Question 1

The federal budget deficit acts as an automatic stabilizer because

Accepted Answer

A)  government tax revenues decrease during a recession. 
B)  unemployment insurance payments decrease during a recession. 
C)  food stamp payments increase during expansionary periods. 
D)  Medicaid payments increase during expansionary periods.

Question 2

The tax multiplier is calculated as "one minus the government purchases multiplier."

Accepted Answer

A) True 
 B)False

Question 3

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate is 0.2, and the marginal propensity to import equals 0.3.

Accepted Answer

A)  1.43 
B)  1.6 
C)  3.33 
D)  4

Question 4

Social Security began as a "pay-as-you-go" system, meaning that payments to current retirees were paid

Accepted Answer

A)  from taxes collected from current workers. 
B)  from taxes collected from retired workers. 
C)  as long as the government had funds available. 
D)  as the government collected revenues from tariffs and excise taxes in the years Social Security payments were made.

Question 5

Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?

Accepted Answer

The answer of Why would a higher tax rate lower...

Question 6

Which of the following best describes supply-side economics?

Accepted Answer

A)  Labor productivity affects aggregate supply. 
B)  Education affects labor productivity which affects aggregate supply. 
C)  Education affects the incentive to work, save, and invest and, therefore, aggregate supply. 
D)  Tax rates affect the incentive to work, save, and invest and, therefore, aggregate supply.

Question 7

What is fiscal policy, and who is responsible for fiscal policy?

Accepted Answer

The answer of What is fiscal policy, and who is...

Question 8

Since the Social Security system began in 1935, the number of workers per retiree has

Accepted Answer

A)  stayed roughly the same. 
B)  continually risen. 
C)  continually declined. 
D)  risen and declined with different generations.

Question 9

The Congressional Budget Office estimates the size of the tax multiplier to be ________ for a 1-year tax cut for higher-income people.

Accepted Answer

A)  0.1 - 0.6 
B)  0.3 - 1.5 
C)  0.5 - 2.5 
D)  2.0 - 3.0

Question 10

Suppose the president is successful in passing a $5 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.75. What happens to equilibrium GDP?

Accepted Answer

A)  There is a $20 billion increase in equilibrium GDP. 
B)  There is a $20 billion decrease in equilibrium GDP. 
C)  There is a $15 billion increase in equilibrium GDP. 
D)  There is a $15 billion decrease in equilibrium GDP.

Question 11

The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle

Accepted Answer

A)  destabilize the economy. 
B)  stabilize the economy. 
C)  decrease potential GDP. 
D)  increase potential GDP.

Question 12

Suppose that Congress allocates $1 billion to clean up after hurricanes in 2018. It also raises taxes by $1 billion to keep the deficit from growing. If the marginal propensity to consume is 0.9, what is the effect on equilibrium GDP?

Accepted Answer

A)  GDP does not change. 
B)  GDP increases by $10 billion. 
C)  GDP increases by $900,000. 
D)  GDP increases by $1 billion.

Question 13

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the president and Congress to conduct expansionary fiscal policy. Briefly explain the condition of the economy and what the president and Congress are attempting to do.

Accepted Answer

The answer of Use the dynamic aggregate demand and aggregate...

Exam 27: Fiscal Policy