Question 1

For the federal deficit to be lowered,

Accepted Answer

A)  the federal government must decrease its spending and increase net exports. 
B)  the federal government's expenditures must be lower than its tax revenue. 
C)  the Federal Reserve must raise interest rates and lower the required reserve ratio. 
D)  the Federal Reserve must reduce the money supply. 
A)  the federal government must decrease its spending and increase net exports. 
B)  the federal government's expenditures must be lower than its tax revenue. 
C)  the Federal Reserve must raise interest rates and lower the required reserve ratio. 
D)  the Federal Reserve must reduce the money supply.

Question 2

The majority of dollars spent by government prior to the Great Depression was spending at the ________ level. In the post-World War II period, two-thirds to three quarters of all dollars spent by government in the United States are spent at the ________ level.

Accepted Answer

A)  federal; state and local 
B)  state and local; federal 
C)  state and local; state 
D)  local; state 
A)  federal; state and local 
B)  state and local; federal 
C)  state and local; state 
D)  local; state

Question 3

As spending on government purchases increases, income rises and money demand falls.

Accepted Answer

A) True 
 B)False

Question 4

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

Accepted Answer

A)  the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. 
B)  the Federal Reserve can immediately recognize when real GDP is below or above potential GDP. 
C)  changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. 
D)  changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time. 
A)  the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. 
B)  the Federal Reserve can immediately recognize when real GDP is below or above potential GDP. 
C)  changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. 
D)  changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.

Question 5

In absolute value, the tax multiplier is greater than the government purchases multiplier.

Accepted Answer

A) True 
 B)False

Question 6

To complement actions by the Fed to reduce inflation, Congress and the President can cut spending and/or raise taxes.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is a reason why we should consider the federal national debt a problem?

Accepted Answer

A)  The federal government is in danger of defaulting on its debt. 
B)  If the debt drives up interest rates, crowding out will occur. 
C)  If the debt was incurred to finance improvements in infrastructure, crowding out will occur. 
D)  If the debt was incurred to finance research and development, crowding out will occur. 
A)  The federal government is in danger of defaulting on its debt. 
B)  If the debt drives up interest rates, crowding out will occur. 
C)  If the debt was incurred to finance improvements in infrastructure, crowding out will occur. 
D)  If the debt was incurred to finance research and development, crowding out will occur.

Question 8

Table 27-5
  
-Refer to Table 27-5. The economy is in the state described by the table above. Draw the dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2, assuming that no policy is pursued. Then illustrate and explain the appropriate fiscal policy to use in this situation. Assume that the policy results in the economy producing potential GDP.

Accepted Answer

@#IMG-DLM& The economy begins in equilibrium at po

Question 9

Figure 27-5  
-Refer to Figure 27-5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely

Accepted Answer

A)  decrease government spending. 
B)  increase government spending. 
C)  increase oil prices. 
D)  increase taxes. 
E)  lower interest rates. 
A)  decrease government spending. 
B)  increase government spending. 
C)  increase oil prices. 
D)  increase taxes. 
E)  lower interest rates.

Question 10

An increase in government purchases will increase aggregate demand because

Accepted Answer

A)  government expenditures are a component of aggregate demand. 
B)  consumption expenditures are a component of aggregate demand. 
C)  the decline in the price level will increase demand. 
D)  the decline in the interest rate will increase demand. 
A)  government expenditures are a component of aggregate demand. 
B)  consumption expenditures are a component of aggregate demand. 
C)  the decline in the price level will increase demand. 
D)  the decline in the interest rate will increase demand.

Question 11

What is the difference between fiscal policy and monetary policy?

Accepted Answer

Fiscal policy involves changes in federa

Question 12

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

Accepted Answer

A)  the money supply and a decrease in interest rates. 
B)  government purchases. 
C)  oil prices. 
D)  taxes. 
A)  the money supply and a decrease in interest rates. 
B)  government purchases. 
C)  oil prices. 
D)  taxes.

Question 13

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act, which is an example of discretionary fiscal policy aimed at increasing

Accepted Answer

A)  real GDP and employment. 
B)  tax revenues and the federal budget surplus. 
C)  disposable income and interest rates. 
D)  the money supply and money demand. 
A)  real GDP and employment. 
B)  tax revenues and the federal budget surplus. 
C)  disposable income and interest rates. 
D)  the money supply and money demand.

Question 14

The largest source of federal government revenue in 2012 was

Accepted Answer

A)  sales taxes. 
B)  corporate income taxes. 
C)  individual income taxes. 
D)  payroll taxes to fund Social Security and Medicare programs. 
A)  sales taxes. 
B)  corporate income taxes. 
C)  individual income taxes. 
D)  payroll taxes to fund Social Security and Medicare programs.

Question 15

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. If the president and the Congress increased government purchases by $500 billion, what would be the result on the economy?

Accepted Answer

The economy would go from a short-run eq

Question 16

Suppose President Obama is successful in passing a $10 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.8. What happens to equilibrium GDP?

Accepted Answer

A)  There is a $50 billion increase in equilibrium GDP. 
B)  There is a $50 billion decrease in equilibrium GDP. 
C)  There is a $40 billion increase in equilibrium GDP. 
D)  There is a $40 billion decrease in equilibrium GDP. 
A)  There is a $50 billion increase in equilibrium GDP. 
B)  There is a $50 billion decrease in equilibrium GDP. 
C)  There is a $40 billion increase in equilibrium GDP. 
D)  There is a $40 billion decrease in equilibrium GDP.

Question 17

Suppose Political Party A proposes a tax cut on business income to stimulate the economy. Political Party B opposes the tax cut on business income asserting that it would only help businesses, not the average working man and woman. If you were hired as an economist for Political Party A, explain how the tax cut on business income would help the average working man and woman.

Accepted Answer

The multiplier effect would spread the e

Question 18

If the federal budget has an actual budget surplus of $75 billion, but a cyclically adjusted budget surplus of $50 billion, then the economy must be above potential real GDP.

Accepted Answer

A) True 
 B)False

Question 19

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the

Accepted Answer

A)  absolute size of the budget deficit or surplus. 
B)  budget deficit or surplus as a percentage of GDP. 
C)  budget deficit or surplus as a percentage of tax revenues. 
D)  budget deficit or surplus as a percentage of government spending. 
A)  absolute size of the budget deficit or surplus. 
B)  budget deficit or surplus as a percentage of GDP. 
C)  budget deficit or surplus as a percentage of tax revenues. 
D)  budget deficit or surplus as a percentage of government spending.

Question 20

The larger the marginal propensity to import, the larger the government purchases multiplier.

Accepted Answer

A) True 
 B)False

Exam 27: Fiscal Policy

For the federal deficit to be lowered,

The majority of dollars spent by government prior to the Great Depression was spending at the ________ level. In the post-World War II period, two-thirds to three quarters of all dollars spent by government in the United States are spent at the ________ level.

As spending on government purchases increases, income rises and money demand falls.

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

In absolute value, the tax multiplier is greater than the government purchases multiplier.

To complement actions by the Fed to reduce inflation, Congress and the President can cut spending and/or raise taxes.

Which of the following is a reason why we should consider the federal national debt a problem?

Figure 27-5 -Refer to Figure 27-5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely

An increase in government purchases will increase aggregate demand because

What is the difference between fiscal policy and monetary policy?

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act, which is an example of discretionary fiscal policy aimed at increasing

The largest source of federal government revenue in 2012 was

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. If the president and the Congress increased government purchases by $500 billion, what would be the result on the economy?

Suppose President Obama is successful in passing a $10 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.8. What happens to equilibrium GDP?

If the federal budget has an actual budget surplus of $75 billion, but a cyclically adjusted budget surplus of $50 billion, then the economy must be above potential real GDP.

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the

The larger the marginal propensity to import, the larger the government purchases multiplier.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

The majority of dollars spent by government prior to the Great Depression was spending at the level. In the post-World War II period, two-thirds to three quarters of all dollars spent by government in the United States are spent at the level.