Question 1

Structures in the economy increase aggregate demand when the economy is in recession and decrease aggregate demand when the economy is inflationary are known as:

Accepted Answer

A)  tax transfers. 
B)  automatic stabilizers. 
C)  accelerators. 
D)  depreciation. 
A)  tax transfers. 
B)  automatic stabilizers. 
C)  accelerators. 
D)  depreciation.

Question 2

If the economy is experiencing inflation, then the most appropriate government policy would be to:

Accepted Answer

A)  shift the aggregate demand curve by using a tax increase coupled with spending cuts. 
B)  shift the aggregate demand curve by using a tax increase coupled with more spending. 
C)  shift the aggregate demand curve by using a tax cut coupled with spending cuts. 
D)  shift the aggregate supply curve by using a tax cut coupled with more spending. 
A)  shift the aggregate demand curve by using a tax increase coupled with spending cuts. 
B)  shift the aggregate demand curve by using a tax increase coupled with more spending. 
C)  shift the aggregate demand curve by using a tax cut coupled with spending cuts. 
D)  shift the aggregate supply curve by using a tax cut coupled with more spending.

Question 3

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 4

The Laffer curve belongs to which of the following schools of economic thought?

Accepted Answer

A)  Keynesian 
B)  Supply-side 
C)  Demand management 
D)  Classical 
A)  Keynesian 
B)  Supply-side 
C)  Demand management 
D)  Classical

Question 5

Unemployment compensation payments:

Accepted Answer

A)  rise during a recession and thus reduce the severity of the recession. 
B)  rise during a recession and thus increase the severity of the recession. 
C)  rise during inflationary episodes and thus reduce the severity of the inflation. 
D)  fall during a recession and thus increase the severity of the recession. 
A)  rise during a recession and thus reduce the severity of the recession. 
B)  rise during a recession and thus increase the severity of the recession. 
C)  rise during inflationary episodes and thus reduce the severity of the inflation. 
D)  fall during a recession and thus increase the severity of the recession.

Question 6

Automatic stabilizers are government programs that:

Accepted Answer

A)  exaggerate the ups and downs in aggregate demand without legislative action. 
B)  bring expenditures and revenues automatically into balance without legislative action. 
C)  shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion. 
D)  increase tax collections automatically during a recession. 
A)  exaggerate the ups and downs in aggregate demand without legislative action. 
B)  bring expenditures and revenues automatically into balance without legislative action. 
C)  shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion. 
D)  increase tax collections automatically during a recession.

Question 7

The balanced budget multiplier is always equal to:

Accepted Answer

A)  0.50. 
B)  0.75. 
C)  1 / MPC. 
D)  1. 
A)  0.50. 
B)  0.75. 
C)  1 / MPC. 
D)  1.

Question 8

Personal income taxes:

Accepted Answer

A)  make recessions and inflationary episodes more severe. 
B)  make recessions and inflationary episodes less severe. 
C)  make recessions more severe and inflationary episodes less severe. 
D)  make recessions less severe and inflationary episodes more severe. 
A)  make recessions and inflationary episodes more severe. 
B)  make recessions and inflationary episodes less severe. 
C)  make recessions more severe and inflationary episodes less severe. 
D)  make recessions less severe and inflationary episodes more severe.

Question 9

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. 
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.

Question 10

When the federal government is running a budget deficit:

Accepted Answer

A)  government tax revenues exceed government expenditures. 
B)  government expenditures exceed government tax revenues. 
C)  the economy must be in an economic recession. 
D)  the size of the national debt will decline. 
A)  government tax revenues exceed government expenditures. 
B)  government expenditures exceed government tax revenues. 
C)  the economy must be in an economic recession. 
D)  the size of the national debt will decline.

Question 11

According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:

Accepted Answer

A)  0. 
B)  at the maximum value. 
C)  the same as it would be at a 50 percent tax rate. 
D)  greater than it would be at a 50 percent tax rate. 
A)  0. 
B)  at the maximum value. 
C)  the same as it would be at a 50 percent tax rate. 
D)  greater than it would be at a 50 percent tax rate.

Question 12

Exhibit 11-6 Aggregate demand and supply model
 
In Exhibit 11-6, if the aggregate demand curve is at AD1, the government should:

Accepted Answer

A)  raise taxes to move to AD2. 
B)  cut taxes to move to AD2. 
C)  cut taxes to move to AD3. 
D)  cut spending to move to AD2. 
A)  raise taxes to move to AD2. 
B)  cut taxes to move to AD2. 
C)  cut taxes to move to AD3. 
D)  cut spending to move to AD2.

Question 13

According to Keynesian economics, what impact would a balanced budget amendment to our constitution have on our national economy?

Accepted Answer

A balanced budget amendment would destab

Question 14

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

Accepted Answer

A)  $500 billion decrease in aggregate demand. 
B)  $500 billion increase in aggregate demand. 
C)  $1,000 billion increase in aggregate demand. 
D)  $1,000 billion decrease in aggregate demand. 
A)  $500 billion decrease in aggregate demand. 
B)  $500 billion increase in aggregate demand. 
C)  $1,000 billion increase in aggregate demand. 
D)  $1,000 billion decrease in aggregate demand.

Question 15

Income tax collections:

Accepted Answer

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

Question 16

The formula to compute the spending multiplier is:

Accepted Answer

A)  1 / (MPC + MPS). 
B)  1 / (1 − MP
C) . 
C)  1 / (1 − MPS). 
D)  1 / (C + I). 
A)  1 / (MPC + MPS). 
B)  1 / (1 − MP
C) . 
C)  1 / (1 − MPS). 
D)  1 / (C + I).

Question 17

The school of economic thought which argues that through tax reductions, and deregulation, government creates the proper incentives for the private sector to increase aggregate supply is known as the:

Accepted Answer

A)  rational expectations school. 
B)  neo-Keynesian school. 
C)  supply-side school. 
D)  classical school. 
A)  rational expectations school. 
B)  neo-Keynesian school. 
C)  supply-side school. 
D)  classical school.

Question 18

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 19

As the marginal propensity to consume (MPC) decreases, the spending multiplier:

Accepted Answer

A)  increases. 
B)  decreases. 
C)  remains constant. 
D)  becomes undefinable. 
A)  increases. 
B)  decreases. 
C)  remains constant. 
D)  becomes undefinable.

Question 20

Which of the following is not an automatic stabilizer?

Accepted Answer

A)  Personal income tax revenue. 
B)  Corporate income tax revenue. 
C)  Unemployment compensation benefits. 
D)  Property tax revenue. 
A)  Personal income tax revenue. 
B)  Corporate income tax revenue. 
C)  Unemployment compensation benefits. 
D)  Property tax revenue.

Exam 21: Fiscal Policy

Structures in the economy increase aggregate demand when the economy is in recession and decrease aggregate demand when the economy is inflationary are known as:

If the economy is experiencing inflation, then the most appropriate government policy would be to:

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

The Laffer curve belongs to which of the following schools of economic thought?

Unemployment compensation payments:

Automatic stabilizers are government programs that:

The balanced budget multiplier is always equal to:

Personal income taxes:

If the marginal propensity to consume = 0.75, then:

When the federal government is running a budget deficit:

According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:

Exhibit 11-6 Aggregate demand and supply model In Exhibit 11-6, if the aggregate demand curve is at AD1, the government should:

According to Keynesian economics, what impact would a balanced budget amendment to our constitution have on our national economy?

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

Income tax collections:

The formula to compute the spending multiplier is:

The school of economic thought which argues that through tax reductions, and deregulation, government creates the proper incentives for the private sector to increase aggregate supply is known as the:

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?

As the marginal propensity to consume (MPC) decreases, the spending multiplier:

Which of the following is not an automatic stabilizer?

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 AD₁, the government should: