Question 1

Describe the differences (in sign and relative magnitude) between the government purchases multiplier and the tax multiplier.

Accepted Answer

First, changes in government purchases a

Question 2

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower 
A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 3

How can tax simplification be beneficial to the economy?

Accepted Answer

Tax simplification would free up resourc

Question 4

A law requiring the government to balance its budget in each year would serve as an automatic destabilizer.

Accepted Answer

A) True 
 B)False

Question 5

What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed.

Accepted Answer

A)  5.3 
B)  10 
C)  11.1 
D)  100 
A)  5.3 
B)  10 
C)  11.1 
D)  100

Question 6

The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was

Accepted Answer

A)  in a recession. 
B)  in an expansion. 
C)  at potential GDP. 
D)  at potential tax revenue. 
A)  in a recession. 
B)  in an expansion. 
C)  at potential GDP. 
D)  at potential tax revenue.

Question 7

Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation.

Accepted Answer

A) True 
 B)False

Question 8

Figure 27-2  
-Refer to Figure 27-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the Congress and the president would be to

Accepted Answer

A)  decrease the required reserve ratio. 
B)  sell government securities. 
C)  increase government expenditures. 
D)  decrease transfer payments. 
A)  decrease the required reserve ratio. 
B)  sell government securities. 
C)  increase government expenditures. 
D)  decrease transfer payments.

Question 9

The government budget for the country of Economia is in surplus in 2011, and in deficit in the following year, 2012. We can conclude the

Accepted Answer

A)  government must have raised tax rates or cut spending. 
B)  government must have cut tax rates or increased spending. 
C)  government fiscal policy did not change between 2011 and 2012. 
D)  none of the above 
A)  government must have raised tax rates or cut spending. 
B)  government must have cut tax rates or increased spending. 
C)  government fiscal policy did not change between 2011 and 2012. 
D)  none of the above

Question 10

What is the "tax wedge"?

Accepted Answer

The "tax wedge" is t

Question 11

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

Accepted Answer

A)  $200 billion. 
B)  less than $200 billion. 
C)  more than $200 billion. 
D)  None of the above are correct. This policy shifts the long-run aggregate supply curve. 
A)  $200 billion. 
B)  less than $200 billion. 
C)  more than $200 billion. 
D)  None of the above are correct. This policy shifts the long-run aggregate supply curve.

Question 12

The tax increases necessary to fund future Social Security and Medicare benefit payments would be

Accepted Answer

A)  small, and have little effect on economic growth. 
B)  small, but could discourage work effort, entrepreneurship and investment, thereby slowing economic growth. 
C)  large, but would have little effect on economic growth. 
D)  large, and could discourage work effort, entrepreneurship and investment, thereby slowing economic growth. 
A)  small, and have little effect on economic growth. 
B)  small, but could discourage work effort, entrepreneurship and investment, thereby slowing economic growth. 
C)  large, but would have little effect on economic growth. 
D)  large, and could discourage work effort, entrepreneurship and investment, thereby slowing economic growth.

Question 13

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back to potential GDP, Congress should

Accepted Answer

A)  lower taxes by an amount less than $500 billion. 
B)  raise government purchases by $500 billion. 
C)  raise government purchases by more than $500 billion. 
D)  lower taxes by $500 billion. 
E)  lower government purchases by $500 billion. 
A)  lower taxes by an amount less than $500 billion. 
B)  raise government purchases by $500 billion. 
C)  raise government purchases by more than $500 billion. 
D)  lower taxes by $500 billion. 
E)  lower government purchases by $500 billion.

Question 14

During most of the years of the Great Depression, the actual federal budget was in ________, and the cyclically adjusted budget was in ________.

Accepted Answer

A)  deficit; surplus 
B)  surplus; surplus 
C)  deficit; deficit 
D)  surplus; deficit 
A)  deficit; surplus 
B)  surplus; surplus 
C)  deficit; deficit 
D)  surplus; deficit

Question 15

If the economy is falling below 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 16

The double taxation problem occurs because households pay taxes on dividends and capital gains from stock and corporations pay taxes on corporate profits.

Accepted Answer

A) True 
 B)False

Question 17

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, and no fiscal or monetary policy is pursued, then at point B

Accepted Answer

A)  the unemployment rate is very low. 
B)  firms are operating below capacity. 
C)  the economy is above full employment. 
D)  income and profits are rising. 
E)  there is pressure on wages and prices to rise. 
A)  the unemployment rate is very low. 
B)  firms are operating below capacity. 
C)  the economy is above full employment. 
D)  income and profits are rising. 
E)  there is pressure on wages and prices to rise.

Question 18

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009, the largest spending increase occurred in which category?

Accepted Answer

A)  energy and the environment 
B)  military, veterans, and homeland security 
C)  health care, social services, and education 
D)  transportation and housing 
A)  energy and the environment 
B)  military, veterans, and homeland security 
C)  health care, social services, and education 
D)  transportation and housing

Question 19

Accumulating debt poses a problem for the U.S. federal government because

Accepted Answer

A)  it is currently in danger of defaulting on the debt. 
B)  a large debt-to-GDP ratio causes crowding out. 
C)  building roads and bridges do not yield enough benefits to justify their cost. 
D)  the debt has to ultimately be paid off. 
A)  it is currently in danger of defaulting on the debt. 
B)  a large debt-to-GDP ratio causes crowding out. 
C)  building roads and bridges do not yield enough benefits to justify their cost. 
D)  the debt has to ultimately be paid off.

Question 20

Cutting taxes

Accepted Answer

A)  will lower disposable income and lower spending. 
B)  will raise disposable income and lower spending. 
C)  will lower disposable income and raise spending. 
D)  will raise disposable income and raise spending. 
A)  will lower disposable income and lower spending. 
B)  will raise disposable income and lower spending. 
C)  will lower disposable income and raise spending. 
D)  will raise disposable income and raise spending.

Exam 27: Fiscal Policy

Describe the differences (in sign and relative magnitude) between the government purchases multiplier and the tax multiplier.

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

How can tax simplification be beneficial to the economy?

A law requiring the government to balance its budget in each year would serve as an automatic destabilizer.

What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed.

The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was

Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation.

Figure 27-2 -Refer to Figure 27-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the Congress and the president would be to

The government budget for the country of Economia is in surplus in 2011, and in deficit in the following year, 2012. We can conclude the

What is the "tax wedge"?

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

The tax increases necessary to fund future Social Security and Medicare benefit payments would be

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back to potential GDP, Congress should

During most of the years of the Great Depression, the actual federal budget was in ________, and the cyclically adjusted budget was in ________.

If the economy is falling below 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

The double taxation problem occurs because households pay taxes on dividends and capital gains from stock and corporations pay taxes on corporate profits.

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, and no fiscal or monetary policy is pursued, then at point B

Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009, the largest spending increase occurred in which category?

Accumulating debt poses a problem for the U.S. federal government because

Cutting taxes

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

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be and real GDP to be .

During most of the years of the Great Depression, the actual federal budget was in , and the cyclically adjusted budget was in .