Question 1

If your income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC) is:

Accepted Answer

A)  0.20. 
B)  0.40. 
C)  0.50. 
D)  0.80. 
A)  0.20. 
B)  0.40. 
C)  0.50. 
D)  0.80.

Question 2

Which of the following is an example of expansionary fiscal policy?

Accepted Answer

A)  Increase taxes. 
B)  Decrease government spending. 
C)  Increase government spending. 
D)  Increase taxes and decrease government spending equally. 
A)  Increase taxes. 
B)  Decrease government spending. 
C)  Increase government spending. 
D)  Increase taxes and decrease government spending equally.

Question 3

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 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 4

"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level." This argument is made by the:

Accepted Answer

A)  Keynesian economists. 
B)  supply-side economists. 
C)  classical economists. 
D)  monetarists. 
A)  Keynesian economists. 
B)  supply-side economists. 
C)  classical economists. 
D)  monetarists.

Question 5

Find the tax multiplier if the MPC is 0.75.

Accepted Answer

A)  − 4. 
B)  − 3. 
C)  0.33. 
D)  3. 
A)  − 4. 
B)  − 3. 
C)  0.33. 
D)  3.

Question 6

An advantage of automatic stabilizers is that this type of fiscal policy

Accepted Answer

A)  requires precise knowledge of full-employment real GDP. 
B)  can be influenced by special interest groups when their concerns are valid. 
C)  is not subject to lag time problems. 
D)  accelerates the direction in which the economy is moving at the time. 
A)  requires precise knowledge of full-employment real GDP. 
B)  can be influenced by special interest groups when their concerns are valid. 
C)  is not subject to lag time problems. 
D)  accelerates the direction in which the economy is moving at the time.

Question 7

Which of the following is emphasized by supply-side economics?

Accepted Answer

A)  the effect of budget deficits on interest rates and aggregate demand 
B)  the effect of government spending on aggregate demand, output, and employment 
C)  the effect of marginal tax rates on aggregate supply 
D)  the effect of budget deficits on the rate of taxation in the future 
A)  the effect of budget deficits on interest rates and aggregate demand 
B)  the effect of government spending on aggregate demand, output, and employment 
C)  the effect of marginal tax rates on aggregate supply 
D)  the effect of budget deficits on the rate of taxation in the future

Question 8

Exhibit 11-6 Aggregate demand and supply model
 
In Exhibit 11-6, if the aggregate demand curve is at AD3, the government should:

Accepted Answer

A)  raise taxes to move to AD1. 
B)  cut taxes to move to AD2. 
C)  not change its behavior. 
D)  cut spending to move to AD2. 
A)  raise taxes to move to AD1. 
B)  cut taxes to move to AD2. 
C)  not change its behavior. 
D)  cut spending to move to AD2.

Question 9

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. 
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.

Question 10

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 11

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. 
A)  run budget deficits. 
B)  decrease taxes. 
C)  increase government spending. 
D)  run budget surpluses.

Question 12

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 13

If the marginal propensity to consume (MPC) is 0.75, and if the goal is to increase real GDP by $400 million, then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

A)  $140 million. 
B)  $100 million. 
C)  $200 million. 
D)  $400 million. 
A)  $140 million. 
B)  $100 million. 
C)  $200 million. 
D)  $400 million.

Question 14

Programs that automatically increase government spending (relative to revenue) during a recession and automatically decrease government spending (relative to revenue) during an economic boom are called:

Accepted Answer

A)  discretionary fiscal policy. 
B)  supply-side programs. 
C)  automatic stabilizers. 
D)  tax credits. 
A)  discretionary fiscal policy. 
B)  supply-side programs. 
C)  automatic stabilizers. 
D)  tax credits.

Question 15

If the marginal propensity to save (MPS) is 0.10, the value of the spending multiplier is:

Accepted Answer

A)  1. 
B)  9. 
C)  10. 
D)  90. 
A)  1. 
B)  9. 
C)  10. 
D)  90.

Question 16

If the marginal propensity to consume (MPC) is 0.75 and if policy makers wish  to increase real GDP by $300 million to fight a recession, then by how much  would taxes have to change?

Accepted Answer

A)   -$30 million 
B)   -$50 million 
C)  -100 million 
D)  -300 million 
A)   -$30 million 
B)   -$50 million 
C)  -100 million 
D)  -300 million

Question 17

Supply-siders' policy recommendations include:

Accepted Answer

A)  lower tax rates, spending cuts, and increased government regulation. 
B)  lower tax rates, lower resource prices, and decreased government regulation. 
C)  lower tax rates, spending increases, and decreased government regulation. 
D)  higher tax rates, spending increases, and increased government regulation. 
A)  lower tax rates, spending cuts, and increased government regulation. 
B)  lower tax rates, lower resource prices, and decreased government regulation. 
C)  lower tax rates, spending increases, and decreased government regulation. 
D)  higher tax rates, spending increases, and increased government regulation.

Question 18

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 19

If no fiscal policy changes are implemented to fight inflation, suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is 0.90, this increase in aggregate demand could be prevented by:

Accepted Answer

A)  increasing government spending by $500 billion. 
B)  increasing government spending by $140 billion. 
C)  decreasing taxes by $40 billion. 
D)  increasing taxes by $100 billion. 
A)  increasing government spending by $500 billion. 
B)  increasing government spending by $140 billion. 
C)  decreasing taxes by $40 billion. 
D)  increasing taxes by $100 billion.

Question 20

If your income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

Accepted Answer

A)  0.2. 
B)  0.4. 
C)  0.5. 
D)  0.8. 
A)  0.2. 
B)  0.4. 
C)  0.5. 
D)  0.8.

Exam 21: Fiscal Policy

If your income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC) is:

Which of the following is an example of expansionary fiscal policy?

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?

"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level." This argument is made by the:

Find the tax multiplier if the MPC is 0.75.

An advantage of automatic stabilizers is that this type of fiscal policy

Which of the following is emphasized by supply-side economics?

Exhibit 11-6 Aggregate demand and supply model In Exhibit 11-6, if the aggregate demand curve is at AD3, the government should:

The unemployment compensation program:

Supply-side economists:

To help close an inflationary gap, the government could:

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

If the marginal propensity to consume (MPC) is 0.75, and if the goal is to increase real GDP by $400 million, then by how much would government spending have to change to generate this increase in real GDP?

Programs that automatically increase government spending (relative to revenue) during a recession and automatically decrease government spending (relative to revenue) during an economic boom are called:

If the marginal propensity to save (MPS) is 0.10, the value of the spending multiplier is:

If the marginal propensity to consume (MPC) is 0.75 and if policy makers wish to increase real GDP by $300 million to fight a recession, then by how much would taxes have to change?

Supply-siders' policy recommendations include:

The spending multiplier is defined as:

If no fiscal policy changes are implemented to fight inflation, suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is 0.90, this increase in aggregate demand could be prevented by:

If your income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) 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 11-6 Aggregate demand and supply model In Exhibit 11-6, if the aggregate demand curve is at AD₃, the government should: