Question 1

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

Accepted Answer

The government should increase its spending and/or reduce taxes (run a deficit), or increase government spending and taxes by the same amount to combat a recession. The government should do just the opposite to combat inflation during an economic expansion.

Question 2

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always equals:

Accepted Answer

A)  1. 
B)  0. 
C)  the interest rate. 
D)  the marginal propensity to invest (MPI). 
A)  1. 
B)  0. 
C)  the interest rate. 
D)  the marginal propensity to invest (MPI). A

Question 3

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. 
A)  rises. 
B)  first rises, then falls, and then rises again. 
C)  falls. 
D)  first rises, and then falls. D

Question 4

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 5

When the economy enters a recession, automatic stabilizers create:

Accepted Answer

A)  higher taxes. 
B)  more discretionary spending. 
C)  budget deficits. 
D)  budget surpluses. 
A)  higher taxes. 
B)  more discretionary spending. 
C)  budget deficits. 
D)  budget surpluses.

Question 6

The Laffer curve reflects the view that when

Accepted Answer

A)  tax rates are too low, raising them creates a greater incentive for suppliers to increase production. 
B)  tax rates are too high, lowering them not  only creates greater incentive for suppliers to increase production, but also ends up generating higher tax revenues . 
C)  tax revenue is too low, the only way to increase it is through higher tax rates. 
D)  tax rates are too high, lowering them also reduces tax revenue. 
A)  tax rates are too low, raising them creates a greater incentive for suppliers to increase production. 
B)  tax rates are too high, lowering them not  only creates greater incentive for suppliers to increase production, but also ends up generating higher tax revenues . 
C)  tax revenue is too low, the only way to increase it is through higher tax rates. 
D)  tax rates are too high, lowering them also reduces tax revenue.

Question 7

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

A)  $240 million. 
B)  $200 million. 
C)  $180 million. 
D)  $40 million. 
A)  $240 million. 
B)  $200 million. 
C)  $180 million. 
D)  $40 million.

Question 8

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 9

On a graph showing the influence of automatic stabilizers on the economy, tax revenues and real GDP have a(n):

Accepted Answer

A)  direct relationship as shown by an upward-sloping line T. 
B)  direct relationship as shown by a downward-sloping line T. 
C)  inverse relationship as shown by an upward-sloping line T. 
D)  inverse relationship as shown by a downward-sloping line T. 
A)  direct relationship as shown by an upward-sloping line T. 
B)  direct relationship as shown by a downward-sloping line T. 
C)  inverse relationship as shown by an upward-sloping line T. 
D)  inverse relationship as shown by a downward-sloping line T.

Question 10

"Lower marginal tax rates encourage people to work, save, and invest, resulting in more output and a larger tax base." This statement most closely reflects which of the following schools of economic thought?

Accepted Answer

A)  Keynesian 
B)  Adam Smithian 
C)  Marxist 
D)  Supply-side economics 
A)  Keynesian 
B)  Adam Smithian 
C)  Marxist 
D)  Supply-side economics

Question 11

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 12

Suppose the government of a small island country does not currently have any automatic stabilizers in place but they decide to implement them with the expectation of an impending recession. Which of the following would be most effective?

Accepted Answer

A)  Institute a 4-year term policy for the president. 
B)  Begin collecting property taxes. 
C)  Create an unemployment compensation program. 
D)  Pass legislation for a one-time investment in infrastructure. 
A)  Institute a 4-year term policy for the president. 
B)  Begin collecting property taxes. 
C)  Create an unemployment compensation program. 
D)  Pass legislation for a one-time investment in infrastructure.

Question 13

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. 
A)  $1,000. 
B)  $9,000. 
C)  $900. 
D)  $190.

Question 14

The change in saving divided by the change in income is the:

Accepted Answer

A)  marginal propensity to save. 
B)  saving function. 
C)  average propensity to save. 
D)  extra propensity to save. 
A)  marginal propensity to save. 
B)  saving function. 
C)  average propensity to save. 
D)  extra propensity to save.

Question 15

Automatic stabilizers create ________ during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _________ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

Accepted Answer

A)  fiscal stimulus, fiscal contraction 
B)  fiscal stimulus, fiscal stimulus 
C)  fiscal contraction, fiscal stimulus 
D)  fiscal contraction, fiscal contraction 
A)  fiscal stimulus, fiscal contraction 
B)  fiscal stimulus, fiscal stimulus 
C)  fiscal contraction, fiscal stimulus 
D)  fiscal contraction, fiscal contraction

Question 16

A balanced budget is present when:

Accepted Answer

A)  the economy is at full employment. 
B)  the actual level of aggregate spending equals the planned level of spending. 
C)  public sector spending equals private sector spending. 
D)  government revenues equal government expenditures. 
A)  the economy is at full employment. 
B)  the actual level of aggregate spending equals the planned level of spending. 
C)  public sector spending equals private sector spending. 
D)  government revenues equal government expenditures.

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

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 19

A change in government spending and/or taxes as the result of legislation is called:

Accepted Answer

A)  open market operations of the Federal Reserve. 
B)  discretionary fiscal policy. 
C)  balanced budget operations. 
D)  discretionary monetary policy. 
A)  open market operations of the Federal Reserve. 
B)  discretionary fiscal policy. 
C)  balanced budget operations. 
D)  discretionary monetary policy.

Question 20

If the MPC = 1, the spending multiplier is:

Accepted Answer

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

Exam 21: Fiscal Policy

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

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always equals:

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

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:

When the economy enters a recession, automatic stabilizers create:

The Laffer curve reflects the view that when

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

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

On a graph showing the influence of automatic stabilizers on the economy, tax revenues and real GDP have a(n):

"Lower marginal tax rates encourage people to work, save, and invest, resulting in more output and a larger tax base." This statement most closely reflects which of the following schools of economic thought?

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:

Suppose the government of a small island country does not currently have any automatic stabilizers in place but they decide to implement them with the expectation of an impending recession. Which of the following would be most effective?

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

The change in saving divided by the change in income is the:

Automatic stabilizers create ________ during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _________ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

A balanced budget is present when:

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

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

A change in government spending and/or taxes as the result of legislation is called:

If the MPC = 1, the spending multiplier is:

Introducing the Economic Way of Thinking

Production Possibilities Opportunity Cost and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand and Supply

Consumer Choice Theory

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets

Income Distribution Poverty and Discrimination

Antitrust and Regulation

Environmental Economics

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

Understanding Direct and Inverse Relationships between Variables

Filters

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:

Automatic stabilizers create during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

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