Question 1

The Laffer curve represents the relationship between real GDP and various possible tax rates.

Accepted Answer

A) True 
 B)False

Question 2

'If the marginal propensity to consume (MPC)is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

Accepted Answer

A) - $240 million. 
B) - $200 million. 
C) - $180 million. 
D) - $50 million. 
A) - $240 million. 
B) - $200 million. 
C) - $180 million. 
D) - $50 million.

Question 3

To help close an inflationary gap, the government could:

Accepted Answer

A) run budget deficits. 
B) decrease taxes. 
C) increase government spending. 
D) run budget surpluses. 
E) do nothing. 
A) run budget deficits. 
B) decrease taxes. 
C) increase government spending. 
D) run budget surpluses. 
E) do nothing.

Question 4

The fraction of each added dollar of income that is used for consumption is called the:

Accepted Answer

A) average propensity to consumer (AP
C) . 
B) autonomous consumption rate (ACR). 
C) marginal consumption propensity (MCP). 
D) marginal propensity to consume (MP
C) . 
A) average propensity to consumer (AP
C) . 
B) autonomous consumption rate (ACR). 
C) marginal consumption propensity (MCP). 
D) marginal propensity to consume (MP
C) .

Question 5

Those who favor government policies to stimulate the economy by creating incentives for individuals and businesses to increase their productive efforts are supporting:

Accepted Answer

A) supply-side economics. 
B) Keynesian economics. 
C) monetarist economics. 
D) Marxian economics. 
A) supply-side economics. 
B) Keynesian economics. 
C) monetarist economics. 
D) Marxian economics.

Question 6

A simultaneous $10 million increase in both taxes and government spending will have no net effect on aggregate demand.

Accepted Answer

A) True 
 B)False

Question 7

Unemployment compensation payments:

Accepted Answer

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

Question 8

The curve that reflects the view that when tax rates are too high, lowering them not only creates greater incentive for suppliers to increase production, but ends up generating higher tax revenues, is known as the:

Accepted Answer

A) Phillips curve. 
B) Laffer curve. 
C) Engel curve. 
D) Rational expectations curve. 
E) consumption curve. 
A) Phillips curve. 
B) Laffer curve. 
C) Engel curve. 
D) Rational expectations curve. 
E) consumption curve.

Question 9

Which of the following would most likely occur if the federal government decreased its spending and reduced the size of the budget deficit during a period of full employment?

Accepted Answer

A) The rate of inflation would decline. 
B) The rate of inflation would rise. 
C) A recession would develop. 
D) Interest rates would fall. 
A) The rate of inflation would decline. 
B) The rate of inflation would rise. 
C) A recession would develop. 
D) Interest rates would fall.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Following Keynesian economics, and assuming a marginal propensity to consume (MPC)of 0.80, an increase in federal government spending of $100 billion at below full employment would be expected to shift the aggregate demand curve by $500 billion to the right.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?

Accepted Answer

A) The rate of inflation would decline. 
B) The r ate of inflation would rise. 
C) A recession would develop. 
D) Interest rates would fall. 
A) The rate of inflation would decline. 
B) The r ate of inflation would rise. 
C) A recession would develop. 
D) Interest rates would fall.

Question 13

Following Keynesian economics, and assuming a marginal propensity to consume (MPC)of 0.75, an increase in taxes of $100 billion would be expected to shift the aggregate demand curve by $300 billion to the left.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following groups believes that the economy can achieve full employment without inflation through tax reductions, lower resource prices, and deregulation?

Accepted Answer

A) Classical school. 
B) Keynesian school. 
C) Neo-Keynesian school. 
D) Rational expectations school. 
E) Supply-side school. 
A) Classical school. 
B) Keynesian school. 
C) Neo-Keynesian school. 
D) Rational expectations school. 
E) Supply-side school.

Question 15

Exhibit 11-7 Aggregate demand and supply model   Beginning at equilibrium E1 in Exhibit 11-7, suppose the marginal propensity to consume (MPC)is 0.75, and the government wishes to lower the price level form 170 to 150 while maintaining a balanced budget. The government should reduce both spending and taxes by:

Accepted Answer

A) $20 billion. 
B) $100 billion. 
C) $133 billion. 
D) $400 billion. 
A) $20 billion. 
B) $100 billion. 
C) $133 billion. 
D) $400 billion.

Question 16

Supply-side economists:

Accepted Answer

A) saw influence beyond in both the Bush and Clinton administrations. 
B) disagreed with economist Arthur Laffer's views on taxes. 
C) were influential in President Reagan's decision to change the tax structure. 
D) believe that government regulations do not reduce productivity and undermine industrial efficiency. 
A) saw influence beyond in both the Bush and Clinton administrations. 
B) disagreed with economist Arthur Laffer's views on taxes. 
C) were influential in President Reagan's decision to change the tax structure. 
D) believe that government regulations do not reduce productivity and undermine industrial efficiency.

Question 17

The tax multiplier equals 1 - spending multiplier.

Accepted Answer

A) True 
 B)False

Question 18

Fiscal policy is the manipulation of government spending and taxes.

Accepted Answer

A) True 
 B)False

Question 19

The presence of the automatic stabilizers means an increase in the budget deficit will be automatically experienced during a recession whereas a budget surplus will be automatically experienced during an economic expansion.

Accepted Answer

A) True 
 B)False

Question 20

According to the Laffer curve, the federal tax rate affects:

Accepted Answer

A) incentive to work. 
B) savings. 
C) investment. 
D) tax revenue. 
E) All of these. 
A) incentive to work. 
B) savings. 
C) investment. 
D) tax revenue. 
E) All of these.

Exam 11: Fiscal Policy

The Laffer curve represents the relationship between real GDP and various possible tax rates.

'If the marginal propensity to consume (MPC)is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

To help close an inflationary gap, the government could:

The fraction of each added dollar of income that is used for consumption is called the:

Those who favor government policies to stimulate the economy by creating incentives for individuals and businesses to increase their productive efforts are supporting:

A simultaneous $10 million increase in both taxes and government spending will have no net effect on aggregate demand.

Unemployment compensation payments:

The curve that reflects the view that when tax rates are too high, lowering them not only creates greater incentive for suppliers to increase production, but ends up generating higher tax revenues, is known as the:

Which of the following would most likely occur if the federal government decreased its spending and reduced the size of the budget deficit during a period of full employment?

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

Following Keynesian economics, and assuming a marginal propensity to consume (MPC)of 0.80, an increase in federal government spending of $100 billion at below full employment would be expected to shift the aggregate demand curve by $500 billion to the right.

Which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?

Following Keynesian economics, and assuming a marginal propensity to consume (MPC)of 0.75, an increase in taxes of $100 billion would be expected to shift the aggregate demand curve by $300 billion to the left.

Which of the following groups believes that the economy can achieve full employment without inflation through tax reductions, lower resource prices, and deregulation?

Supply-side economists:

The tax multiplier equals 1 - spending multiplier.

Fiscal policy is the manipulation of government spending and taxes.

The presence of the automatic stabilizers means an increase in the budget deficit will be automatically experienced during a recession whereas a budget surplus will be automatically experienced during an economic expansion.

According to the Laffer curve, the federal tax rate affects:

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