. 
D) A tax decrease.

Exam 11: Fiscal Policy

The change in consumption divided by a change in income is defined as:

A $10 million increase in government spending has the same economic impact as a $10 million tax cut.

If MPC = 0.80, how much should government spending change to increase real GDP by $500?

Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?

The ratio of a change in consumption to a change in income is the:

If MPC = 0.9, equilibrium real GDP is $1,000, and full-employment real GDP is $2,000, then how much should government spending change to bring about full employment?

If the marginal propensity to consume (MPC)is 0.75, the value of the spending multiplier is:

Find the tax multiplier if the MPC is 0.75.

The Keynesian analysis of fiscal policy argues that:

The change in consumption divided by a change in income is called the:

During the Reagan administration, the Laffer curve was used to ague that:

The marginal propensity to consume measures the ratio of the:

The spending multiplier is defined as:

Describe appropriate discretionary fiscal policy according to Keynesian economics to smooth out the business cycle.

If the MPC = 1, the spending multiplier is:

Supply-side policy suggests that if we _______ taxes of workers, the _________ labor will increase, causing equilibrium wages to ________.

Income tax collections:

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 the economy was about to enter an inflationary boom, which of the following would be the most appropriate policy?

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

Supply-side policy suggests that if we ___ taxes of workers, the _ labor will increase, causing equilibrium wages to ____.

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: