Question 1

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ transfer payments by _____ $40 billion.

Accepted Answer

A)  increase; less than
B)  increase; more than
C)  decrease; less than
D)  decrease; more than B

Question 2

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy.

Accepted Answer

A)  G; C and I
B)  T; G and C
C)  C; X and M
D)  I; G and T A

Question 3

The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million.

Accepted Answer

A) True 
 B)False  False

Question 4

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

Accepted Answer

A)  A $25 billion increase in government spending
B)  A $25 billion increase in taxes
C)  A $250 billion increase in government spending
D)  A $1,000 billion increase in government spending

Question 5

Social Security spending is projected to:

Accepted Answer

A)  increase as baby boomers retire.
B)  decrease as baby boomers retire.
C)  stay the same over the next decade.
D)  increase for this decade and then decline.

Question 6

Since 1964, the budget deficit _____ of GDP.

Accepted Answer

A)  has never been more than 12%
B)  has been as high as 50%
C)  has usually been 0%
D)  has usually been between 0% and -20%

Question 7

Use the following to answer questions :
Figure: Short- and Long-Run Equilibrium 
-(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n):

Accepted Answer

A)  increase in transfer payments.
B)  decrease in transfer payments.
C)  increase in taxes.
D)  decrease in government spending.

Question 8

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

Accepted Answer

A)  expansionary fiscal
B)  contractionary fiscal
C)  expansionary monetary
D)  contractionary monetary

Question 9

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

Accepted Answer

A)  the same as
B)  less than
C)  bigger than
D)  not relevant to

Question 10

Public debt is government debt held by individuals and institutions outside the government.

Accepted Answer

A) True 
 B)False

Question 11

Expansionary fiscal policy:

Accepted Answer

A)  increases long-run aggregate supply.
B)  decreases long-run aggregate supply.
C)  increases aggregate demand.
D)  decreases aggregate demand.

Question 12

Contractionary fiscal policy includes:

Accepted Answer

A)  decreasing taxes.
B)  decreasing the money supply.
C)  decreasing government expenditures.
D)  increasing government expenditures.

Question 13

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

Accepted Answer

A)  $10 billion.
B)  $20 billion.
C)  $27.8 billion.
D)  $50 billion.

Question 14

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.

Accepted Answer

A) True 
 B)False

Question 15

Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity to consume is 0.8. If the government is going to close the gap by changing government purchases of goods and services and imposes no taxes, what specific fiscal policy action should policy makers take?

Accepted Answer

The answer of Suppose that real GDP is $1,500, potential...

Question 16

Funding for Social Security and Medicare:

Accepted Answer

A)  must come from government borrowing.
B)  comes from dedicated taxes.
C)  is likely to increase with the retirement of baby boomers.
D)  can be accomplished with lower taxes in the future.

Question 17

Expansionary fiscal policies:

Accepted Answer

A)  make the budget surplus smaller.
B)  make the budget deficit smaller.
C)  affect only taxes.
D)  affect only government purchases of goods and services.

Question 18

Use the following to answer questions:
Figure: Fiscal Policy II 
-(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is an increase in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

Accepted Answer

A)  AD1; left; increase; decrease
B)  AD1; left; decrease; decrease
C)  AD2; right; increase; increase
D)  AD2; right; decrease; increase

Question 19

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

Accepted Answer

A)  decrease government purchases.
B)  decrease taxes.
C)  decrease government transfers.
D)  increase real interest rates.

Question 20

Use the following to answer questions :
Figure: Fiscal Policy Choices 
-(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.

Accepted Answer

A)  panel (b) ; AD1 to AD2
B)  panel (a) ; AD2 to AD1
C)  panel (a) ; AD1 to AD2
D)  panel (b) ; AD2 to AD1

Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _ transfer payments by _ $40 billion.

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _ and influences _ through fiscal policy.

The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million.

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

Social Security spending is projected to:

Since 1964, the budget deficit _____ of GDP.

Use the following to answer questions : Figure: Short- and Long-Run Equilibrium -(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, the appropriate policy to return the economy to potential output is a(n) :

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

Public debt is government debt held by individuals and institutions outside the government.

Expansionary fiscal policy:

Contractionary fiscal policy includes:

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.

Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity to consume is 0.8. If the government is going to close the gap by changing government purchases of goods and services and imposes no taxes, what specific fiscal policy action should policy makers take?

Funding for Social Security and Medicare:

Expansionary fiscal policies:

Use the following to answer questions: Figure: Fiscal Policy II -(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is an increase in taxes, ___ will shift to the _, causing a(n) _ in the price level and a(n) ___ in real GDP.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _ from _.

Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ transfer payments by _____ $40 billion.

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy.

The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million.

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

Social Security spending is projected to:

Since 1964, the budget deficit _____ of GDP.

Use the following to answer questions : Figure: Short- and Long-Run Equilibrium -(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n) :

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

Public debt is government debt held by individuals and institutions outside the government.

Expansionary fiscal policy:

Contractionary fiscal policy includes:

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.

Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity to consume is 0.8. If the government is going to close the gap by changing government purchases of goods and services and imposes no taxes, what specific fiscal policy action should policy makers take?

Funding for Social Security and Medicare:

Expansionary fiscal policies:

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from _____.

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _ transfer payments by _ $40 billion.

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _ and influences _ through fiscal policy.

Use the following to answer questions : Figure: Short- and Long-Run Equilibrium -(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, the appropriate policy to return the economy to potential output is a(n) :

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary fiscal policy to shift aggregate demand in _ from _.