Question 1

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 2

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 3

If the marginal propensity to save (MPS) is 0.50, 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 4

Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?

Accepted Answer

A)  $300 decrease in taxes. 
B)  $75 increase in government spending. 
C)  $75 decrease in taxes. 
D)  $300 increase in government spending. 
E)  $75 decrease in government spending. 
A)  $300 decrease in taxes. 
B)  $75 increase in government spending. 
C)  $75 decrease in taxes. 
D)  $300 increase in government spending. 
E)  $75 decrease in government spending.

Question 5

The equation for the spending multiplier is:

Accepted Answer

A)  1 / (1 − MP
C) . 
B)  1 − MPC. 
C)  1 − (MPC − MPS). 
D)  MPC/MPS. 
E)  none of the above. 
A)  1 / (1 − MP
C) . 
B)  1 − MPC. 
C)  1 − (MPC − MPS). 
D)  MPC/MPS. 
E)  none of the above.

Question 6

Which of the following would most likely occur if the federal government decreased its spending and reduced 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 7

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 8

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 9

Government programs that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries are called:

Accepted Answer

A)  discretionary fiscal policy. 
B)  automatic stabilizers. 
C)  progressive taxation. 
D)  price deflators. 
A)  discretionary fiscal policy. 
B)  automatic stabilizers. 
C)  progressive taxation. 
D)  price deflators.

Question 10

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)  new Classical school. 
E)  classical school. 
A)  rational expectations school. 
B)  neo-Keynesian school. 
C)  supply-Side school. 
D)  new Classical school. 
E)  classical school.

Question 11

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 12

If your income increases from $30,000 to $35,000 and your consumption increases from $11,000 to $12,000, your marginal propensity to consume (MPC) is:

Accepted Answer

A)  0.2. 
B)  0.4. 
C)  0.5. 
D)  0.8. 
E)  1.0. 
A)  0.2. 
B)  0.4. 
C)  0.5. 
D)  0.8. 
E)  1.0.

Question 13

Supply-side fiscal policies focus on improving the incentives to work, save, and invest.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

In the U.S. economy, the effect on federal tax revenues and spending of a decrease in employment is to:

Accepted Answer

A)  cut tax revenues and raise expenditures. 
B)  cut spending and raise tax revenues. 
C)  raise both tax revenues and expenditures. 
D)  cut both spending and tax revenues. 
A)  cut tax revenues and raise expenditures. 
B)  cut spending and raise tax revenues. 
C)  raise both tax revenues and expenditures. 
D)  cut both spending and tax revenues.

Question 16

Supply-siders believe that high tax rates are a disincentive to labor supply.

Accepted Answer

A) True 
 B)False

Question 17

If the marginal propensity to consume (MPC) is 0.96, the value of the spending multiplier is:

Accepted Answer

A)  25. 
B)  40. 
C)  96. 
D)  100. 
A)  25. 
B)  40. 
C)  96. 
D)  100.

Question 18

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 19

The presence of the automatic stabilizers means an increase in the budget deficit will be automatically experienced during a recession whereas a budget surplus will be automatically experienced during an economic expansion.

Accepted Answer

A) True 
 B)False

Question 20

If the economy was about to enter an inflationary boom, which of the following would be most appropriate policy?

Accepted Answer

A)  A tax increase. 
B)  A decrease in government spending. 
C)  An increase in government spending. 
D)  A tax decrease. 
A)  A tax increase. 
B)  A decrease in government spending. 
C)  An increase in government spending. 
D)  A tax decrease.

Exam 15: Fiscal Policy

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

When the economy enters a recession, automatic stabilizers create:

If the marginal propensity to save (MPS) is 0.50, the value of the spending multiplier is:

Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?

The equation for the spending multiplier is:

Which of the following would most likely occur if the federal government decreased its spending and reduced the size of the budget deficit during a period of full employment?

A balanced budget is present when:

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:

Government programs that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries are called:

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:

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.

If your income increases from $30,000 to $35,000 and your consumption increases from $11,000 to $12,000, your marginal propensity to consume (MPC) is:

Supply-side fiscal policies focus on improving the incentives to work, save, and invest.

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

In the U.S. economy, the effect on federal tax revenues and spending of a decrease in employment is to:

Supply-siders believe that high tax rates are a disincentive to labor supply.

If the marginal propensity to consume (MPC) is 0.96, the value of the spending multiplier is:

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

The presence of the automatic stabilizers means an increase in the budget deficit will be automatically experienced during a recession whereas a budget surplus will be automatically experienced during an economic expansion.

If the economy was about to enter an inflationary boom, which of the following would be most appropriate policy?

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

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.