Question 1

Supply-side fiscal policies focus on improving the incentives to work, save, and invest.

Accepted Answer

A) True 
 B)False

Question 2

Assume the marginal propensity to consume (MPC)is 0.80 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:

Accepted Answer

A) left by $80 billion. 
B) right by $200 billion. 
C) right by $400 billion. 
D) left by $400 billion. 
A) left by $80 billion. 
B) right by $200 billion. 
C) right by $400 billion. 
D) left by $400 billion.

Question 3

If the marginal propensity to consume = 0.75, then:

Accepted Answer

A) the marginal propensity to save = 0.75. 
B) the marginal propensity to save = 1.33. 
C) the marginal propensity to save = 0.20. 
D) the marginal propensity to save = 0.25. 
E) since the marginal propensity to save and the marginal propensity to consume are unrelated, we cannot determine the marginal propensity to save from the information given. 
A) the marginal propensity to save = 0.75. 
B) the marginal propensity to save = 1.33. 
C) the marginal propensity to save = 0.20. 
D) the marginal propensity to save = 0.25. 
E) since the marginal propensity to save and the marginal propensity to consume are unrelated, we cannot determine the marginal propensity to save from the information given.

Question 4

A government spending and taxation policy to achieve macroeconomic goals is known as:

Accepted Answer

A) countercyclical policy. 
B) fiscal policy. 
C) monetary policy. 
D) a balanced budget. 
E) presidential discretion. 
A) countercyclical policy. 
B) fiscal policy. 
C) monetary policy. 
D) a balanced budget. 
E) presidential discretion.

Question 5

Exhibit 11-1 Disposable income and consumption data   In Exhibit 11-1, when disposable income (Y)is increased from $1,000 to $2,000, the marginal propensity to consume is:

Accepted Answer

A) 0.2. 
B) 0.6. 
C) 0.8. 
D) 1.0. 
E) 1.25. 
A) 0.2. 
B) 0.6. 
C) 0.8. 
D) 1.0. 
E) 1.25.

Question 6

Automatic stabilizers "lean against the prevailing wind" of the business cycle because:

Accepted Answer

A) wages are controlled by the minimum wage law. 
B) federal expenditures and tax revenues change as the level of real GDP changes. 
C) the spending and tax multipliers are constant. 
D) they include the power of special interests. 
A) wages are controlled by the minimum wage law. 
B) federal expenditures and tax revenues change as the level of real GDP changes. 
C) the spending and tax multipliers are constant. 
D) they include the power of special interests.

Question 7

Because of the automatic stabilizers, a decline in the level of economic activity will cause:

Accepted Answer

A) a reduction in tax revenues collected. 
B) an increase in government expenditures. 
C) a greater budget deficit. 
D) all of these. 
A) a reduction in tax revenues collected. 
B) an increase in government expenditures. 
C) a greater budget deficit. 
D) all of these.

Question 8

If the marginal propensity to consume (MPC)is 0.50, the value of the spending multiplier is:

Accepted Answer

A) 5 
B) 1 
C) 2 
A) 5 
B) 1 
C) 2

Question 9

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:

Accepted Answer

A) expanding and contracting the money supply. 
B) encouraging business to expand or contract investment. 
C) regulating net exports. 
D) decreasing government spending or increasing taxes. 
A) expanding and contracting the money supply. 
B) encouraging business to expand or contract investment. 
C) regulating net exports. 
D) decreasing government spending or increasing taxes.

Question 10

Exhibit 11-7 Aggregate demand and supply model   Beginning at equilibrium E1 in Exhibit 11-7, assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:

Accepted Answer

A) left by $1,000 billion. 
B) right by $1,000 billion. 
C) right by $900 billion. 
D) left by $900 billion. 
A) left by $1,000 billion. 
B) right by $1,000 billion. 
C) right by $900 billion. 
D) left by $900 billion.

Question 11

The government wishes to close an inflationary gap by reducing real GDP by $400 billion. Assuming a tax multiplier of 4 and an income multiplier of 5, which of the following policy prescriptions would reduce the inflationary gap by $400 billion?

Accepted Answer

A) Decreasing government spending by $400 billion and increasing taxes by $400 billion. 
B) Decreasing government spending by $160 billion and decreasing taxes by $100 billion. 
C) Decreasing government spending by $40 billion and decreasing taxes by $40 billion. 
D) Decreasing government spending by $80 billion and keeping taxes the same. 
E) Doing absolutely nothing to the economy. 
A) Decreasing government spending by $400 billion and increasing taxes by $400 billion. 
B) Decreasing government spending by $160 billion and decreasing taxes by $100 billion. 
C) Decreasing government spending by $40 billion and decreasing taxes by $40 billion. 
D) Decreasing government spending by $80 billion and keeping taxes the same. 
E) Doing absolutely nothing to the economy.

Question 12

Assume Congress enacts a $10 billion increase in spending and a $10 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

Accepted Answer

A) $20 billion increase in aggregate demand. 
B) $10 billion increase in aggregate demand. 
C) $100 billion increase in aggregate demand. 
D) $10 billion decrease in aggregate demand. 
A) $20 billion increase in aggregate demand. 
B) $10 billion increase in aggregate demand. 
C) $100 billion increase in aggregate demand. 
D) $10 billion decrease in aggregate demand.

Question 13

Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC)is given by the formula:

Accepted Answer

A) MPC - 1. 
B) (MPC - 1)\ MPC. 
C) 1 \ MPC. 
D) 1 - [1 \ (1 - MP
C) ]. 
A) MPC - 1. 
B) (MPC - 1)\ MPC. 
C) 1 \ MPC. 
D) 1 - [1 \ (1 - MP
C) ].

Question 14

Supply-side fiscal policies were advocated by the Reagan administration.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 11-1 Disposable income and consumption data
  In Exhibit 11-1, when disposable income (Y)is increased from $0 to $1,000 to $2,000, the marginal propensity to consume:

Accepted Answer

A) is 1. 
B) decreases from 0.9 to 0.8. 
C) decreases from 0.8 to 0.7. 
D) increases from 0.8 to 0.9. 
E) is negative. 
A) is 1. 
B) decreases from 0.9 to 0.8. 
C) decreases from 0.8 to 0.7. 
D) increases from 0.8 to 0.9. 
E) is negative.

Question 16

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC)is 0.50, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should:

Accepted Answer

A) increase spending by $250 billion. 
B) decrease spending by $500 billion. 
C) increase spending by $1,000 billion. 
D) increase spending by $500 billion. 
A) increase spending by $250 billion. 
B) decrease spending by $500 billion. 
C) increase spending by $1,000 billion. 
D) increase spending by $500 billion.

Question 17

The size of the spending multiplier depends on the marginal propensity to consume (MPC).

Accepted Answer

A) True 
 B)False

Question 18

When the government levies a $100 million tax on people's income and puts the $100 million back into the economy in the form of a spending program, such as new interstate highway construction, the:

Accepted Answer

A) tax, then, generates a $100 million decline in real GDP. 
B) level of real GDP expands by $100 million. 
C) effect on real GDP is uncertain. 
D) tax multiplier overpowers the income multiplier, triggering a rollback in real GDP. 
A) tax, then, generates a $100 million decline in real GDP. 
B) level of real GDP expands by $100 million. 
C) effect on real GDP is uncertain. 
D) tax multiplier overpowers the income multiplier, triggering a rollback in real GDP.

Question 19

The Laffer curve shows as tax rates rise, tax revenue:

Accepted Answer

A) rises. 
B) first rises, then falls, and then rises again. 
C) falls. 
D) first rises, and then falls. 
E) remains at a constant level. 
A) rises. 
B) first rises, then falls, and then rises again. 
C) falls. 
D) first rises, and then falls. 
E) remains at a constant level.

Question 20

The Laffer curve shows the relationship between tax:

Accepted Answer

A) revenue and tax rates. 
B) revenue and take-home pay. 
C) revenue and government spending. 
D) rates and take-home pay. 
E) rates and government spending. 
A) revenue and tax rates. 
B) revenue and take-home pay. 
C) revenue and government spending. 
D) rates and take-home pay. 
E) rates and government spending.

Exam 11: Fiscal Policy

Supply-side fiscal policies focus on improving the incentives to work, save, and invest.

Assume the marginal propensity to consume (MPC)is 0.80 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:

If the marginal propensity to consume = 0.75, then:

A government spending and taxation policy to achieve macroeconomic goals is known as:

Exhibit 11-1 Disposable income and consumption data In Exhibit 11-1, when disposable income (Y)is increased from $1,000 to $2,000, the marginal propensity to consume is:

Automatic stabilizers "lean against the prevailing wind" of the business cycle because:

Because of the automatic stabilizers, a decline in the level of economic activity will cause:

If the marginal propensity to consume (MPC)is 0.50, the value of the spending multiplier is:

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:

Exhibit 11-7 Aggregate demand and supply model Beginning at equilibrium E1 in Exhibit 11-7, assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:

The government wishes to close an inflationary gap by reducing real GDP by $400 billion. Assuming a tax multiplier of 4 and an income multiplier of 5, which of the following policy prescriptions would reduce the inflationary gap by $400 billion?

Assume Congress enacts a $10 billion increase in spending and a $10 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC)is given by the formula:

Supply-side fiscal policies were advocated by the Reagan administration.

Exhibit 11-1 Disposable income and consumption data In Exhibit 11-1, when disposable income (Y)is increased from $0 to $1,000 to $2,000, the marginal propensity to consume:

The size of the spending multiplier depends on the marginal propensity to consume (MPC).

When the government levies a $100 million tax on people's income and puts the $100 million back into the economy in the form of a spending program, such as new interstate highway construction, the:

The Laffer curve shows as tax rates rise, tax revenue:

The Laffer curve shows the relationship between tax:

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 11-7 Aggregate demand and supply model Beginning at equilibrium E₁ in Exhibit 11-7, assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the: