Question 1

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

Accepted Answer

A) Personal income tax revenues. 
B) Corporate income tax revenues. 
C) Unemployment benefits. 
D) All of these. 
A) Personal income tax revenues. 
B) Corporate income tax revenues. 
C) Unemployment benefits. 
D) All of these.

Question 2

Which of the following is the best example of an automatic stabilizer?

Accepted Answer

A) Welfare payments. 
B) Foreign aid 
C) Defense spending. 
D) Highway construction. 
A) Welfare payments. 
B) Foreign aid 
C) Defense spending. 
D) Highway construction.

Question 3

Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 11-3 Aggregate demand and supply model   Beginning at equilibrium E1 in Exhibit 11-3, when the government increases spending or cuts taxes the economy will experience:

Accepted Answer

A) an inflationary recession. 
B) stagflation. 
C) cost-push inflation. 
D) demand-pull inflation. 
A) an inflationary recession. 
B) stagflation. 
C) cost-push inflation. 
D) demand-pull inflation.

Question 5

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 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 6

Which of the following is an example of an automatic stabilizer?

Accepted Answer

A) Congress legislates lower tax rates to increase consumption and investment. 
B) Tax rates are increased during a recession to maintain a balanced budget. 
C) A regressive income tax system reduces tax revenues (as a share of income)as income expands. 
D) Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted. 
A) Congress legislates lower tax rates to increase consumption and investment. 
B) Tax rates are increased during a recession to maintain a balanced budget. 
C) A regressive income tax system reduces tax revenues (as a share of income)as income expands. 
D) Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted.

Question 7

"Last month unemployment fell to 4 percent, its lowest level in years. The economy is growing rapidly, but consumer prices have risen at an annual rate of 10 percent during the last six months." Which of the following policies would be most appropriate under these circumstances?

Accepted Answer

A) An increase in both government spending and taxes. 
B) An increase in taxes. 
C) A reduction in taxes. 
D) An increase in government spending. 
A) An increase in both government spending and taxes. 
B) An increase in taxes. 
C) A reduction in taxes. 
D) An increase in government spending.

Question 8

Exhibit 11-8 Aggregate demand and supply curves   In Exhibit 11-8, supply-siders claimed that the shift from AS1 to AS2 would occur if the government:

Accepted Answer

A) increased tax rates and increased the amount of government regulation. 
B) increased tax rates and decreased the amount of government regulation. 
C) decreased tax rates and increased the amount of government regulation. 
D) decreased tax rates and decreased the amount of government regulation. 
A) increased tax rates and increased the amount of government regulation. 
B) increased tax rates and decreased the amount of government regulation. 
C) decreased tax rates and increased the amount of government regulation. 
D) decreased tax rates and decreased the amount of government regulation.

Question 9

The size of the spending multiplier depends on the level of real GDP.

Accepted Answer

A) True 
 B)False

Question 10

Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and\or an increase in taxes.

Accepted Answer

A) True 
 B)False

Question 11

An increase in government spending will have the greatest expansionary impact on the economy if it is combined with:

Accepted Answer

A) an increase in tax revenue equal to the increase in spending. 
B) a decrease in tax revenue equal to the increase in spending. 
C) unchanged tax revenue. 
D) none of these is true. 
A) an increase in tax revenue equal to the increase in spending. 
B) a decrease in tax revenue equal to the increase in spending. 
C) unchanged tax revenue. 
D) none of these is true.

Question 12

Exhibit 11-7 Aggregate demand and supply model   Suppose the economy in Exhibit 11-7 is in equilibrium at point E1 and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, to lower the price level from 170 to 150 the government should raise 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 13

The unemployment compensation program:

Accepted Answer

A) makes recessions more severe. 
B) makes recession less severe. 
C) makes recessions more severe and inflationary episodes less severe. 
D) makes recessions less severe and inflationary episodes more severe. 
E) has no effect on the severity of recessions and inflationary episodes. 
A) makes recessions more severe. 
B) makes recession less severe. 
C) makes recessions more severe and inflationary episodes less severe. 
D) makes recessions less severe and inflationary episodes more severe. 
E) has no effect on the severity of recessions and inflationary episodes.

Question 14

Using the aggregate demand and supply model, expansionary fiscal policy will not affect the price level, but will restore full-employment GDP.

Accepted Answer

A) True 
 B)False

Question 15

Assume Congress enacts a $10 billion decrease in spending and a $10 billion decrease in tax revenue. The result of this balanced-budget approach is a:

Accepted Answer

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

Question 16

Exhibit 11-7 Aggregate demand and supply model   Suppose the economy in Exhibit 11-7 is in equilibrium at point E1 and the marginal propensity to consumer (MPC)is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending 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 17

If the marginal propensity to consume (MPC)is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:

Accepted Answer

A) increase by $50. 
B) decrease by $50. 
C) increase by $200. 
D) decrease by $200. 
A) increase by $50. 
B) decrease by $50. 
C) increase by $200. 
D) decrease by $200.

Question 18

According to Keynesian economics, fiscal policy should be coordinated to create a surplus during economic expansions.

Accepted Answer

A) True 
 B)False

Question 19

According to supply-side economists, lowering corporate income taxes:

Accepted Answer

A) results in wage hikes for employees but no economic growth. 
B) moves society toward greater income equality. 
C) checks the expansion of real GDP and employment. 
D) stimulates investment and economic growth. 
E) does not create enough incentive for producers to increase production. 
A) results in wage hikes for employees but no economic growth. 
B) moves society toward greater income equality. 
C) checks the expansion of real GDP and employment. 
D) stimulates investment and economic growth. 
E) does not create enough incentive for producers to increase production.

Question 20

If the marginal propensity to save (MPS)is 0.25, the value of the spending multiplier is:

Accepted Answer

A) 1. 
B) 2. 
C) 4. 
D) 9. 
A) 1. 
B) 2. 
C) 4. 
D) 9.

Exam 11: Fiscal Policy

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

Which of the following is the best example of an automatic stabilizer?

Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

Exhibit 11-3 Aggregate demand and supply model Beginning at equilibrium E1 in Exhibit 11-3, when the government increases spending or cuts taxes the economy will experience:

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:

Which of the following is an example of an automatic stabilizer?

"Last month unemployment fell to 4 percent, its lowest level in years. The economy is growing rapidly, but consumer prices have risen at an annual rate of 10 percent during the last six months." Which of the following policies would be most appropriate under these circumstances?

Exhibit 11-8 Aggregate demand and supply curves In Exhibit 11-8, supply-siders claimed that the shift from AS1 to AS2 would occur if the government:

The size of the spending multiplier depends on the level of real GDP.

Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and\or an increase in taxes.

An increase in government spending will have the greatest expansionary impact on the economy if it is combined with:

Exhibit 11-7 Aggregate demand and supply model Suppose the economy in Exhibit 11-7 is in equilibrium at point E1 and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, to lower the price level from 170 to 150 the government should raise taxes by:

The unemployment compensation program:

Using the aggregate demand and supply model, expansionary fiscal policy will not affect the price level, but will restore full-employment GDP.

Assume Congress enacts a $10 billion decrease in spending and a $10 billion decrease in tax revenue. The result of this balanced-budget approach is a:

Exhibit 11-7 Aggregate demand and supply model Suppose the economy in Exhibit 11-7 is in equilibrium at point E1 and the marginal propensity to consumer (MPC)is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by:

If the marginal propensity to consume (MPC)is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:

According to Keynesian economics, fiscal policy should be coordinated to create a surplus during economic expansions.

According to supply-side economists, lowering corporate income taxes:

If the marginal propensity to save (MPS)is 0.25, the value of the spending multiplier is:

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 11-3 Aggregate demand and supply model Beginning at equilibrium E₁ in Exhibit 11-3, when the government increases spending or cuts taxes the economy will experience:

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 11-8 Aggregate demand and supply curves In Exhibit 11-8, supply-siders claimed that the shift from AS₁ to AS₂ would occur if the government:

Exhibit 11-7 Aggregate demand and supply model Suppose the economy in Exhibit 11-7 is in equilibrium at point E₁ and the marginal propensity to consume (MPC)is 0.75. Following Keynesian economics, to lower the price level from 170 to 150 the government should raise taxes by:

Exhibit 11-7 Aggregate demand and supply model Suppose the economy in Exhibit 11-7 is in equilibrium at point E₁ and the marginal propensity to consumer (MPC)is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by: