Question 1

Supply-side fiscal policies were advocated by the Reagan administration.

Accepted Answer

A) True 
 B)False

Question 2

Appropriate supply-side policy (or policies)during a recession would be to do which of the following?

Accepted Answer

A) Cut taxes on business. 
B) Reduce costly regulations on businesses. 
C) Increase government spending. 
D) Both a.and b.above are correct. 
A) Cut taxes on business. 
B) Reduce costly regulations on businesses. 
C) Increase government spending. 
D) Both a.and b.above are correct.

Question 3

Assume the economy is in recession and real GDP is below full employment.The marginal propensity to consume (MPC)is 0.50,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 $250 billion. 
B)  decrease spending by $500 billion. 
C)  increase spending by $1,000 billion. 
D)  increase spending by $500 billion. 
A)  increase spending by $250 billion. 
B)  decrease spending by $500 billion. 
C)  increase spending by $1,000 billion. 
D)  increase spending by $500 billion.

Question 4

As the marginal propensity to consume (MPC)decreases,the spending multiplier:

Accepted Answer

A)  increases. 
B)  decreases. 
C)  remains constant. 
D)  becomes undefinable. 
A)  increases. 
B)  decreases. 
C)  remains constant. 
D)  becomes undefinable.

Question 5

A government spending and taxation policy to achieve macroeconomic goals is known as:

Accepted Answer

A)  countercyclical policy. 
B)  fiscal policy. 
C)  monetary policy. 
D)  a balanced budget. 
A)  countercyclical policy. 
B)  fiscal policy. 
C)  monetary policy. 
D)  a balanced budget.

Question 6

The Laffer curve shows the relationship between tax:

Accepted Answer

A)  revenue and tax rates. 
B)  revenue and take-home pay. 
C)  revenue and government spending. 
D)  rates and take-home pay. 
E)  rates and government spending. 
A)  revenue and tax rates. 
B)  revenue and take-home pay. 
C)  revenue and government spending. 
D)  rates and take-home pay. 
E)  rates and government spending.

Question 7

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 increase its spending by:

Accepted Answer

A)  $200 billion. 
B)  $250 billion. 
C)  $500 billion. 
D)  $1 trillion. 
A)  $200 billion. 
B)  $250 billion. 
C)  $500 billion. 
D)  $1 trillion.

Question 8

Exhibit 15-5 Aggregate demand and supply model
  
-Suppose the economy in Exhibit 15-5 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)  increasing government tax revenue by $6 billion. 
B)  decreasing government tax revenue by $6.1 billion. 
C)  decreasing government tax revenue by $200 billion. 
D)  increasing government tax revenue by approximately $66 billion. 
E)  decreasing government tax revenue by approximately $66 billion. 
A)  increasing government tax revenue by $6 billion. 
B)  decreasing government tax revenue by $6.1 billion. 
C)  decreasing government tax revenue by $200 billion. 
D)  increasing government tax revenue by approximately $66 billion. 
E)  decreasing government tax revenue by approximately $66 billion.

Question 9

According to the Laffer curve,when the tax rate is 100 percent,tax revenue will be:

Accepted Answer

A)  0. 
B)  at the maximum value. 
C)  the same as it would be at a 50 percent tax rate. 
D)  greater than it would be at a 50 percent tax rate. 
E)  the same as it would be at a 20 percent tax rate. 
A)  0. 
B)  at the maximum value. 
C)  the same as it would be at a 50 percent tax rate. 
D)  greater than it would be at a 50 percent tax rate. 
E)  the same as it would be at a 20 percent tax rate.

Question 10

To help close an inflationary gap,the government could:

Accepted Answer

A)  run budget deficits. 
B)  decrease taxes. 
C)  increase government spending. 
D)  run budget surpluses. 
E)  do nothing. 
A)  run budget deficits. 
B)  decrease taxes. 
C)  increase government spending. 
D)  run budget surpluses. 
E)  do nothing.

Question 11

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 12

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.

Question 13

Personal income taxes:

Accepted Answer

A)  make recessions and inflationary episodes more severe. 
B)  make recessions and inflationary episodes less severe. 
C)  make recessions more severe and inflationary episodes less severe. 
D)  make recessions less severe and inflationary episodes more severe. 
E)  have no effect on the severity of recessions and inflationary episodes. 
A)  make recessions and inflationary episodes more severe. 
B)  make recessions and inflationary episodes less severe. 
C)  make recessions more severe and inflationary episodes less severe. 
D)  make recessions less severe and inflationary episodes more severe. 
E)  have no effect on the severity of recessions and inflationary episodes.

Question 14

An increase in the marginal propensity to consume (MPC)leads to a increase in the spending multiplier.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 15-7 Aggregate demand and supply model
  
-Beginning at equilibrium E₁ in Exhibit 15-7,assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion.The aggregate demand curve will shift to the:

Accepted Answer

A)  left by $1,000 billion. 
B)  right by $1,000 billion. 
C)  right by $900 billion. 
D)  left by $900 billion. 
A)  left by $1,000 billion. 
B)  right by $1,000 billion. 
C)  right by $900 billion. 
D)  left by $900 billion.

Question 16

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 17

The ratio of the change in GDP to an initial change in aggregate spending is the:

Accepted Answer

A)  spending multiplier. 
B)  permanent income rate. 
C)  marginal expenditure rate. 
D)  marginal propensity to consume. 
A)  spending multiplier. 
B)  permanent income rate. 
C)  marginal expenditure rate. 
D)  marginal propensity to consume.

Question 18

If an inflationary boom exists,the appropriate fiscal policy is to:

Accepted Answer

A)  increase the budget deficit. 
B)  increase government spending and hold taxes constant. 
C)  decrease government spending and/or raise taxes. 
D)  hold government spending constant and decrease taxes. 
A)  increase the budget deficit. 
B)  increase government spending and hold taxes constant. 
C)  decrease government spending and/or raise taxes. 
D)  hold government spending constant and decrease taxes.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

According to the Laffer curve,the federal tax rate affects:

Accepted Answer

A)  incentive to work. 
B)  savings. 
C)  investment. 
D)  tax revenue. 
E)  All of the above. 
A)  incentive to work. 
B)  savings. 
C)  investment. 
D)  tax revenue. 
E)  All of the above.

Exam 15: Fiscal Policy

Supply-side fiscal policies were advocated by the Reagan administration.

Appropriate supply-side policy (or policies)during a recession would be to do which of the following?

As the marginal propensity to consume (MPC)decreases,the spending multiplier:

A government spending and taxation policy to achieve macroeconomic goals is known as:

The Laffer curve shows the relationship between tax:

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 increase its spending by:

Exhibit 15-5 Aggregate demand and supply model -Suppose the economy in Exhibit 15-5 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:

According to the Laffer curve,when the tax rate is 100 percent,tax revenue will be:

To help close an inflationary gap,the government could:

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

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

Personal income taxes:

An increase in the marginal propensity to consume (MPC)leads to a increase in the spending multiplier.

Exhibit 15-7 Aggregate demand and supply model -Beginning at equilibrium E₁ in Exhibit 15-7,assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion.The aggregate demand curve will shift to the:

The equation for the spending multiplier is:

The ratio of the change in GDP to an initial change in aggregate spending is the:

If an inflationary boom exists,the appropriate fiscal policy is to:

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

According to the Laffer curve,the federal tax rate affects:

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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