Question 1

An increase in federal budget deficit

Accepted Answer

A) only occurs when there is a surplus in the balance of trade 
B) may create inflation 
C) decreases aggregate supply 
D) decreases aggregate quantity demanded along a stationary curve 
E) may reduce the equilibrium level of output and employment 
A) only occurs when there is a surplus in the balance of trade 
B) may create inflation 
C) decreases aggregate supply 
D) decreases aggregate quantity demanded along a stationary curve 
E) may reduce the equilibrium level of output and employment

Question 2

Keynes believed that the economy does not automatically move toward an equilibrium at full employment.

Accepted Answer

A) True 
 B)False

Question 3

Exhibit 11-2  
-What happens in the economy illustrated in Exhibit 11-2 if government purchases increase by the amount necessary to achieve full employment?

Accepted Answer

A) The AD curve shifts to the right,the SRAS curve shifts to the left,and long-run equilibrium is achieved. 
B) The AD curve shifts to the right,the price level increases,and long-run equilibrium is achieved. 
C) The AD curve shifts to the right,the price level increases,and the expansionary gap worsens. 
D) The AD curve shifts to the left,the price level increases,and the contractionary gap worsens. 
E) The SRAS curve shifts to the left,the price level decreases,and long-run equilibrium is achieved. 
A) The AD curve shifts to the right,the SRAS curve shifts to the left,and long-run equilibrium is achieved. 
B) The AD curve shifts to the right,the price level increases,and long-run equilibrium is achieved. 
C) The AD curve shifts to the right,the price level increases,and the expansionary gap worsens. 
D) The AD curve shifts to the left,the price level increases,and the contractionary gap worsens. 
E) The SRAS curve shifts to the left,the price level decreases,and long-run equilibrium is achieved.

Question 4

All of the following are variables that can be manipulated to affect fiscal policy except one.Which is the exception?

Accepted Answer

A) personal income taxes 
B) government expenditures on goods and services 
C) government expenditures on unemployment benefits 
D) the interest rate 
E) corporate income taxes 
A) personal income taxes 
B) government expenditures on goods and services 
C) government expenditures on unemployment benefits 
D) the interest rate 
E) corporate income taxes

Question 5

Discretionary fiscal policy works by shifting the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False

Question 6

If the economy is already producing at its potential,

Accepted Answer

A) the spending multiplier equals 1/(1 - MP
C) in the long run 
B) the spending multiplier is less than 1/(1 - MP
C) in the long run 
C) the spending multiplier is more than 1/(1 - MP
C) in the long run 
D) the spending multiplier equals zero in the long run 
E) the aggregate demand curve is horizontal 
A) the spending multiplier equals 1/(1 - MP
C) in the long run 
B) the spending multiplier is less than 1/(1 - MP
C) in the long run 
C) the spending multiplier is more than 1/(1 - MP
C) in the long run 
D) the spending multiplier equals zero in the long run 
E) the aggregate demand curve is horizontal

Question 7

To close a contractionary gap using fiscal policy,the government can

Accepted Answer

A) increase government spending by the size of the gap 
B) decrease government spending by the size of the gap 
C) increase government spending by more than the size of the gap 
D) increase government spending by less than the size of the gap 
E) decrease government spending by more than the size of the gap 
A) increase government spending by the size of the gap 
B) decrease government spending by the size of the gap 
C) increase government spending by more than the size of the gap 
D) increase government spending by less than the size of the gap 
E) decrease government spending by more than the size of the gap

Question 8

A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.

Accepted Answer

A) True 
 B)False

Question 9

If the short-run aggregate supply curve has a positive slope,effective fiscal policy to correct for an expansionary gap will

Accepted Answer

A) only reduce the price level 
B) only reduce real GDP 
C) only increase the price level 
D) only increase real GDP 
E) reduce both the price level and real GDP 
A) only reduce the price level 
B) only reduce real GDP 
C) only increase the price level 
D) only increase real GDP 
E) reduce both the price level and real GDP

Question 10

If policy makers think the natural rate of unemployment is lower than it really is,then their policies designed to move the economy to the estimated natural rate,if continued over the long run,will

Accepted Answer

A) cause continuing inflation 
B) shift the long-run aggregate supply curve to the right 
C) shift the supply curve of labor to the right 
D) reduce unemployment more than they had intended 
E) keep the economy below its potential GDP level 
A) cause continuing inflation 
B) shift the long-run aggregate supply curve to the right 
C) shift the supply curve of labor to the right 
D) reduce unemployment more than they had intended 
E) keep the economy below its potential GDP level

Question 11

The U.S.federal income tax is progressive,which means that

Accepted Answer

A) tax receipts grow at the same rate that income does 
B) tax receipts grow at the same rate that government spending does 
C) middle income individuals pay more total taxes than either high or low-income individuals 
D) high-income individuals are generally able to pay fewer taxes 
E) high-income individuals are taxed at a higher rate than low-income individuals 
A) tax receipts grow at the same rate that income does 
B) tax receipts grow at the same rate that government spending does 
C) middle income individuals pay more total taxes than either high or low-income individuals 
D) high-income individuals are generally able to pay fewer taxes 
E) high-income individuals are taxed at a higher rate than low-income individuals

Question 12

Which of the following are used in fiscal policy?

Accepted Answer

A) transfer payments only 
B) taxes and government purchases 
C) government purchases only 
D) government purchases,transfer payments,and taxes 
E) taxes and transfer payments 
A) transfer payments only 
B) taxes and government purchases 
C) government purchases only 
D) government purchases,transfer payments,and taxes 
E) taxes and transfer payments

Question 13

A leading Classical economist and author of The Wealth Of Nations was

Accepted Answer

A) David Ricardo 
B) François Quesnay 
C) Simon Kuznets 
D) John Maynard Keynes 
E) Adam Smith 
A) David Ricardo 
B) François Quesnay 
C) Simon Kuznets 
D) John Maynard Keynes 
E) Adam Smith

Question 14

Exhibit 11-3  
-In Exhibit 11-3,if the government wants to eliminate the recessionary gap it should _______ net taxes by _______.

Accepted Answer

A) increase; $2 trillion 
B) decrease; $2 trillion 
C) decrease; $2 trillion x [(1 - MP
C) /MPC] 
D) increase; $2 trillion x [(1 - MP
C) /MPC] 
E) decrease; $2 trillion x MPC/(1-MP
C)  
A) increase; $2 trillion 
B) decrease; $2 trillion 
C) decrease; $2 trillion x [(1 - MP
C) /MPC] 
D) increase; $2 trillion x [(1 - MP
C) /MPC] 
E) decrease; $2 trillion x MPC/(1-MP
C)

Question 15

Lags in the approval and implementation of fiscal policy

Accepted Answer

A) weaken fiscal policy as a tool of economic stabilization 
B) increase the effectiveness of fiscal policy as a tool of economic stabilization 
C) help legislators to better assess what policies are most appropriate to adopt 
D) make fiscal policy more responsive to the current economic environment 
E) cause fiscal policy to be more effective in changing the level of real GDP than changing the price level 
A) weaken fiscal policy as a tool of economic stabilization 
B) increase the effectiveness of fiscal policy as a tool of economic stabilization 
C) help legislators to better assess what policies are most appropriate to adopt 
D) make fiscal policy more responsive to the current economic environment 
E) cause fiscal policy to be more effective in changing the level of real GDP than changing the price level

Question 16

Which of the following is not a weakness of fiscal policy?

Accepted Answer

A) Implementation of policy is difficult. 
B) Time lags in fiscal policy are long and variable. 
C) Fiscal policy works only during periods of stagflation. 
D) Fiscal policy often affects only current income,but many economic decisions are made on the basis of permanent income. 
E) Fiscal policy might have undesirable long-term effects on short-run aggregate supply. 
A) Implementation of policy is difficult. 
B) Time lags in fiscal policy are long and variable. 
C) Fiscal policy works only during periods of stagflation. 
D) Fiscal policy often affects only current income,but many economic decisions are made on the basis of permanent income. 
E) Fiscal policy might have undesirable long-term effects on short-run aggregate supply.

Question 17

Which of the following is an example of an automatic stabilizer?

Accepted Answer

A) tax reductions passed by Congress in times of unemployment 
B) tax reductions passed by Congress in times of inflation 
C) government defense spending 
D) unemployment compensation 
E) welfare programs 
A) tax reductions passed by Congress in times of unemployment 
B) tax reductions passed by Congress in times of inflation 
C) government defense spending 
D) unemployment compensation 
E) welfare programs

Question 18

The existence of stagflation in the 1970s undermined the credibility of (aggregate)demand-management policies.

Accepted Answer

A) True 
 B)False

Question 19

If policy makers estimate the natural rate of unemployment incorrectly,

Accepted Answer

A) their policies will cause deflation in the long run 
B) their policies will cause even more unemployment in the long run 
C) the economy will stay below its potential GDP level in the long run 
D) the economy will tend toward that level of unemployment the policy makers believe is correct 
E) policies that appear to be successful in the short run will lead to further economic problems 
A) their policies will cause deflation in the long run 
B) their policies will cause even more unemployment in the long run 
C) the economy will stay below its potential GDP level in the long run 
D) the economy will tend toward that level of unemployment the policy makers believe is correct 
E) policies that appear to be successful in the short run will lead to further economic problems

Question 20

Recent studies of the effectiveness of fiscal policy tend to suggest that increases in government spending are more effective than tax cuts in stimulating real GDP.

Accepted Answer

A) True 
 B)False

Exam 12: Fiscal Policy

An increase in federal budget deficit

Keynes believed that the economy does not automatically move toward an equilibrium at full employment.

Exhibit 11-2 -What happens in the economy illustrated in Exhibit 11-2 if government purchases increase by the amount necessary to achieve full employment?

All of the following are variables that can be manipulated to affect fiscal policy except one.Which is the exception?

Discretionary fiscal policy works by shifting the short-run aggregate supply curve.

If the economy is already producing at its potential,

To close a contractionary gap using fiscal policy,the government can

A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.

If the short-run aggregate supply curve has a positive slope,effective fiscal policy to correct for an expansionary gap will

If policy makers think the natural rate of unemployment is lower than it really is,then their policies designed to move the economy to the estimated natural rate,if continued over the long run,will

The U.S.federal income tax is progressive,which means that

Which of the following are used in fiscal policy?

A leading Classical economist and author of The Wealth Of Nations was

Exhibit 11-3 -In Exhibit 11-3,if the government wants to eliminate the recessionary gap it should _______ net taxes by _______.

Lags in the approval and implementation of fiscal policy

Which of the following is not a weakness of fiscal policy?

Which of the following is an example of an automatic stabilizer?

The existence of stagflation in the 1970s undermined the credibility of (aggregate)demand-management policies.

If policy makers estimate the natural rate of unemployment incorrectly,

Recent studies of the effectiveness of fiscal policy tend to suggest that increases in government spending are more effective than tax cuts in stimulating real GDP.

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand, supply, and Markets

Introduction to Macroeconomics

Tracking the Useconomy

Unemployment and Inflation

Productivity and Growth

Aaggregate Expenditure and Aggregate Demand

Baggregate Expenditure and Aggregate Demand

Aggregate Supply

Federal Budgets and Public Policy

Money and the Financial System

Banking and the Money Supply

Monetary Theory and Policy

Macro Policy Debate: Active or Passive

International Trade

Externalities and the Environment

International Finance

Economic Development

understanding Graphs

National Income Accounts

The Algebra of Demand-Side Equilibrium

Filters

Exhibit 11-3 -In Exhibit 11-3,if the government wants to eliminate the recessionary gap it should _ net taxes by _.