Question 1

Keynesian analysis stresses that a tax cut that increases the government's budget deficit or reduces its budget surplus:

Accepted Answer

A)  is appropriate during a period of inflation. 
B)  will increase the money supply. 
C)  will stimulate aggregate supply and, thereby, promote employment. 
D)  will stimulate aggregate demand and, thereby, promote employment. 
A)  is appropriate during a period of inflation. 
B)  will increase the money supply. 
C)  will stimulate aggregate supply and, thereby, promote employment. 
D)  will stimulate aggregate demand and, thereby, promote employment.

Question 2

Mathematically,the value of the tax multiplier in terms of the marginal propensity to consume (MPC)is given by the formula:

Accepted Answer

A)  MPC - 1. 
B)  (MPC - 1)/MPC. 
C)  1/MPC. 
D)  1-[1/(1 - MP
C) ]. 
A)  MPC - 1. 
B)  (MPC - 1)/MPC. 
C)  1/MPC. 
D)  1-[1/(1 - MP
C) ].

Question 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

If the marginal propensity to consume (MPC)is 0.75,the value of the spending multiplier is:

Accepted Answer

A)  0. 
B)  1. 
C)  4. 
D)  5. 
A)  0. 
B)  1. 
C)  4. 
D)  5.

Question 6

When the MPC gets smaller,the spending multiplier:

Accepted Answer

A)  gets larger. 
B)  gets smaller. 
C)  stays the same. 
D)  gets smaller at low real GDP, and larger at high real GDP. 
E)  gets larger at low real GDP, and smaller at high real GDP. 
A)  gets larger. 
B)  gets smaller. 
C)  stays the same. 
D)  gets smaller at low real GDP, and larger at high real GDP. 
E)  gets larger at low real GDP, and smaller at high real GDP.

Question 7

If no fiscal policy changes are made,suppose the current aggregate demand curve will increase horizontally (shift rightward)by $1,000 billion and cause inflation.If the marginal propensity to consume is 0.90,federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

Accepted Answer

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

Question 8

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 9

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 10

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 consume (MPC)is 0.75.Following Keynesian economics,to lower the price level from 170 to 150 the government should raise taxes 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 11

Assume the economy is in recession and real GDP is below full employment.The marginal propensity to consume (MPC)is 0.90,and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending).If an increase of $1,000 billion aggregate demand can restore full employment,the government should:

Accepted Answer

A)  increase spending by $100 billion. 
B)  decrease spending by $790 billion. 
C)  increase spending by $1,000 billion. 
D)  increase spending by $250 billion. 
A)  increase spending by $100 billion. 
B)  decrease spending by $790 billion. 
C)  increase spending by $1,000 billion. 
D)  increase spending by $250 billion.

Question 12

Using the aggregate demand and supply model,expansionary fiscal policy will not affect the price level,but will restore full-employment GDP.

Accepted Answer

A) True 
 B)False

Question 13

If the economy is experiencing demand-pull inflation,then the appropriate government policy would be to shift the aggregate demand curve by using a:

Accepted Answer

A)  tax increase coupled with spending cuts. 
B)  tax increase coupled with more spending. 
C)  tax cut coupled with spending cuts 
D)  tax cut coupled with more spending 
E)  tax cut coupled with spending cuts. 
A)  tax increase coupled with spending cuts. 
B)  tax increase coupled with more spending. 
C)  tax cut coupled with spending cuts 
D)  tax cut coupled with more spending 
E)  tax cut coupled with spending cuts.

Question 14

Assume that an economy's real GDP multiplier is 4.If this economy is in equilibrium at $2,000 billion,then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?

Accepted Answer

A)  $500 billion spending cut. 
B)  $500 billion spending increase. 
C)  $125 billion spending cut. 
D)  $125 billion spending increase. 
E)  $2,000 billion spending cut. 
A)  $500 billion spending cut. 
B)  $500 billion spending increase. 
C)  $125 billion spending cut. 
D)  $125 billion spending increase. 
E)  $2,000 billion spending cut.

Question 15

According to supply-side economists,lowering corporate income taxes:

Accepted Answer

A)  results in wage hikes for employees but no economic growth. 
B)  moves society toward greater income equality. 
C)  checks the expansion of real GDP and employment. 
D)  stimulates investment and economic growth. 
E)  does not create enough incentive for producers to increase production. 
A)  results in wage hikes for employees but no economic growth. 
B)  moves society toward greater income equality. 
C)  checks the expansion of real GDP and employment. 
D)  stimulates investment and economic growth. 
E)  does not create enough incentive for producers to increase production.

Question 16

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 17

Exhibit 15-6 Aggregate demand and supply model
  
-In Exhibit 15-6,if the aggregate demand curve is at AD₃ ,the government should:

Accepted Answer

A)  raise taxes to move to AD₁. 
B)  cut taxes to move to AD₂. 
C)  cut taxes to move to AD₁. 
D)  cut spending to move to AD₂. 
E)  not change its behavior. 
A)  raise taxes to move to AD₁. 
B)  cut taxes to move to AD₂. 
C)  cut taxes to move to AD₁. 
D)  cut spending to move to AD₂. 
E)  not change its behavior.

Question 18

Following Keynesian economics,and assuming a marginal propensity to consume (MPC)of 0.80,an increase in federal government spending of $100 billion at below full employment would be expected to shift the aggregate demand curve by $500 billion to the right.

Accepted Answer

A) True 
 B)False

Question 19

Supply-siders' policy recommendations include:

Accepted Answer

A)  lower tax rates, spending cuts, and increased government regulation. 
B)  lower tax rates, lower resource prices, and decreased government regulation. 
C)  lower tax rates, spending increases, and decreased government regulation. 
D)  lower tax rates, spending increases, and increased government regulation. 
E)  higher tax rates, spending cuts, and decreased government regulation. 
A)  lower tax rates, spending cuts, and increased government regulation. 
B)  lower tax rates, lower resource prices, and decreased government regulation. 
C)  lower tax rates, spending increases, and decreased government regulation. 
D)  lower tax rates, spending increases, and increased government regulation. 
E)  higher tax rates, spending cuts, and decreased government regulation.

Question 20

During the Reagan administration,the Laffer curve was used to ague that:

Accepted Answer

A)  the supply-side effects of tax cuts are relatively small. 
B)  discretionary tax cuts are unwise because they create stagflation. 
C)  lower income tax rates could increase tax revenues. 
D)  a "flat tax" would simplify the tax code and stimulate economic growth. 
A)  the supply-side effects of tax cuts are relatively small. 
B)  discretionary tax cuts are unwise because they create stagflation. 
C)  lower income tax rates could increase tax revenues. 
D)  a "flat tax" would simplify the tax code and stimulate economic growth.

Exam 15: Fiscal Policy

Keynesian analysis stresses that a tax cut that increases the government's budget deficit or reduces its budget surplus:

Mathematically,the value of the tax multiplier in terms of the marginal propensity to consume (MPC)is given by the formula:

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:

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

If the marginal propensity to consume (MPC)is 0.75,the value of the spending multiplier is:

When the MPC gets smaller,the spending multiplier:

If no fiscal policy changes are made,suppose the current aggregate demand curve will increase horizontally (shift rightward)by $1,000 billion and cause inflation.If the marginal propensity to consume is 0.90,federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

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?

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.

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 consume (MPC)is 0.75.Following Keynesian economics,to lower the price level from 170 to 150 the government should raise taxes by:

Using the aggregate demand and supply model,expansionary fiscal policy will not affect the price level,but will restore full-employment GDP.

If the economy is experiencing demand-pull inflation,then the appropriate government policy would be to shift the aggregate demand curve by using a:

Assume that an economy's real GDP multiplier is 4.If this economy is in equilibrium at $2,000 billion,then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?

According to supply-side economists,lowering corporate income taxes:

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:

Exhibit 15-6 Aggregate demand and supply model -In Exhibit 15-6,if the aggregate demand curve is at AD₃ ,the government should:

Following Keynesian economics,and assuming a marginal propensity to consume (MPC)of 0.80,an increase in federal government spending of $100 billion at below full employment would be expected to shift the aggregate demand curve by $500 billion to the right.

Supply-siders' policy recommendations include:

During the Reagan administration,the Laffer curve was used to ague that:

Introducing the Economic Way of Thinking

A: Appendix: Applying Graphs to Economics

Production Possibilities,Opportunity Cost,and Economic Growth

Part 1: Market Demand and Supply

Part 2: 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

A: Appendix: The Self-Correcting Aggregate Demand and Supply Model

The Public Sector

Federal Deficits,Surpluses,and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

A: Appendix: 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.