Question 1

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 2

Because of the automatic stabilizers, a decline in the level of economic activity will cause:

Accepted Answer

A)  a reduction in tax revenues collected. 
B)  an increase in government expenditures. 
C)  a greater budget deficit. 
D)  all of the above. 
A)  a reduction in tax revenues collected. 
B)  an increase in government expenditures. 
C)  a greater budget deficit. 
D)  all of the above.

Question 3

The tax multiplier equals 1 − spending multiplier.

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 15-1  Disposable income and consumption data   In Exhibit 15-1, when disposable income (Y) is increased from $0 to $1,000 to $2,000, the marginal propensity to consume:

Accepted Answer

A)  is 1. 
B)  decreases from 0.9 to 0.8. 
C)  decreases from 0.8 to 0.7. 
D)  increases from 0.8 to 0.9. 
E)  is negative. 
A)  is 1. 
B)  decreases from 0.9 to 0.8. 
C)  decreases from 0.8 to 0.7. 
D)  increases from 0.8 to 0.9. 
E)  is negative.

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

Following Keynesian economics, and assuming a marginal propensity to consume (MPC) of 0.75, an increase in taxes of $100 billion would be expected to shift the aggregate demand curve by $300 billion to the left.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 15-4  Aggregate demand and supply model   Suppose the economy in Exhibit 15-4 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by:

Accepted Answer

A)  decreasing government spending by $750 billion. 
B)  decreasing government spending by $100 billion. 
C)  increasing government spending by $25 billion. 
D)  decreasing government spending by $25 billion. 
A)  decreasing government spending by $750 billion. 
B)  decreasing government spending by $100 billion. 
C)  increasing government spending by $25 billion. 
D)  decreasing government spending by $25 billion.

Question 8

Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and/or an increase in taxes.

Accepted Answer

A) True 
 B)False

Question 9

Fiscal policy is the management of aggregate demand through changes in taxes and government spending.

Accepted Answer

A) True 
 B)False

Question 10

According to Keynesian economics, fiscal policy should be coordinated to create a surplus during economic expansions.

Accepted Answer

A) True 
 B)False

Question 11

Supply-side economics is based on the theory that:

Accepted Answer

A)  budget deficits will stimulate demand, output, and employment. 
B)  budget deficits will lead to higher interest rates, which will weaken their expansionary impact. 
C)  higher tax rates will increase tax revenues. 
D)  increases in aggregate supply lower the price level. 
A)  budget deficits will stimulate demand, output, and employment. 
B)  budget deficits will lead to higher interest rates, which will weaken their expansionary impact. 
C)  higher tax rates will increase tax revenues. 
D)  increases in aggregate supply lower the price level.

Question 12

The tax multiplier is greater than the spending multiplier regardless of the value of the marginal propensity to consume (MPC).

Accepted Answer

A) True 
 B)False

Question 13

Unemployment insurance payments act as automatic stabilizers by:

Accepted Answer

A)  allowing for more consumer spending during prosperity. 
B)  making the unemployment rate worse during a recession. 
C)  allowing for more consumer spending during a recession. 
D)  changing the Phillips curve to a Laffer curve. 
A)  allowing for more consumer spending during prosperity. 
B)  making the unemployment rate worse during a recession. 
C)  allowing for more consumer spending during a recession. 
D)  changing the Phillips curve to a Laffer curve.

Question 14

The Laffer curve is a graph of the relationship between tax rates and:

Accepted Answer

A)  real GDP. 
B)  total tax revenues. 
C)  government spending. 
D)  inflation. 
A)  real GDP. 
B)  total tax revenues. 
C)  government spending. 
D)  inflation.

Question 15

Exhibit 15-4  Aggregate demand and supply model   Suppose the economy in Exhibit 15-4 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by:

Accepted Answer

A)  decreasing government tax revenue by $100 billion. 
B)  decreasing government tax revenue by $750 billion. 
C)  increasing government tax revenue by $100 billion. 
D)  increasing government tax revenue by approximately $33 billion. 
E)  decreasing government tax revenue by approximately $33 billion. 
A)  decreasing government tax revenue by $100 billion. 
B)  decreasing government tax revenue by $750 billion. 
C)  increasing government tax revenue by $100 billion. 
D)  increasing government tax revenue by approximately $33 billion. 
E)  decreasing government tax revenue by approximately $33 billion.

Question 16

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

Accepted Answer

A)  − $300 million. 
B)  − $200 million. 
C)  − 100 million. 
D)  − $50 million. 
A)  − $300 million. 
B)  − $200 million. 
C)  − 100 million. 
D)  − $50 million.

Question 17

Exhibit 15-6  Aggregate demand and supply model   In Exhibit 15-6, 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. 
E)  not change its behavior. 
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. 
E)  not change its behavior.

Question 18

Exhibit 15-7  Aggregate demand and supply model   Suppose the economy in Exhibit 15-7 is in equilibrium at point E1 and the marginal propensity to consumer ( MPC ) is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by:

Accepted Answer

A)  $20 billion. 
B)  $100 billion. 
C)  $133 billion. 
D)  $400 billion. 
A)  $20 billion. 
B)  $100 billion. 
C)  $133 billion. 
D)  $400 billion.

Question 19

The marginal propensity to consume (MPC) is the change in consumption divided by the change in income.

Accepted Answer

A) True 
 B)False

Question 20

According to supply-side fiscal policy, reducing tax rates on wages and profits will:

Accepted Answer

A)  create demand-pull inflation. 
B)  lower the price level but may trigger a recession. 
C)  result in stagflation. 
D)  reduce both unemployment and inflation. 
A)  create demand-pull inflation. 
B)  lower the price level but may trigger a recession. 
C)  result in stagflation. 
D)  reduce both unemployment and inflation.

Exam 15: Fiscal Policy

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

Because of the automatic stabilizers, a decline in the level of economic activity will cause:

The tax multiplier equals 1 − spending multiplier.

Exhibit 15-1 Disposable income and consumption data In Exhibit 15-1, when disposable income (Y) is increased from $0 to $1,000 to $2,000, the marginal propensity to consume:

Unemployment compensation payments:

Following Keynesian economics, and assuming a marginal propensity to consume (MPC) of 0.75, an increase in taxes of $100 billion would be expected to shift the aggregate demand curve by $300 billion to the left.

Exhibit 15-4 Aggregate demand and supply model Suppose the economy in Exhibit 15-4 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by:

Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and/or an increase in taxes.

Fiscal policy is the management of aggregate demand through changes in taxes and government spending.

According to Keynesian economics, fiscal policy should be coordinated to create a surplus during economic expansions.

Supply-side economics is based on the theory that:

The tax multiplier is greater than the spending multiplier regardless of the value of the marginal propensity to consume (MPC).

Unemployment insurance payments act as automatic stabilizers by:

The Laffer curve is a graph of the relationship between tax rates and:

Exhibit 15-4 Aggregate demand and supply model Suppose the economy in Exhibit 15-4 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by:

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

Exhibit 15-6 Aggregate demand and supply model In Exhibit 15-6, if the aggregate demand curve is at AD1 , the government should:

Exhibit 15-7 Aggregate demand and supply model Suppose the economy in Exhibit 15-7 is in equilibrium at point E1 and the marginal propensity to consumer ( MPC ) is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by:

The marginal propensity to consume (MPC) is the change in consumption divided by the change in income.

According to supply-side fiscal policy, reducing tax rates on wages and profits will:

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

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

Exhibit 15-4 Aggregate demand and supply model Suppose the economy in Exhibit 15-4 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E₂ and reduce inflation by:

Exhibit 15-4 Aggregate demand and supply model Suppose the economy in Exhibit 15-4 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E₂ and reduce inflation by:

Exhibit 15-6 Aggregate demand and supply model In Exhibit 15-6, if the aggregate demand curve is at AD₁ , the government should:

Exhibit 15-7 Aggregate demand and supply model Suppose the economy in Exhibit 15-7 is in equilibrium at point E₁ and the marginal propensity to consumer ( MPC ) is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by: