Question 1

Assume the marginal propensity to consume (MPC)is 0.75 and the government increases taxes by $250 billion.The aggregate demand curve will shift to the:

Accepted Answer

A)  left by $1,000 billion. 
B)  right by $1,000 billion. 
C)  left by $750 billion. 
D)  right by $750 billion. 
A)  left by $1,000 billion. 
B)  right by $1,000 billion. 
C)  left by $750 billion. 
D)  right by $750 billion.

Question 2

Fiscal policy is concerned with:

Accepted Answer

A)  encouraging businesses to invest. 
B)  regulation of net exports. 
C)  changes in government spending and/or tax revenues. 
D)  expanding and contracting the money supply. 
A)  encouraging businesses to invest. 
B)  regulation of net exports. 
C)  changes in government spending and/or tax revenues. 
D)  expanding and contracting the money supply.

Question 3

Find the tax multiplier if the MPC is 0.75.

Accepted Answer

A)  -4. 
B)  -3. 
C)  0.33. 
D)  3. 
E)  4. 
A)  -4. 
B)  -3. 
C)  0.33. 
D)  3. 
E)  4.

Question 4

Exhibit 15-8 Aggregate demand and supply curves
  
-In Exhibit 15-8,supply-siders claimed that the shift from AS₁ to AS₂ would occur if the government:

Accepted Answer

A)  increased tax rates and increased the amount of government regulation. 
B)  increased tax rates and decreased the amount of government regulation 
C)  increased tax rates and decreased the amount of government regulation, 
D)  decreased tax rates and decreased the amount of government regulation.. 
E)  decreased tax rates and decreased the amount of government regulation., 
A)  increased tax rates and increased the amount of government regulation. 
B)  increased tax rates and decreased the amount of government regulation 
C)  increased tax rates and decreased the amount of government regulation, 
D)  decreased tax rates and decreased the amount of government regulation.. 
E)  decreased tax rates and decreased the amount of government regulation.,

Question 5

If the marginal propensity to consume (MPC)is 0.90,the value of the spending multiplier is 90.

Accepted Answer

A) True 
 B)False

Question 6

If the economy is experiencing inflation,then the most appropriate government policy would be to:

Accepted Answer

A)  shift the aggregate demand curve by using a tax increase coupled with spending cuts. 
B)  shift the aggregate demand curve by using a tax increase coupled with more spending. 
C)  shift the aggregate demand curve by using a tax cut coupled with spending cuts. 
D)  shift the aggregate demand curve by using a tax cut coupled with more spending. 
E)  shift the aggregate supply curve by using a tax cut coupled with spending cuts. 
A)  shift the aggregate demand curve by using a tax increase coupled with spending cuts. 
B)  shift the aggregate demand curve by using a tax increase coupled with more spending. 
C)  shift the aggregate demand curve by using a tax cut coupled with spending cuts. 
D)  shift the aggregate demand curve by using a tax cut coupled with more spending. 
E)  shift the aggregate supply curve by using a tax cut coupled with spending cuts.

Question 7

According to Keynesian economics,fiscal policy should create a deficit during economic contractions.

Accepted Answer

A) True 
 B)False

Question 8

If the marginal propensity to save (MPS)is 0.50,the value of the spending multiplier is:

Accepted Answer

A)  1. 
B)  2. 
C)  4. 
D)  9. 
A)  1. 
B)  2. 
C)  4. 
D)  9.

Question 9

If no fiscal policy changes are made,suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation.If the marginal propensity to consume (MPC)is 0.80,federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

Accepted Answer

A)  government spending by $200 billion. 
B)  taxes by $100 billion. 
C)  taxes by $1,000 billion. 
D)  government spending by $1,000 billion. 
A)  government spending by $200 billion. 
B)  taxes by $100 billion. 
C)  taxes by $1,000 billion. 
D)  government spending by $1,000 billion.

Question 10

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 spending by $50 billion. 
B)  decreasing government spending by $6 billion. 
C)  decreasing government spending by $100 billion. 
D)  decreasing government spending by $50 billion. 
A)  increasing government spending by $50 billion. 
B)  decreasing government spending by $6 billion. 
C)  decreasing government spending by $100 billion. 
D)  decreasing government spending by $50 billion.

Question 11

If the marginal propensity to consume (MPC)is 0.80,the value of the spending multiplier is:

Accepted Answer

A)  2. 
B)  5. 
C)  8. 
D)  10. 
A)  2. 
B)  5. 
C)  8. 
D)  10.

Question 12

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 13

Supply-side economic policies are designed to shift the aggregate supply curve to the right,whereas Keynesian economic policies focus on shifting the aggregate demand curve to the right during recessions and to the left during an economic expansion.

Accepted Answer

A) True 
 B)False

Question 14

The tax multiplier is equal to the spending multiplier.

Accepted Answer

A) True 
 B)False

Question 15

Automatic stabilizers "lean against the prevailing wind" of the business cycle because:

Accepted Answer

A)  wages are controlled by the minimum wage law. 
B)  federal expenditures and tax revenues change as the level of real GDP changes. 
C)  the spending and tax multipliers are constant. 
D)  they include the power of special interests. 
A)  wages are controlled by the minimum wage law. 
B)  federal expenditures and tax revenues change as the level of real GDP changes. 
C)  the spending and tax multipliers are constant. 
D)  they include the power of special interests.

Question 16

If the marginal propensity to save (MPS)is 0.25,the value of the spending multiplier is:

Accepted Answer

A)  1. 
B)  2. 
C)  4. 
D)  9. 
A)  1. 
B)  2. 
C)  4. 
D)  9.

Question 17

If the marginal propensity to consume (MPC)is 0.75,and if the goal is to increase real GDP by $400 million,then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

A)  $140 million. 
B)  $100 million. 
C)  $200 million. 
D)  $400 million. 
A)  $140 million. 
B)  $100 million. 
C)  $200 million. 
D)  $400 million.

Question 18

Automatic stabilizers combine changes in discretionary fiscal policy with changes in government spending and taxes influenced by the business cycle in order to stabilize the economy.

Accepted Answer

A) True 
 B)False

Question 19

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 0.75.Following Keynesian economics,to restore full employment,the government should cut taxes by:

Accepted Answer

A)  $0.20 trillion. 
B)  $1 trillion. 
C)  $0.5 trillion. 
D)  $0.25 trillion. 
A)  $0.20 trillion. 
B)  $1 trillion. 
C)  $0.5 trillion. 
D)  $0.25 trillion.

Question 20

Exhibit 15-6 Aggregate demand and supply model
  
-In Exhibit 15-6,if the aggregate demand curve is at AD₂ ,the government should:

Accepted Answer

A)  raise taxes to move to AD₁. 
B)  cut taxes to move to AD₃ 
C)  cut taxes to move to AD₃. 
D)  cut spending to move to AD₃.. 
E)  not change its policy. 
A)  raise taxes to move to AD₁. 
B)  cut taxes to move to AD₃ 
C)  cut taxes to move to AD₃. 
D)  cut spending to move to AD₃.. 
E)  not change its policy.

Exam 15: Fiscal Policy

Assume the marginal propensity to consume (MPC)is 0.75 and the government increases taxes by $250 billion.The aggregate demand curve will shift to the:

Fiscal policy is concerned with:

Find the tax multiplier if the MPC is 0.75.

Exhibit 15-8 Aggregate demand and supply curves -In Exhibit 15-8,supply-siders claimed that the shift from AS₁ to AS₂ would occur if the government:

If the marginal propensity to consume (MPC)is 0.90,the value of the spending multiplier is 90.

If the economy is experiencing inflation,then the most appropriate government policy would be to:

According to Keynesian economics,fiscal policy should create a deficit during economic contractions.

If the marginal propensity to save (MPS)is 0.50,the value of the spending multiplier is:

If no fiscal policy changes are made,suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation.If the marginal propensity to consume (MPC)is 0.80,federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

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:

If the marginal propensity to consume (MPC)is 0.80,the value of the spending multiplier is:

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

Supply-side economic policies are designed to shift the aggregate supply curve to the right,whereas Keynesian economic policies focus on shifting the aggregate demand curve to the right during recessions and to the left during an economic expansion.

The tax multiplier is equal to the spending multiplier.

Automatic stabilizers "lean against the prevailing wind" of the business cycle because:

If the marginal propensity to save (MPS)is 0.25,the value of the spending multiplier is:

If the marginal propensity to consume (MPC)is 0.75,and if the goal is to increase real GDP by $400 million,then by how much would government spending have to change to generate this increase in real GDP?

Automatic stabilizers combine changes in discretionary fiscal policy with changes in government spending and taxes influenced by the business cycle in order to stabilize the economy.

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 0.75.Following Keynesian economics,to restore full employment,the government should cut taxes by:

Exhibit 15-6 Aggregate demand and supply model -In Exhibit 15-6,if the aggregate demand curve is at AD₂ ,the government should:

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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