Question 1

Which of the following is true of automatic stabilizers?

Accepted Answer

A) They require ongoing decisions about government purchases and taxation to promote full employment and price stability. 
B) They include the unemployment compensation program. 
C) They tend to stimulate aggregate demand when the economy is experiencing an expansionary gap. 
D) They include tax cuts passed by Congress to ease a current recession in an economy that has a proportional income tax. 
E) They include government purchases of goods and services requiring Congressional approval. 
A) They require ongoing decisions about government purchases and taxation to promote full employment and price stability. 
B) They include the unemployment compensation program. 
C) They tend to stimulate aggregate demand when the economy is experiencing an expansionary gap. 
D) They include tax cuts passed by Congress to ease a current recession in an economy that has a proportional income tax. 
E) They include government purchases of goods and services requiring Congressional approval. B

Question 2

Reducing net taxes and reducing government purchases are both effective ways of eliminating an expansionary gap.

Accepted Answer

A) True 
 B)False  False

Question 3

Under which of the following conditions will a change in government purchases have the greatest effect on the economy in the short run?

Accepted Answer

A) The aggregate demand curve is relatively flat. 
B) The aggregate demand curve is relatively steep. 
C) The short-run aggregate supply curve is relatively flat. 
D) The aggregate demand curve is vertical. 
E) The short-run aggregate supply curve is vertical. 
A) The aggregate demand curve is relatively flat. 
B) The aggregate demand curve is relatively steep. 
C) The short-run aggregate supply curve is relatively flat. 
D) The aggregate demand curve is vertical. 
E) The short-run aggregate supply curve is vertical. C

Question 4

Christopher Knittel,an economist at the University of California,Davis,estimated that the government could have gotten 10 times more carbon reduction by spending the $3 billion in used in the Cash for Clunkers program in the market for carbon offsets.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following was a successful application of fiscal policy in the United States?

Accepted Answer

A) Roosevelt's strategy in combating the Great Depression 
B) the tax cut of 1964 
C) the temporary tax surcharge of 1968 
D) the battle against stagflation during the 1970s 
E) the large tax cut of 1981 
A) Roosevelt's strategy in combating the Great Depression 
B) the tax cut of 1964 
C) the temporary tax surcharge of 1968 
D) the battle against stagflation during the 1970s 
E) the large tax cut of 1981

Question 6

According to Keynesian theory,the natural forces in the economy may not quickly move the economy toward potential real GDP.

Accepted Answer

A) True 
 B)False

Question 7

Large federal budget deficits

Accepted Answer

A) can best be reduced by automatic stabilizers 
B) make it difficult to use discretionary fiscal policy 
C) in the mid to late 1980s were the result of a severe recession 
D) still constitute only about 1 percent of GDP 
E) have little to do with the growth of the federal debt 
A) can best be reduced by automatic stabilizers 
B) make it difficult to use discretionary fiscal policy 
C) in the mid to late 1980s were the result of a severe recession 
D) still constitute only about 1 percent of GDP 
E) have little to do with the growth of the federal debt

Question 8

Keynes thought that one macroeconomic problem is that

Accepted Answer

A) the potential and equilibrium levels of output can be the same 
B) the equilibrium level of output can never be equal to the potential level 
C) over time,the potential level of output may be pulled down to the equilibrium level 
D) the potential level of output can fall below the equilibrium level 
E) the equilibrium level of output can fall below the potential level 
A) the potential and equilibrium levels of output can be the same 
B) the equilibrium level of output can never be equal to the potential level 
C) over time,the potential level of output may be pulled down to the equilibrium level 
D) the potential level of output can fall below the equilibrium level 
E) the equilibrium level of output can fall below the potential level

Question 9

Exhibit 11-2  
-Which of the following sets of policies would unquestionably move the economy illustrated in Exhibit 11-2 to full employment?

Accepted Answer

A) increase in government purchases,increase in taxes,and decrease in transfer payments 
B) decrease in government purchases,increase in taxes,and decrease in transfer payments 
C) increase in government purchases,decrease in taxes,and increase in transfer payments 
D) increase in government purchases,increase in taxes,and increase in transfer payments 
E) decrease in government purchases,decrease in taxes,and decrease in transfer payments 
A) increase in government purchases,increase in taxes,and decrease in transfer payments 
B) decrease in government purchases,increase in taxes,and decrease in transfer payments 
C) increase in government purchases,decrease in taxes,and increase in transfer payments 
D) increase in government purchases,increase in taxes,and increase in transfer payments 
E) decrease in government purchases,decrease in taxes,and decrease in transfer payments

Question 10

The reason that fiscal policy was not helpful in the 1970s was that such policy is aimed at

Accepted Answer

A) both aggregate demand and aggregate supply,but the problem was only with demand 
B) both aggregate demand and aggregate supply,but the problem was only with supply 
C) aggregate demand only,but the problem was in aggregate supply 
D) aggregate supply only,but the problem was in aggregate demand 
E) either aggregate demand or aggregate supply,but the problem was with both of them at once 
A) both aggregate demand and aggregate supply,but the problem was only with demand 
B) both aggregate demand and aggregate supply,but the problem was only with supply 
C) aggregate demand only,but the problem was in aggregate supply 
D) aggregate supply only,but the problem was in aggregate demand 
E) either aggregate demand or aggregate supply,but the problem was with both of them at once

Question 11

There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.

Accepted Answer

A) True 
 B)False

Question 12

When spending by the federal government exceeds net taxes,

Accepted Answer

A) the price level tends to fall 
B) the money supply must fall 
C) the aggregate demand curve shifts rightward 
D) aggregate supply moves rightward 
E) there is a federal budget surplus 
A) the price level tends to fall 
B) the money supply must fall 
C) the aggregate demand curve shifts rightward 
D) aggregate supply moves rightward 
E) there is a federal budget surplus

Question 13

A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following government policies would increase aggregate demand?

Accepted Answer

A) a deficit in the government budget 
B) a stimulation of investment through an increase in taxes 
C) a stimulation of consumption through an increase in taxes 
D) a surplus in the government budget 
E) a decrease in government spending 
A) a deficit in the government budget 
B) a stimulation of investment through an increase in taxes 
C) a stimulation of consumption through an increase in taxes 
D) a surplus in the government budget 
E) a decrease in government spending

Question 15

A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False

Question 16

Keynesian theory and policies were developed to show why

Accepted Answer

A) prolonged periods of unemployment were impossible 
B) prolonged periods of inflation were impossible 
C) unemployment could persist for long periods 
D) the interest rate ensures that saving equals investment 
E) flexible prices and wages ensure that a modern economy will enjoy prolonged periods of low unemployment and low inflation 
A) prolonged periods of unemployment were impossible 
B) prolonged periods of inflation were impossible 
C) unemployment could persist for long periods 
D) the interest rate ensures that saving equals investment 
E) flexible prices and wages ensure that a modern economy will enjoy prolonged periods of low unemployment and low inflation

Question 17

One thing that policy makers often overlook is

Accepted Answer

A) how quickly fiscal policy can respond to changes in economic conditions 
B) how fiscal policies unintentionally affect individual incentive to work,spend,save and invest 
C) how fiscal policy affects the price level 
D) how fiscal policy affects the economy's output 
E) how voters might respond to a policy that increases taxes 
A) how quickly fiscal policy can respond to changes in economic conditions 
B) how fiscal policies unintentionally affect individual incentive to work,spend,save and invest 
C) how fiscal policy affects the price level 
D) how fiscal policy affects the economy's output 
E) how voters might respond to a policy that increases taxes

Question 18

Most government purchases are made at the federal,not the state,level of government.

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 11-3  
-In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS110 in Exhibit 11-3,what would be the size of the recessionary gap?

Accepted Answer

A) $.5 trillion 
B) $1 trillion 
C) $1.5 trillion 
D) $2 trillion 
E) $2.5 trillion 
A) $.5 trillion 
B) $1 trillion 
C) $1.5 trillion 
D) $2 trillion 
E) $2.5 trillion

Question 20

If net taxes increase and government purchases decrease,

Accepted Answer

A) the price level will rise 
B) the money supply must increase 
C) the aggregate demand will shift rightward 
D) output and employment will fall 
E) there will be a federal budget deficit 
A) the price level will rise 
B) the money supply must increase 
C) the aggregate demand will shift rightward 
D) output and employment will fall 
E) there will be a federal budget deficit

Exam 12: Fiscal Policy

Which of the following is true of automatic stabilizers?

Reducing net taxes and reducing government purchases are both effective ways of eliminating an expansionary gap.

Under which of the following conditions will a change in government purchases have the greatest effect on the economy in the short run?

Christopher Knittel,an economist at the University of California,Davis,estimated that the government could have gotten 10 times more carbon reduction by spending the $3 billion in used in the Cash for Clunkers program in the market for carbon offsets.

Which of the following was a successful application of fiscal policy in the United States?

According to Keynesian theory,the natural forces in the economy may not quickly move the economy toward potential real GDP.

Large federal budget deficits

Keynes thought that one macroeconomic problem is that

Exhibit 11-2 -Which of the following sets of policies would unquestionably move the economy illustrated in Exhibit 11-2 to full employment?

The reason that fiscal policy was not helpful in the 1970s was that such policy is aimed at

There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.

When spending by the federal government exceeds net taxes,

A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

Which of the following government policies would increase aggregate demand?

A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve.

Keynesian theory and policies were developed to show why

One thing that policy makers often overlook is

Most government purchases are made at the federal,not the state,level of government.

Exhibit 11-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS110 in Exhibit 11-3,what would be the size of the recessionary gap?

If net taxes increase and government purchases decrease,

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Introduction to Macroeconomics

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Exhibit 11-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₁₁₀in Exhibit 11-3,what would be the size of the recessionary gap?