Question 1

Higher personal tax rates

Accepted Answer

A)  cause the relationship between consumption expenditures and GDP to become flatter. 
B)  increase household disposable income. 
C)  change the amount people want to spend out of each after-tax dollar but leave the spending percentage of pretax income unchanged. 
D)  cause equilibrium levels of GDP to rise. 
E)  are mandated by the Employment Act of 1946. 
A)  cause the relationship between consumption expenditures and GDP to become flatter. 
B)  increase household disposable income. 
C)  change the amount people want to spend out of each after-tax dollar but leave the spending percentage of pretax income unchanged. 
D)  cause equilibrium levels of GDP to rise. 
E)  are mandated by the Employment Act of 1946.

Question 2

Fiscal policy is the

Accepted Answer

A)  policy that corporations follow to maintain their dividends when profit rises. 
B)  name given to Federal Reserve Banks' efforts to control interest rates. 
C)  process by which prices are established in the stock market. 
D)  use of government spending and taxation for stabilization purposes. 
E)  international trade and commerce policy pursued by a nation. 
A)  policy that corporations follow to maintain their dividends when profit rises. 
B)  name given to Federal Reserve Banks' efforts to control interest rates. 
C)  process by which prices are established in the stock market. 
D)  use of government spending and taxation for stabilization purposes. 
E)  international trade and commerce policy pursued by a nation.

Question 3

Tax cuts and tax surcharges are examples of

Accepted Answer

A)  public works programs. 
B)  discretionary fiscal policy. 
C)  welfare transfers. 
D)  monetary policy. 
E)  automatic stabilizers. 
A)  public works programs. 
B)  discretionary fiscal policy. 
C)  welfare transfers. 
D)  monetary policy. 
E)  automatic stabilizers.

Question 4

Why was economist John Kenneth Galbraith opposed to the tax cut advocated by Walter Heller in 1964?

Accepted Answer

A)  He did not believe the tax cut would have the desired impact. 
B)  He felt the tax cut would have the long-term effect of reducing the government's income. 
C)  He did not believe the tax cut would get support in Congress. 
D)  He feared that tax cuts would gain popularity at the expense of important programs to assist the needy. 
E)  He wanted to be chairperson of the Council of Economic Advisers and was angry at being made ambassador to India. 
A)  He did not believe the tax cut would have the desired impact. 
B)  He felt the tax cut would have the long-term effect of reducing the government's income. 
C)  He did not believe the tax cut would get support in Congress. 
D)  He feared that tax cuts would gain popularity at the expense of important programs to assist the needy. 
E)  He wanted to be chairperson of the Council of Economic Advisers and was angry at being made ambassador to India.

Question 5

High rates of unemployment generally mean that

Accepted Answer

A)  the aggregate demand curve is rising. 
B)  the aggregate demand curve is horizontal. 
C)  the equilibrium output is above potential output. 
D)  policies to increase spending are appropriate. 
E)  the price level is rising. 
A)  the aggregate demand curve is rising. 
B)  the aggregate demand curve is horizontal. 
C)  the equilibrium output is above potential output. 
D)  policies to increase spending are appropriate. 
E)  the price level is rising.

Question 6

When a prospering economy began to show signs of hitting a slump,President Eisenhower,despite diverse suggestions from all sides,held the tax rate stable and,in effect,did nothing.In hindsight,most economists of the 1990s agree that Eisenhower's strategy

Accepted Answer

A)  led to a long period of economic stagnation during the 1950s. 
B)  was hopelessly naive; a tax increase would have been the right move. 
C)  would have been enhanced by increased government spending and more attention to balancing the budget. 
D)  represented a tragic return to the old, worn theories of classical economics. 
E)  was right given the effects of automatic stabilizers on the economy. 
A)  led to a long period of economic stagnation during the 1950s. 
B)  was hopelessly naive; a tax increase would have been the right move. 
C)  would have been enhanced by increased government spending and more attention to balancing the budget. 
D)  represented a tragic return to the old, worn theories of classical economics. 
E)  was right given the effects of automatic stabilizers on the economy.

Question 7

In a simple Keynesian model,an increase in government spending,other things being equal

Accepted Answer

A)  increases the equilibrium GDP by a multiplier effect. 
B)  alters the composition of, but not the total amount of, intended spending. 
C)  shifts the C + I + G line downward. 
D)  pushes the aggregate demand curve to the left, causing price levels to fall. 
E)  changes the angle of the 45-degree line. 
A)  increases the equilibrium GDP by a multiplier effect. 
B)  alters the composition of, but not the total amount of, intended spending. 
C)  shifts the C + I + G line downward. 
D)  pushes the aggregate demand curve to the left, causing price levels to fall. 
E)  changes the angle of the 45-degree line.

Question 8

If equilibrium GDP exceeds potential GDP

Accepted Answer

A)  potential output is much greater than actual output. 
B)  the economy is in a recession. 
C)  price levels are falling. 
D)  actual spending is too low. 
E)  an inflationary gap exists. 
A)  potential output is much greater than actual output. 
B)  the economy is in a recession. 
C)  price levels are falling. 
D)  actual spending is too low. 
E)  an inflationary gap exists.

Question 9

Fiscal policy that promotes,either directly or indirectly,the reduction of private and public spending would be appropriate when the economy is

Accepted Answer

A)  experiencing a high rate of inflation. 
B)  experiencing a high rate of unemployment. 
C)  entering a recession. 
D)  exporting more than it imports. 
E)  experiencing rapidly falling price levels. 
A)  experiencing a high rate of inflation. 
B)  experiencing a high rate of unemployment. 
C)  entering a recession. 
D)  exporting more than it imports. 
E)  experiencing rapidly falling price levels.

Question 10

Why did the automatic stabilizers have more of an effect on our economy during the Eisenhower presidency than they did during the 1930s when Roosevelt was president?

Accepted Answer

A)  We had shifted from an agricultural economy to an industrial economy. 
B)  We had learned more about controlling inflation and unemployment, so less adjustment was needed. 
C)  As the classical economists predicted, inflation and unemployment had begun to balance each other out. 
D)  The size of the federal government had increased dramatically since the 1930s. 
E)  In reality, the opposite is true; the automatic stabilizers had a greater impact in the 1930s than in the 1950s. 
A)  We had shifted from an agricultural economy to an industrial economy. 
B)  We had learned more about controlling inflation and unemployment, so less adjustment was needed. 
C)  As the classical economists predicted, inflation and unemployment had begun to balance each other out. 
D)  The size of the federal government had increased dramatically since the 1930s. 
E)  In reality, the opposite is true; the automatic stabilizers had a greater impact in the 1930s than in the 1950s.

Question 11

In a simple Keynesian model,when net exports increase,the

Accepted Answer

A)  C + I + G + (X - M₁) line shifts downward. 
B)  45-degree line becomes flatter. 
C)  multiplier falls to zero. 
D)  aggregate demand curve shifts to the left. 
E)  equilibrium level of GDP increases by an amount greater than the increase in net exports. 
A)  C + I + G + (X - M₁) line shifts downward. 
B)  45-degree line becomes flatter. 
C)  multiplier falls to zero. 
D)  aggregate demand curve shifts to the left. 
E)  equilibrium level of GDP increases by an amount greater than the increase in net exports.

Question 12

Automatic stabilizers make fiscal policy easier to undertake because they

Accepted Answer

A)  allow economists to formulate rules so that the economy is perpetually stable. 
B)  enable policy makers to prescribe public works programs during inflationary periods since expenditures for unemployment and welfare have correspondingly decreased. 
C)  act to increase spending when the economy turns down and to decrease spending when the economy overheats. 
D)  eliminate the causes of unemployment and inflation experienced by the economy. 
E)  give the president the complete authority for determining stabilization policy. 
A)  allow economists to formulate rules so that the economy is perpetually stable. 
B)  enable policy makers to prescribe public works programs during inflationary periods since expenditures for unemployment and welfare have correspondingly decreased. 
C)  act to increase spending when the economy turns down and to decrease spending when the economy overheats. 
D)  eliminate the causes of unemployment and inflation experienced by the economy. 
E)  give the president the complete authority for determining stabilization policy.

Question 13

Refer to the following graphs for the following question.
  
-Which of the diagrams best reflects the existence of an inflationary gap?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  E 
A)  A 
B)  B 
C)  C 
D)  D 
E)  E

Question 14

The following question are based on the following diagram:
  
-Which of the following events would correct the condition shown?

Accepted Answer

A)  an increase in spending by the private sector 
B)  a decrease in potential output because of a natural disaster 
C)  an increase in wages and other input prices 
D)  an increase in the money supply by the government 
E)  an increase in government spending accompanied by a tax cut 
A)  an increase in spending by the private sector 
B)  a decrease in potential output because of a natural disaster 
C)  an increase in wages and other input prices 
D)  an increase in the money supply by the government 
E)  an increase in government spending accompanied by a tax cut

Question 15

Using the spending and taxing powers of government to stabilize the economy is called fiscal

Accepted Answer

A)  fitness. 
B)  policy. 
C)  federalism. 
D)  finance. 
E)  reserve. 
A)  fitness. 
B)  policy. 
C)  federalism. 
D)  finance. 
E)  reserve.

Question 16

An MPS of 0.6 allows a $1 billion change in intended government expenditures to change the equilibrium GDP by ________ billion.

Accepted Answer

A)  $0.4 
B)  $0.6 
C)  $1 
D)  $1.67 
E)  $2.5 
A)  $0.4 
B)  $0.6 
C)  $1 
D)  $1.67 
E)  $2.5

Question 17

The following question are based on the following diagram:
  
-Which of the following events would correct the condition shown?

Accepted Answer

A)  a decrease in the money supply by the government 
B)  a shift to the left in the short-run aggregate supply curve 
C)  a significant tax increase accompanied by a decrease in government spending 
D)  an increase in private sector spending 
E)  an increase in wages and other input prices 
A)  a decrease in the money supply by the government 
B)  a shift to the left in the short-run aggregate supply curve 
C)  a significant tax increase accompanied by a decrease in government spending 
D)  an increase in private sector spending 
E)  an increase in wages and other input prices

Question 18

The following question are based on the following diagram showing the equilibrium level of GDP. Exports are currently $60 billion and imports are $40 billion.
  
-If in the preceding question the multiplier is 3,the new level of GDP will be ________ billion.

Accepted Answer

A)  $545 
B)  $515 
C)  $485 
D)  $470 
E)  $455 
A)  $545 
B)  $515 
C)  $485 
D)  $470 
E)  $455

Question 19

Which of the following categories of federal government expenditures are ranked correctly in order of their importance?

Accepted Answer

A)  income security, Social Security, interest, health, national defense 
B)  Social Security, national defense, income security, Medicare, health 
C)  transportation, health, interest, national defense, veterans' benefits 
D)  interest, health, national defense, agriculture, energy 
E)  national defense, Medicare, education, Social Security, general government 
A)  income security, Social Security, interest, health, national defense 
B)  Social Security, national defense, income security, Medicare, health 
C)  transportation, health, interest, national defense, veterans' benefits 
D)  interest, health, national defense, agriculture, energy 
E)  national defense, Medicare, education, Social Security, general government

Question 20

When President Kennedy took office in 1961,the economy was marked by relatively high unemployment.On the advice of Walter Heller,Kennedy agreed to a tax cut to deal with the problem.Viewed in historical perspective,the impact of this tax cut of 1964 was

Accepted Answer

A)  great, stimulating investment, greatly reducing unemployment, and increasing GDP. 
B)  negligible on income and employment but caused a rapid increase in inflation. 
C)  moderate, insufficient to convince most economists that the decision was correct. 
D)  very slight, disappointing those who had favored a government spending package in place of the tax cut. 
E)  negligible, so slight as to indicate that the decision was a poor one. 
A)  great, stimulating investment, greatly reducing unemployment, and increasing GDP. 
B)  negligible on income and employment but caused a rapid increase in inflation. 
C)  moderate, insufficient to convince most economists that the decision was correct. 
D)  very slight, disappointing those who had favored a government spending package in place of the tax cut. 
E)  negligible, so slight as to indicate that the decision was a poor one.

Exam 18: Fiscal Policy and National Output

Higher personal tax rates

Fiscal policy is the

Tax cuts and tax surcharges are examples of

Why was economist John Kenneth Galbraith opposed to the tax cut advocated by Walter Heller in 1964?

High rates of unemployment generally mean that

When a prospering economy began to show signs of hitting a slump,President Eisenhower,despite diverse suggestions from all sides,held the tax rate stable and,in effect,did nothing.In hindsight,most economists of the 1990s agree that Eisenhower's strategy

In a simple Keynesian model,an increase in government spending,other things being equal

If equilibrium GDP exceeds potential GDP

Fiscal policy that promotes,either directly or indirectly,the reduction of private and public spending would be appropriate when the economy is

Why did the automatic stabilizers have more of an effect on our economy during the Eisenhower presidency than they did during the 1930s when Roosevelt was president?

In a simple Keynesian model,when net exports increase,the

Automatic stabilizers make fiscal policy easier to undertake because they

Refer to the following graphs for the following question. -Which of the diagrams best reflects the existence of an inflationary gap?

The following question are based on the following diagram: -Which of the following events would correct the condition shown?

Using the spending and taxing powers of government to stabilize the economy is called fiscal

An MPS of 0.6 allows a $1 billion change in intended government expenditures to change the equilibrium GDP by ________ billion.

The following question are based on the following diagram: -Which of the following events would correct the condition shown?

The following question are based on the following diagram showing the equilibrium level of GDP. Exports are currently $60 billion and imports are $40 billion. -If in the preceding question the multiplier is 3,the new level of GDP will be ________ billion.

Which of the following categories of federal government expenditures are ranked correctly in order of their importance?

When President Kennedy took office in 1961,the economy was marked by relatively high unemployment.On the advice of Walter Heller,Kennedy agreed to a tax cut to deal with the problem.Viewed in historical perspective,the impact of this tax cut of 1964 was

What is Economics

Markets and Prices

The Business Firm: Organization,motivation,and Optimal Input Decisions

Getting Behind the Demand and Supply Curves

Market Demand and Price Elasticity

Economic Efficiency,market Supply,and Perfect Competition

Monopoly and Its Regulation

Monopolistic Competition,oligopoly,and Antitrust Policy

Pollution and the Environment

The Supply and Demand for Labor

Interest,rent,and Profit

Poverty,income Inequality,and Discrimination

Economic Growth

Public Goods and the Role of the Government

National Income and Product

Business Fluctuations and Unemployment

The Determination of National Output and the Keynesian Multiplier

Inflation

Money and the Banking System

The Federal Reserve and Monetary Policy

Supply Shocks and Inflation

Productivity,growth,and Technology Policy

Surpluses,deficits,public Debt,and the Federal Budget

Monetary Policy,interest Rates,and Economic Activity

Controversies Over Stabilization Policy

International Trade

Exchange Rates and the Balance of Payments

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