Question 1

Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation.According to Keynesian theory,which of the following is an appropriate discretionary fiscal policy to use in this situation?

Accepted Answer

A)   A reduction in the money supply.
B)   Less government regulation.
C)   Increase federal spending.
D)   Higher taxes.E) B) and C)
F) All of the above

Question 2

The Laffer curve is a graph of the relationship between tax rates and:

Accepted Answer

A)   real GDP.
B)   total tax revenues.
C)   government spending.
D)   inflation.E) None of the above
F) B) and D)

Question 3

The Laffer curve shows as tax rates rise,tax revenue:

Accepted Answer

A)   rises.
B)   first rises, then falls, and then rises again.
C)   falls.
D)   first rises, and then falls.
E)   remains at a constant level.F) B) and E)
G) A) and B)

Question 4

Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

Accepted Answer

A) True 
 B)False

Question 5

The spending multiplier is defined as:

Accepted Answer

A)   the ratio of the change in equilibrium real GDP to the initial change in spending.
B)   the change in initial spending divided by the change in personal income.
C)   1/(marginal propensity to consume) .
D)   1/(1 - marginal propensity to save) .E) A) and B)
F) None of the above

Question 6

Which of the following statements is true?

Accepted Answer

A)   Above the optimal tax rate, a reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues.
B)   According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation.
C)   The presence of the automatic stabilizers tends to destabilize the economy.
D)   To combat inflation, Keynesians recommend lower taxes and greater government spending.E) B) and C)
F) B) and D)

Question 7

Given full-employment output = $2,800,equilibrium real GDP = $2,500,and MPS = 0.25,which of the following changes would most likely bring the economy to a full-employment level of real GDP?

Accepted Answer

A)   $300 decrease in taxes.
B)   $75 increase in government spending.
C)   $75 decrease in taxes.
D)   $300 increase in government spending.
E)   $75 decrease in government spending.F) A) and D)
G) B) and D)

Question 8

If no fiscal policy changes are implemented to fight inflation,suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices.Assuming the marginal propensity to consume is 0.90,this increase in aggregate demand could be prevented by:

Accepted Answer

A)   increasing government spending by $500 billion.
B)   increasing government spending by $140 billion.
C)   decreasing taxes by $40 billion.
D)   increasing taxes by $100 billion.E) All of the above
F) B) and D)

Question 9

When an economy dips into recession,automatic stabilizers will:

Accepted Answer

A)   enlarge the budget deficit (or reduce the surplus) .
B)   reduce the budget deficit (or increase the surplus) .
C)   ensure that the budget remains in balance.
D)   expand the supply of money and, thereby, stimulate aggregate demand.E) B) and D)
F) All of the above

Question 10

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

Accepted Answer

A)   Personal income tax revenues.
B)   Corporate income tax revenues.
C)   Unemployment benefits.
D)   All of the above.E) A) and B)
F) A) and C)

Question 11

If the marginal propensity to save (MPS) is 0.10,the value of the spending multiplier is:

Accepted Answer

A)   1.
B)   9.
C)   10.
D)   90.E) None of the above
F) A) and B)

Question 12

Supply-side economics calls for:

Accepted Answer

A)   lower taxes on businesses and individuals.
B)   regulatory reforms to increase productivity.
C)   government subsidies to promote technological advance.
D)   All of the above.E) All of the above
F) B) and D)

Question 13

Exhibit 15-2 Aggregate demand and supply model
 
-Suppose the economy in Exhibit 15-2 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75.Following Keynesian economics,the federal government can move the economy to full employment at point E₂ by:

Accepted Answer

A)   decreasing government tax revenue by $100 billion.
B)   decreasing government tax revenue by $750 billion.
C)   increasing government tax revenue by $100 billion.
D)   increasing government tax revenue by approximately $33 billion.
E)   decreasing government tax revenue by approximately $33 billion.F) A) and D)
G) D) and E)

Question 14

It is inflationary for government to increase spending if:

Accepted Answer

A)   it also cuts taxes.
B)   the aggregate supply curve is flat.
C)   the economy is at full employment.
D)   equilibrium real GDP is well below full employment.E) B) and D)
F) B) and C)

Question 15

To combat a recession,Keynesian fiscal policy recommends:

Accepted Answer

A)   An increase in taxes.
B)   An increase in government spending.
C)   An increase in taxes and a decrease in government purchases to balance the budget.
D)   A reduction in both taxes and government spending.E) A) and B)
F) A) and C)

Question 16

The ratio of a change in consumption to a change in income is the:

Accepted Answer

A)   consumption function.
B)   propensity to consume.
C)   average propensity to consume.
D)   extra propensity to consume.
E)   marginal propensity to consume.F) A) and E)
G) C) and D)

Question 17

Exhibit 15-3 Aggregate demand and supply model
 
-Suppose the economy in Exhibit 15-3 is in equilibrium at point E₁,and the marginal propensity to consume (MPC) is 0.80.Following Keynesian economics,to restore full employment,the government should cut taxes by:

Accepted Answer

A)   $0.20 trillion.
B)   $250 billion.
C)   $0.50 trillion.
D)   $1 trillion.E) All of the above
F) A) and C)

Question 18

Expansionary fiscal policy consists of:

Accepted Answer

A)   increasing government spending.
B)   increasing payroll taxes to finance health care.
C)   decreasing government spending.
D)   raising the minimum wage.E) C) and D)
F) A) and B)

Question 19

Mathematically,the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula:

Accepted Answer

A)   MPC - 1.
B)   (MPC - 1) /MPC.
C)   1/MPC.
D)   1/(1 - MP
C)  .E) None of the above
F) B) and D)

Question 20

Which of the following is emphasized by supply-side economics?

Accepted Answer

A)   The impact of budget deficits on interest rates and aggregate demand.
B)   The impact of government spending on aggregate demand, output, and employment.
C)   The impact of marginal tax rates on aggregate supply.
D)   The impact of budget deficits on the rate of taxation in the future.E) C) and D)
F) A) and B)

Exam 15: Fiscal Policy

Expansionary fiscal policy consists of:

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If the marginal propensity to save (MPS) is 0.10,the value of the spending multiplier is:

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Mathematically,the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula:

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Given full-employment output = $2,800,equilibrium real GDP = $2,500,and MPS = 0.25,which of the following changes would most likely bring the economy to a full-employment level of real GDP?

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To combat a recession,Keynesian fiscal policy recommends:

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Which of the following statements is true?

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Supply-side economics calls for:

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It is inflationary for government to increase spending if:

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Exhibit 15-3 Aggregate demand and supply model -Suppose the economy in Exhibit 15-3 is in equilibrium at point E₁,and the marginal propensity to consume (MPC) is 0.80.Following Keynesian economics,to restore full employment,the government should cut taxes by:

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Which of the following is emphasized by supply-side economics?

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If no fiscal policy changes are implemented to fight inflation,suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices.Assuming the marginal propensity to consume is 0.90,this increase in aggregate demand could be prevented by:

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When an economy dips into recession,automatic stabilizers will:

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Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

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The Laffer curve shows as tax rates rise,tax revenue:

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Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

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Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation.According to Keynesian theory,which of the following is an appropriate discretionary fiscal policy to use in this situation?

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The ratio of a change in consumption to a change in income is the:

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Exhibit 15-2 Aggregate demand and supply model -Suppose the economy in Exhibit 15-2 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75.Following Keynesian economics,the federal government can move the economy to full employment at point E₂ by:

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The spending multiplier is defined as:

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The Laffer curve is a graph of the relationship between tax rates and:

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