Question 1

In the traditional Keynesian model, if the government increases spending, then

Accepted Answer

A)  real Gross Domestic Product (GDP) will rise and the price level will remain constant. 
B)  real Gross Domestic Product (GDP) will increase and the price level will fall. 
C)  both real Gross Domestic Product (GDP) and the price level will rise. 
D)  real Gross Domestic Product (GDP) will remain constant and the price level will rise. 
A)  real Gross Domestic Product (GDP) will rise and the price level will remain constant. 
B)  real Gross Domestic Product (GDP) will increase and the price level will fall. 
C)  both real Gross Domestic Product (GDP) and the price level will rise. 
D)  real Gross Domestic Product (GDP) will remain constant and the price level will rise.

Question 2

Discretionary fiscal policy is

Accepted Answer

A)  automatic changes in government expenditures and interest rates that achieve certain national economic goals. 
B)  deliberate changes in government expenditures or taxes in order to achieve certain national economic goals. 
C)  used to achieve full employment by changing monetary growth targets. 
D)  deliberate changes in government regulations in markets to achieve certain social goals. 
A)  automatic changes in government expenditures and interest rates that achieve certain national economic goals. 
B)  deliberate changes in government expenditures or taxes in order to achieve certain national economic goals. 
C)  used to achieve full employment by changing monetary growth targets. 
D)  deliberate changes in government regulations in markets to achieve certain social goals.

Question 3

Suppose that real GDP is initially $20 trillion and the government attempts to increase real GDP to $21 trillion. The marginal propensity to consume is 0.8, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. Which increase in government spending below could yield the desired level of real GDP?

Accepted Answer

A)  $100 billion 
B)  $125 billion 
C)  $200 billion 
D)  $400 billion 
A)  $100 billion 
B)  $125 billion 
C)  $200 billion 
D)  $400 billion

Question 4

Typical goals for fiscal policy are

Accepted Answer

A)  high employment and price stability. 
B)  high prices for consumers and low prices for businesses. 
C)  running high deficits and raising consumer prices. 
D)  increasing the money supply so the government can spend more. 
A)  high employment and price stability. 
B)  high prices for consumers and low prices for businesses. 
C)  running high deficits and raising consumer prices. 
D)  increasing the money supply so the government can spend more.

Question 5

Fiscal policy refers to the

Accepted Answer

A)  manipulation of the money supply in order to increase the amount of cash that the government holds. 
B)  adjustment of government spending and taxes in order to achieve certain national economic goals. 
C)  adjustment of national income data to account for price level changes. 
D)  government policy that aims at raising the market prices of certain goods. 
A)  manipulation of the money supply in order to increase the amount of cash that the government holds. 
B)  adjustment of government spending and taxes in order to achieve certain national economic goals. 
C)  adjustment of national income data to account for price level changes. 
D)  government policy that aims at raising the market prices of certain goods.

Question 6

The balanced-budget multiplier is equal to

Accepted Answer

A)  the percentage increase in government expenditures. 
B)  the reciprocal of the increase in government expenditures. 
C)  the percentage increase in taxes. 
D)  one. 
A)  the percentage increase in government expenditures. 
B)  the reciprocal of the increase in government expenditures. 
C)  the percentage increase in taxes. 
D)  one.

Question 7

Contractionary fiscal policy will most likely

Accepted Answer

A)  raise real GDP more than the increase in the price level. 
B)  raise real GDP. 
C)  lower the price level. 
D)  raise inflation. 
A)  raise real GDP more than the increase in the price level. 
B)  raise real GDP. 
C)  lower the price level. 
D)  raise inflation.

Question 8

What is supply-side economics?

Accepted Answer

Supply-side economics is the idea that c

Question 9

Which of the following fiscal policy actions would most likely cause a reduction in the size of an inflationary gap?

Accepted Answer

A)  cuts in taxes and increases in government spending 
B)  increases in government spending 
C)  increases in taxes 
D)  cuts in taxes 
A)  cuts in taxes and increases in government spending 
B)  increases in government spending 
C)  increases in taxes 
D)  cuts in taxes

Question 10

-Refer to the above figure. Suppose that the economy starts at AD1. If the government reduces taxes, then the economy goes to AD2, but then falls back to AD1. This is an example of

Accepted Answer

A)  partial crowding-out effect. 
B)  the free rider problem. 
C)  laissez-faire. 
D)  complete crowding-out effect. 
A)  partial crowding-out effect. 
B)  the free rider problem. 
C)  laissez-faire. 
D)  complete crowding-out effect.

Question 11

The government will conduct expansionary fiscal policy if it attempts to

Accepted Answer

A)  reduce the price level. 
B)  reduce real GDP. 
C)  shift the aggregate demand curve to the left. 
D)  reduce the level of unemployment. 
A)  reduce the price level. 
B)  reduce real GDP. 
C)  shift the aggregate demand curve to the left. 
D)  reduce the level of unemployment.

Question 12

In 2009, Congress passed a bill that involved government spending increases and tax cuts with the purpose of stimulating the U.S. economy. This policy is an example of

Accepted Answer

A)  an automatic stabilizer. 
B)  contractionary fiscal policy. 
C)  expansionary fiscal policy. 
D)  expansionary monetary policy. 
A)  an automatic stabilizer. 
B)  contractionary fiscal policy. 
C)  expansionary fiscal policy. 
D)  expansionary monetary policy.

Question 13

Who formulated the theory that government borrowing may function like an increase in taxes in the sense of reducing current consumption and business expenditures?

Accepted Answer

A)  John Maynard Keynes 
B)  Jean Baptiste Say 
C)  David Ricardo 
D)  Adam Smith 
A)  John Maynard Keynes 
B)  Jean Baptiste Say 
C)  David Ricardo 
D)  Adam Smith

Question 14

-Refer to the above figure. If the economy is currently at point C, then an increase in taxes will lead to

Accepted Answer

A)  an increase in the price level and an increase in real GDP. 
B)  a decrease in real GDP and an increase in the price level. 
C)  a decrease in real GDP and a decrease in the price level. 
D)  a decrease in the price level and an increase in real GDP. 
A)  an increase in the price level and an increase in real GDP. 
B)  a decrease in real GDP and an increase in the price level. 
C)  a decrease in real GDP and a decrease in the price level. 
D)  a decrease in the price level and an increase in real GDP.

Question 15

The existence of automatic stabilizers will

Accepted Answer

A)  reduce the recognition lag of discretionary fiscal policy. 
B)  eliminate recessions. 
C)  reduce the size of recessionary and inflationary gaps. 
D)  cause the effects of shocks to aggregate demand to have a larger effect on GDP. 
A)  reduce the recognition lag of discretionary fiscal policy. 
B)  eliminate recessions. 
C)  reduce the size of recessionary and inflationary gaps. 
D)  cause the effects of shocks to aggregate demand to have a larger effect on GDP.

Question 16

-Refer to the above figure. If the relevant aggregate demand curve is AD2, what is the current economic situation?

Accepted Answer

A)  inflationary gap 
B)  recessionary gap 
C)  equilibrium 
D)  overemployment 
A)  inflationary gap 
B)  recessionary gap 
C)  equilibrium 
D)  overemployment

Question 17

The crowding-out effect refers to

Accepted Answer

A)  an increase in the consumption of domestic goods at the expense of imported goods. 
B)  an increase in the consumption of imported goods at the expense of domestic goods. 
C)  a decrease in consumption and investment caused by an increase in government borrowing. 
D)  a decrease in consumer spending caused by a decrease in consumer confidence. 
A)  an increase in the consumption of domestic goods at the expense of imported goods. 
B)  an increase in the consumption of imported goods at the expense of domestic goods. 
C)  a decrease in consumption and investment caused by an increase in government borrowing. 
D)  a decrease in consumer spending caused by a decrease in consumer confidence.

Question 18

A problem with using fiscal policy to fine-tune the economy is that

Accepted Answer

A)  it takes time for policymakers to agree on the appropriate fiscal policy. 
B)  fiscal policy impacts the economy too fast. 
C)  fiscal policy impacts only urban areas of the nation. 
D)  fiscal policy impacts only the largest states in the nation. 
A)  it takes time for policymakers to agree on the appropriate fiscal policy. 
B)  fiscal policy impacts the economy too fast. 
C)  fiscal policy impacts only urban areas of the nation. 
D)  fiscal policy impacts only the largest states in the nation.

Question 19

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD2. In the end, the aggregate demand curve is still AD1. A possible reason for this is that

Accepted Answer

A)  the economy is already at full employment. 
B)  the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving. 
C)  people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending. 
D)  some of the increased government spending is not counted in GDP. 
A)  the economy is already at full employment. 
B)  the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving. 
C)  people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending. 
D)  some of the increased government spending is not counted in GDP.

Question 20

The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is

Accepted Answer

A)  fiscal policy. 
B)  the recognition time lag. 
C)  the effect time lag. 
D)  the action time lag. 
A)  fiscal policy. 
B)  the recognition time lag. 
C)  the effect time lag. 
D)  the action time lag.

Exam 13: Fiscal Policy

In the traditional Keynesian model, if the government increases spending, then

Discretionary fiscal policy is

Typical goals for fiscal policy are

Fiscal policy refers to the

The balanced-budget multiplier is equal to

Contractionary fiscal policy will most likely

What is supply-side economics?

Which of the following fiscal policy actions would most likely cause a reduction in the size of an inflationary gap?

-Refer to the above figure. Suppose that the economy starts at AD1. If the government reduces taxes, then the economy goes to AD2, but then falls back to AD1. This is an example of

The government will conduct expansionary fiscal policy if it attempts to

In 2009, Congress passed a bill that involved government spending increases and tax cuts with the purpose of stimulating the U.S. economy. This policy is an example of

Who formulated the theory that government borrowing may function like an increase in taxes in the sense of reducing current consumption and business expenditures?

-Refer to the above figure. If the economy is currently at point C, then an increase in taxes will lead to

The existence of automatic stabilizers will

-Refer to the above figure. If the relevant aggregate demand curve is AD2, what is the current economic situation?

The crowding-out effect refers to

A problem with using fiscal policy to fine-tune the economy is that

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD2. In the end, the aggregate demand curve is still AD1. A possible reason for this is that

The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Measuring the Economys Performance

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Deficit Spending and the Public Debt

Money, Banking, and Central Banking

Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

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