Question 1

The spending multiplier is defined as:

Accepted Answer

A)  the ratio of the change in equilibrium real GDP to the initial change in spending. 
B)  the change in initial spending divided by the change in personal income. 
C)  1/(marginal propensity to consume). 
D)  1/(1 - marginal propensity to save). 
A)  the ratio of the change in equilibrium real GDP to the initial change in spending. 
B)  the change in initial spending divided by the change in personal income. 
C)  1/(marginal propensity to consume). 
D)  1/(1 - marginal propensity to save).

Question 2

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 3

If the marginal propensity to save (MPS)is 0.10,the value of the spending multiplier is:

Accepted Answer

A)  1. 
B)  9. 
C)  10. 
D)  90. 
A)  1. 
B)  9. 
C)  10. 
D)  90.

Question 4

When an economy dips into recession,automatic stabilizers will:

Accepted Answer

A)  enlarge the budget deficit (or reduce the surplus). 
B)  reduce the budget deficit (or increase the surplus). 
C)  ensure that the budget remains in balance. 
D)  expand the supply of money and, thereby, stimulate aggregate demand. 
A)  enlarge the budget deficit (or reduce the surplus). 
B)  reduce the budget deficit (or increase the surplus). 
C)  ensure that the budget remains in balance. 
D)  expand the supply of money and, thereby, stimulate aggregate demand.

Question 5

Which of the following is emphasized by supply-side economics?

Accepted Answer

A)  The impact of budget deficits on interest rates and aggregate demand. 
B)  The impact of government spending on aggregate demand, output, and employment. 
C)  The impact of marginal tax rates on aggregate supply. 
D)  The impact of budget deficits on the rate of taxation in the future. 
A)  The impact of budget deficits on interest rates and aggregate demand. 
B)  The impact of government spending on aggregate demand, output, and employment. 
C)  The impact of marginal tax rates on aggregate supply. 
D)  The impact of budget deficits on the rate of taxation in the future.

Question 6

It is inflationary for government to increase spending if:

Accepted Answer

A)  it also cuts taxes. 
B)  the aggregate supply curve is flat. 
C)  the economy is at full employment. 
D)  equilibrium real GDP is well below full employment. 
A)  it also cuts taxes. 
B)  the aggregate supply curve is flat. 
C)  the economy is at full employment. 
D)  equilibrium real GDP is well below full employment.

Question 7

Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation.According to Keynesian theory,which of the following is an appropriate discretionary fiscal policy to use in this situation?

Accepted Answer

A)  A reduction in the money supply. 
B)  Less government regulation. 
C)  Increase federal spending. 
D)  Higher taxes. 
A)  A reduction in the money supply. 
B)  Less government regulation. 
C)  Increase federal spending. 
D)  Higher taxes.

Question 8

If no fiscal policy changes are implemented to fight inflation,suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices.Assuming the marginal propensity to consume is 0.90,this increase in aggregate demand could be prevented by:

Accepted Answer

A)  increasing government spending by $500 billion. 
B)  increasing government spending by $140 billion. 
C)  decreasing taxes by $40 billion. 
D)  increasing taxes by $100 billion. 
A)  increasing government spending by $500 billion. 
B)  increasing government spending by $140 billion. 
C)  decreasing taxes by $40 billion. 
D)  increasing taxes by $100 billion.

Question 9

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 10

Expansionary fiscal policy consists of:

Accepted Answer

A)  increasing government spending. 
B)  increasing payroll taxes to finance health care. 
C)  decreasing government spending. 
D)  raising the minimum wage. 
A)  increasing government spending. 
B)  increasing payroll taxes to finance health care. 
C)  decreasing government spending. 
D)  raising the minimum wage.

Question 11

Mathematically,the value of the spending 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 - MP
C) . 
A)  MPC - 1. 
B)  (MPC - 1)/MPC. 
C)  1/MPC. 
D)  1/(1 - MP
C) .

Question 12

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

Accepted Answer

A)  Personal income tax revenues. 
B)  Corporate income tax revenues. 
C)  Unemployment benefits. 
D)  All of the above. 
A)  Personal income tax revenues. 
B)  Corporate income tax revenues. 
C)  Unemployment benefits. 
D)  All of the above.

Question 13

Exhibit 15-3 Aggregate demand and supply model
  
-Suppose the economy in Exhibit 15-3 is in equilibrium at point E₁,and the marginal propensity to consume (MPC)is 0.80.Following Keynesian economics,to restore full employment,the government should cut taxes by:

Accepted Answer

A)  $0.20 trillion. 
B)  $250 billion. 
C)  $0.50 trillion. 
D)  $1 trillion. 
A)  $0.20 trillion. 
B)  $250 billion. 
C)  $0.50 trillion. 
D)  $1 trillion.

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

To combat a recession,Keynesian fiscal policy recommends:

Accepted Answer

A)  An increase in taxes. 
B)  An increase in government spending. 
C)  An increase in taxes and a decrease in government purchases to balance the budget. 
D)  A reduction in both taxes and government spending. 
A)  An increase in taxes. 
B)  An increase in government spending. 
C)  An increase in taxes and a decrease in government purchases to balance the budget. 
D)  A reduction in both taxes and government spending.

Question 16

The ratio of a change in consumption to a change in income is the:

Accepted Answer

A)  consumption function. 
B)  propensity to consume. 
C)  average propensity to consume. 
D)  extra propensity to consume. 
E)  marginal propensity to consume. 
A)  consumption function. 
B)  propensity to consume. 
C)  average propensity to consume. 
D)  extra propensity to consume. 
E)  marginal propensity to consume.

Question 17

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 18

Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 15-2 Aggregate demand and supply model
  
-Suppose the economy in Exhibit 15-2 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 full employment at point E₂ 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 20

Which of the following statements is true?

Accepted Answer

A)  Above the optimal tax rate, a reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues. 
B)  According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. 
C)  The presence of the automatic stabilizers tends to destabilize the economy. 
D)  To combat inflation, Keynesians recommend lower taxes and greater government spending. 
A)  Above the optimal tax rate, a reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues. 
B)  According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. 
C)  The presence of the automatic stabilizers tends to destabilize the economy. 
D)  To combat inflation, Keynesians recommend lower taxes and greater government spending.

Exam 15: Fiscal Policy

The spending multiplier is defined as:

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

If the marginal propensity to save (MPS)is 0.10,the value of the spending multiplier is:

When an economy dips into recession,automatic stabilizers will:

Which of the following is emphasized by supply-side economics?

It is inflationary for government to increase spending if:

Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation.According to Keynesian theory,which of the following is an appropriate discretionary fiscal policy to use in this situation?

If no fiscal policy changes are implemented to fight inflation,suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices.Assuming the marginal propensity to consume is 0.90,this increase in aggregate demand could be prevented by:

Supply-side economics calls for:

Expansionary fiscal policy consists of:

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

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

Exhibit 15-3 Aggregate demand and supply model -Suppose the economy in Exhibit 15-3 is in equilibrium at point E₁,and the marginal propensity to consume (MPC)is 0.80.Following Keynesian economics,to restore full employment,the government should cut taxes by:

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

To combat a recession,Keynesian fiscal policy recommends:

The ratio of a change in consumption to a change in income is the:

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?

Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

Exhibit 15-2 Aggregate demand and supply model -Suppose the economy in Exhibit 15-2 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 full employment at point E₂ by:

Which of the following statements is true?

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

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