Question 1

AD will shift to the right, other things being equal, when:

Accepted Answer

A) the government budget deficit increases because government purchases rose. 
B) the government budget deficit increases because taxes rose. 
C) the government budget deficit increases because transfer payments fell. 
D) under any of the above circumstances. 
A) the government budget deficit increases because government purchases rose. 
B) the government budget deficit increases because taxes rose. 
C) the government budget deficit increases because transfer payments fell. 
D) under any of the above circumstances.

Question 2

The issuance of debt involves some intergenerational transfer of income; long after the debt is issued, a new generation of taxpayers must make interest payments on the debt.

Accepted Answer

A) True 
 B)False

Question 3

How does a change in taxes primarily affect aggregate demand?

Accepted Answer

A) A tax change alters exports and net exports. 
B) A tax change alters investment by an equal and opposite amount. 
C) A tax change alters disposable income and consumption spending. 
D) A tax change alters government purchases by an equal amount. 
E) A tax change alters saving by an equal amount. 
A) A tax change alters exports and net exports. 
B) A tax change alters investment by an equal and opposite amount. 
C) A tax change alters disposable income and consumption spending. 
D) A tax change alters government purchases by an equal amount. 
E) A tax change alters saving by an equal amount.

Question 4

A cut in taxes, combined with an increase in transfer payments, would:

Accepted Answer

A) increase AD. 
B) decrease AD. 
C) leave AD unchanged. 
D) have an indeterminate effect on AD. 
A) increase AD. 
B) decrease AD. 
C) leave AD unchanged. 
D) have an indeterminate effect on AD.

Question 5

If there is initially a federal budget deficit, and government purchases and transfer payments both fall:

Accepted Answer

A) there is an indeterminate effect on both AD and the budget deficit. 
B) AD increases and the budget deficit increases. 
C) AD increases and the budget deficit decreases. 
D) AD decreases and the budget deficit increases. 
E) AD decreases and the budget deficit decreases. 
A) there is an indeterminate effect on both AD and the budget deficit. 
B) AD increases and the budget deficit increases. 
C) AD increases and the budget deficit decreases. 
D) AD decreases and the budget deficit increases. 
E) AD decreases and the budget deficit decreases.

Question 6

If there is initially a federal budget surplus, and government purchases and transfer payments both fall:

Accepted Answer

A) there is an indeterminate effect on both AD and the budget surplus. 
B) AD increases and the budget surplus increases. 
C) AD increases and the budget surplus decreases. 
D) AD decreases and the budget surplus increases. 
E) AD decreases and the budget surplus decreases. 
A) there is an indeterminate effect on both AD and the budget surplus. 
B) AD increases and the budget surplus increases. 
C) AD increases and the budget surplus decreases. 
D) AD decreases and the budget surplus increases. 
E) AD decreases and the budget surplus decreases.

Question 7

A $100 billion decrease in government purchases would:

Accepted Answer

A) increase AD by $500 billion if MPC = 0.8. 
B) decrease AD by $300 billion if MPC = 2/3. 
C) increase AD by $200 billion if MPC = 0.5. 
D) decrease AD by $40 billion if MPC = 0.4. 
A) increase AD by $500 billion if MPC = 0.8. 
B) decrease AD by $300 billion if MPC = 2/3. 
C) increase AD by $200 billion if MPC = 0.5. 
D) decrease AD by $40 billion if MPC = 0.4.

Question 8

If there is initially a federal budget deficit, and government purchases and transfer payments both rise:

Accepted Answer

A) AD increases and the budget deficit increases. 
B) AD increases and the budget deficit decreases. 
C) AD decreases and the budget deficit increases. 
D) AD decreases and the budget deficit decreases. 
E) there is an indeterminate effect on both AD and the budget deficit. 
A) AD increases and the budget deficit increases. 
B) AD increases and the budget deficit decreases. 
C) AD decreases and the budget deficit increases. 
D) AD decreases and the budget deficit decreases. 
E) there is an indeterminate effect on both AD and the budget deficit.

Question 9

A decrease in taxes will do which of the following in the long run?

Accepted Answer

A) decrease unemployment 
B) increase real output 
C) decrease the price level 
D) None of the above. 
A) decrease unemployment 
B) increase real output 
C) decrease the price level 
D) None of the above.

Question 10

Supply-side advocates believe that when taxes and regulations are too burdensome, people will:

Accepted Answer

A) save less. 
B) work less. 
C) provide less investment capital. 
D) do all of the above. 
A) save less. 
B) work less. 
C) provide less investment capital. 
D) do all of the above.

Question 11

A decrease in transfer payments will have a smaller effect on aggregate demand the:

Accepted Answer

A) larger the marginal propensity to consume. 
B) larger the average propensity to consume. 
C) larger the marginal propensity to save. 
D) larger the average propensity to save. 
A) larger the marginal propensity to consume. 
B) larger the average propensity to consume. 
C) larger the marginal propensity to save. 
D) larger the average propensity to save.

Question 12

Which of the following is an appropriate fiscal policy response to high inflation?

Accepted Answer

A) increase interest rates 
B) increase government purchases 
C) increase transfer payments 
D) none of the above 
A) increase interest rates 
B) increase government purchases 
C) increase transfer payments 
D) none of the above

Question 13

How does the multiplier work and what might government use it for?

Accepted Answer

The initial purchase of goods or service

Question 14

Which of the following statements is not true with regard to automatic stabilizers?

Accepted Answer

A) The most important automatic stabilizer is the tax system. 
B) They act as shock absorbers to the economy. 
C) They require legislative action. 
D) Automatic stabilizers like government transfer payments change as business cycles conditions change. 
A) The most important automatic stabilizer is the tax system. 
B) They act as shock absorbers to the economy. 
C) They require legislative action. 
D) Automatic stabilizers like government transfer payments change as business cycles conditions change.

Question 15

The most important automatic stabilizer is:

Accepted Answer

A) open market operations. 
B) the unemployment compensation system. 
C) the tax system. 
D) the welfare system. 
A) open market operations. 
B) the unemployment compensation system. 
C) the tax system. 
D) the welfare system.

Question 16

Fiscal policy is a plan for taxing and spending that is designed to steer the economy in some desired direction.

Accepted Answer

A) True 
 B)False

Question 17

The primary benefit of the automatic stabilizers is:

Accepted Answer

A) they provide public assistance through legislative decision making. 
B) they require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle. 
C) they require legislative action, so there is a lag in response to these tools to fluctuations in the business cycle, and there is time to identify the spillover effects. 
D) none of the above. 
A) they provide public assistance through legislative decision making. 
B) they require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle. 
C) they require legislative action, so there is a lag in response to these tools to fluctuations in the business cycle, and there is time to identify the spillover effects. 
D) none of the above.

Question 18

In general, the multiplier effect applies to changes in government spending but not to changes in taxation.

Accepted Answer

A) True 
 B)False

Question 19

Supply-side economics stress that:

Accepted Answer

A) aggregate demand is the major determinant of real output and aggregate employment. 
B) tax rates are not a major determinant of real output and aggregate employment. 
C) an increase in government expenditures financed by higher tax rates will cause RGDP to rise. 
D) marginal tax rate changes can exert a significant impact on RGDP, even in the long run. 
A) aggregate demand is the major determinant of real output and aggregate employment. 
B) tax rates are not a major determinant of real output and aggregate employment. 
C) an increase in government expenditures financed by higher tax rates will cause RGDP to rise. 
D) marginal tax rate changes can exert a significant impact on RGDP, even in the long run.

Question 20

According to the supply-side view of fiscal policy, if the impact on tax revenues is the same, does it make any difference whether the government cuts taxes in a way that reduces marginal tax rates or in a way that does not reduce marginal tax rates?

Accepted Answer

A) No; both actions will exert the same impact on aggregate supply and demand. 
B) Yes; only lower tax rates will increase the incentive to earn marginal income and thereby stimulate aggregate supply. 
C) No; in both cases people will increase their saving in the expectation of higher future taxes and thereby offset the stimulus effect of lower taxes. 
D) Yes; interest rates will increase if marginal tax rates are lowered, whereas they will tend to decrease if marginal tax rates are left unchanged. 
A) No; both actions will exert the same impact on aggregate supply and demand. 
B) Yes; only lower tax rates will increase the incentive to earn marginal income and thereby stimulate aggregate supply. 
C) No; in both cases people will increase their saving in the expectation of higher future taxes and thereby offset the stimulus effect of lower taxes. 
D) Yes; interest rates will increase if marginal tax rates are lowered, whereas they will tend to decrease if marginal tax rates are left unchanged.

AD will shift to the right, other things being equal, when:

The issuance of debt involves some intergenerational transfer of income; long after the debt is issued, a new generation of taxpayers must make interest payments on the debt.

How does a change in taxes primarily affect aggregate demand?

A cut in taxes, combined with an increase in transfer payments, would:

If there is initially a federal budget deficit, and government purchases and transfer payments both fall:

If there is initially a federal budget surplus, and government purchases and transfer payments both fall:

A $100 billion decrease in government purchases would:

If there is initially a federal budget deficit, and government purchases and transfer payments both rise:

A decrease in taxes will do which of the following in the long run?

Supply-side advocates believe that when taxes and regulations are too burdensome, people will:

A decrease in transfer payments will have a smaller effect on aggregate demand the:

Which of the following is an appropriate fiscal policy response to high inflation?

How does the multiplier work and what might government use it for?

Which of the following statements is not true with regard to automatic stabilizers?

The most important automatic stabilizer is:

Fiscal policy is a plan for taxing and spending that is designed to steer the economy in some desired direction.

The primary benefit of the automatic stabilizers is:

In general, the multiplier effect applies to changes in government spending but not to changes in taxation.

Supply-side economics stress that:

According to the supply-side view of fiscal policy, if the impact on tax revenues is the same, does it make any difference whether the government cuts taxes in a way that reduces marginal tax rates or in a way that does not reduce marginal tax rates?

The Role and Method of Economics

The Economic Way of Thinking

Supply and Demand

Using Supply and Demand

Market Failure and Public Choice

Production and Costs

Firms in Competitive Markets

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets, Income Distribution, and Poverty

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Economic Growth

Aggregate Demand and Aggregate Supply

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Economics

Filters

Exam 14: Fiscal Policy

AD will shift to the right, other things being equal, when:

The issuance of debt involves some intergenerational transfer of income; long after the debt is issued, a new generation of taxpayers must make interest payments on the debt.

How does a change in taxes primarily affect aggregate demand?

A cut in taxes, combined with an increase in transfer payments, would:

If there is initially a federal budget deficit, and government purchases and transfer payments both fall:

If there is initially a federal budget surplus, and government purchases and transfer payments both fall:

A $100 billion decrease in government purchases would:

If there is initially a federal budget deficit, and government purchases and transfer payments both rise:

A decrease in taxes will do which of the following in the long run?

Supply-side advocates believe that when taxes and regulations are too burdensome, people will:

A decrease in transfer payments will have a smaller effect on aggregate demand the:

Which of the following is an appropriate fiscal policy response to high inflation?

How does the multiplier work and what might government use it for?

Which of the following statements is not true with regard to automatic stabilizers?

The most important automatic stabilizer is:

Fiscal policy is a plan for taxing and spending that is designed to steer the economy in some desired direction.

The primary benefit of the automatic stabilizers is:

In general, the multiplier effect applies to changes in government spending but not to changes in taxation.

Supply-side economics stress that:

According to the supply-side view of fiscal policy, if the impact on tax revenues is the same, does it make any difference whether the government cuts taxes in a way that reduces marginal tax rates or in a way that does not reduce marginal tax rates?

The Role and Method of Economics

The Economic Way of Thinking

Supply and Demand

Using Supply and Demand

Market Failure and Public Choice

Production and Costs

Firms in Competitive Markets

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets, Income Distribution, and Poverty

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Economic Growth

Aggregate Demand and Aggregate Supply

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Economics

Filters