Question 1

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

Accepted Answer

A)  Increased government spending. 
B)  Higher taxes. 
C)  A balanced-budget reduction in both spending and taxes. 
D)  An expansion in the money supply. 
A)  Increased government spending. 
B)  Higher taxes. 
C)  A balanced-budget reduction in both spending and taxes. 
D)  An expansion in the money supply.

Question 2

The government can reduce unemployment or reduce inflation by:

Accepted Answer

A)  manipulating aggregate demand. 
B)  manipulating the availability of natural resources. 
C)  manipulating the availability of capital goods. 
D)  manipulating the availability of qualified workers. 
E)  curbing the level of immigration. 
A)  manipulating aggregate demand. 
B)  manipulating the availability of natural resources. 
C)  manipulating the availability of capital goods. 
D)  manipulating the availability of qualified workers. 
E)  curbing the level of immigration.

Question 3

If MPC = 0.9, equilibrium real GDP is $1,000, and full-employment real GDP is $2,000, then how much should government spending change to bring about full employment?

Accepted Answer

A)  +1,000. 
B)  -100. 
C)  +900. 
D)  +100. 
E)  -0.9. 
A)  +1,000. 
B)  -100. 
C)  +900. 
D)  +100. 
E)  -0.9.

Question 4

When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier:

Accepted Answer

A)  also increases. 
B)  decreases. 
C)  remains unchanged. 
D)  reacts unpredictably. 
A)  also increases. 
B)  decreases. 
C)  remains unchanged. 
D)  reacts unpredictably.

Question 5

Supply-side economics calls for:

Accepted Answer

A)  lower taxes on businesses and individuals. 
B)  regulatory reforms to increase productivity. 
C)  government subsidies to promote technological advance. 
D)  All of the above. 
A)  lower taxes on businesses and individuals. 
B)  regulatory reforms to increase productivity. 
C)  government subsidies to promote technological advance. 
D)  All of the above.

Question 6

The ratio of the change in GDP to an initial change in aggregate spending is the:

Accepted Answer

A)  spending multiplier. 
B)  permanent income rate. 
C)  marginal expenditure rate. 
D)  marginal propensity to consume. 
A)  spending multiplier. 
B)  permanent income rate. 
C)  marginal expenditure rate. 
D)  marginal propensity to consume.

Question 7

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.

Question 8

The marginal propensity to consume measures the ratio of the:

Accepted Answer

A)  average amount of our income that we spend. 
B)  average amount of our savings that we spend. 
C)  change in consumer spending to a change in money holdings. 
D)  change in consumer spending to a change in interest rates. 
E)  change in consumer spending to a change in income. 
A)  average amount of our income that we spend. 
B)  average amount of our savings that we spend. 
C)  change in consumer spending to a change in money holdings. 
D)  change in consumer spending to a change in interest rates. 
E)  change in consumer spending to a change in income.

Question 9

Assume the marginal propensity to consume (MPC) is 0.75 and the economy is in recession with real GDP $1 trillion below full-employment real GDP. To achieve full employment, aggregate demand (AD) must be increased $2 trillion. Following discretionary fiscal policy, government spending should be increased:

Accepted Answer

A)  $0.25 trillion. 
B)  $1 trillion. 
C)  $0.5 trillion. 
D)  $2 trillion. 
A)  $0.25 trillion. 
B)  $1 trillion. 
C)  $0.5 trillion. 
D)  $2 trillion.

Question 10

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 demand curve by using a tax cut coupled with more spending. 
E)  shift the aggregate supply curve by using a tax cut coupled with spending cuts. 
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 demand curve by using a tax cut coupled with more spending. 
E)  shift the aggregate supply curve by using a tax cut coupled with spending cuts.

Question 11

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.

Question 12

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

Accepted Answer

The government should increase its spend

Question 13

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 14

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 15

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC) is 0.80, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

Accepted Answer

A)  government spending by $200 billion. 
B)  taxes by $100 billion. 
C)  taxes by $1,000 billion. 
D)  government spending by $1,000 billion. 
A)  government spending by $200 billion. 
B)  taxes by $100 billion. 
C)  taxes by $1,000 billion. 
D)  government spending by $1,000 billion.

Question 16

Suppose that the economy is operating in full-employment equilibrium along the vertical section of the aggregate supply curve. If the aggregate demand curve is reduced by $100 billion in order for the price level to decline by 5 percent, and if the marginal propensity to consume (MPC) is 0.75, then what change in taxes would generate the desired price reduction?

Accepted Answer

A)  $300 billion. 
B)  − $75 billion. 
C)  − $33.3 billion. 
D)  − $25 billion. 
A)  $300 billion. 
B)  − $75 billion. 
C)  − $33.3 billion. 
D)  − $25 billion.

Question 17

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. 
E)  inadequate information is given. 
A)  $1,000. 
B)  $9,000. 
C)  $900. 
D)  $190. 
E)  inadequate information is given.

Question 18

"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)  Aggregate demandian. 
D)  Supply-side economics. 
A)  Keynesian. 
B)  Adam Smithian. 
C)  Aggregate demandian. 
D)  Supply-side economics.

Question 19

If the MPC = 1, the spending multiplier is:

Accepted Answer

A)  infinite. 
B)  zero. 
C)  10. 
D)  100. 
E)  1. 
A)  infinite. 
B)  zero. 
C)  10. 
D)  100. 
E)  1.

Question 20

Keynesian economics focuses on the role of aggregate spending in determining the level of real GDP.

Accepted Answer

A) True 
 B)False

Exam 15: Fiscal Policy

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

The government can reduce unemployment or reduce inflation by:

If MPC = 0.9, equilibrium real GDP is $1,000, and full-employment real GDP is $2,000, then how much should government spending change to bring about full employment?

When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier:

Supply-side economics calls for:

The ratio of the change in GDP to an initial change in aggregate spending is the:

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

The marginal propensity to consume measures the ratio of the:

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

Which of the following is not an automatic stabilizer?

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

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

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

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC) is 0.80, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

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

"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?

If the MPC = 1, the spending multiplier is:

Keynesian economics focuses on the role of aggregate spending in determining the level of real GDP.

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Filters