Question 1

Keynesian analysis indicates that an unexpected decline in aggregate demand will lead to

Accepted Answer

A) a reduction in inventories and an expansion in employment. 
B) an increase in inventories and a reduction in output. 
C) lower interest rates, which will stimulate aggregate demand and keep the economy at full employment. 
D) a lower price level, which will quickly guide the economy to full-employment equilibrium. 
A) a reduction in inventories and an expansion in employment. 
B) an increase in inventories and a reduction in output. 
C) lower interest rates, which will stimulate aggregate demand and keep the economy at full employment. 
D) a lower price level, which will quickly guide the economy to full-employment equilibrium. B

Question 2

Which of the following is a major deficiency of fiscal policy as a stabilization tool?

Accepted Answer

A) Congress is reluctant to make changes in either taxes or expenditures. 
B) The Constitution requires the president to submit and Congress to pass a balanced budget. 
C) Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly. 
D) A change in fiscal policy exerts major effects on the economy quickly. 
A) Congress is reluctant to make changes in either taxes or expenditures. 
B) The Constitution requires the president to submit and Congress to pass a balanced budget. 
C) Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly. 
D) A change in fiscal policy exerts major effects on the economy quickly. C

Question 3

What three types of timing problems might policy makers experience when conducting discretionary fiscal policy?

Accepted Answer

Since it is difficult to forecast the economy, there is generally a lag between the time a policy change is needed and when that need is recognized by policy makers. Another lag is involved in instituting a policy change since Congress must act to change tax laws and expenditure programs. Finally, there is a lag between the time a policy is put into place and when the impact is felt on the economy. These three lags make it difficult to time fiscal policy in a countercyclical manner.

Question 4

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

Accepted Answer

A) is appropriate during a period of inflation. 
B) will increase the money supply. 
C) will stimulate aggregate supply and, thereby, promote employment. 
D) will stimulate aggregate demand and, thereby, promote employment. 
A) is appropriate during a period of inflation. 
B) will increase the money supply. 
C) will stimulate aggregate supply and, thereby, promote employment. 
D) will stimulate aggregate demand and, thereby, promote employment.

Question 5

The marginal propensity to consume (MPC) is

Accepted Answer

A) consumption expenditures divided by saving. 
B) consumption expenditures divided by disposable income. 
C) consumption expenditures divided by personal income. 
D) additional consumption expenditures divided by additional disposable income. 
A) consumption expenditures divided by saving. 
B) consumption expenditures divided by disposable income. 
C) consumption expenditures divided by personal income. 
D) additional consumption expenditures divided by additional disposable income.

Question 6

The major advantage of automatic stabilizers is that they

Accepted Answer

A) guarantee the federal budget will be balanced in a relatively short amount of time. 
B) institute countercyclical fiscal policy without the delays associated with legislative action. 
C) automatically produce surpluses during recessions and deficits during expansions. 
D) require discretionary actions on the part of Congress before they exert an impact on output and employment. 
A) guarantee the federal budget will be balanced in a relatively short amount of time. 
B) institute countercyclical fiscal policy without the delays associated with legislative action. 
C) automatically produce surpluses during recessions and deficits during expansions. 
D) require discretionary actions on the part of Congress before they exert an impact on output and employment.

Question 7

If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

Accepted Answer

A) counteract inflation. 
B) reduce the trade deficit. 
C) continue inflationary pressures. 
D) increase unemployment. 
A) counteract inflation. 
B) reduce the trade deficit. 
C) continue inflationary pressures. 
D) increase unemployment.

Question 8

Within the Keynesian model, when total spending is less than the full-employment level of output, firms will

Accepted Answer

A) continue to produce the current level of output. 
B) cut production to reduce their inventory accumulation. 
C) expand production to reduce their inventory accumulation. 
D) cut production to build inventories. 
A) continue to produce the current level of output. 
B) cut production to reduce their inventory accumulation. 
C) expand production to reduce their inventory accumulation. 
D) cut production to build inventories.

Question 9

When aggregate demand exceeds current output, Keynesian analysis indicates that

Accepted Answer

A) unplanned inventory accumulation will cause output to rise. 
B) unplanned inventory accumulation will cause output to fall. 
C) unplanned inventory reductions will cause output to rise. 
D) unplanned inventory reductions will cause output to fall. 
A) unplanned inventory accumulation will cause output to rise. 
B) unplanned inventory accumulation will cause output to fall. 
C) unplanned inventory reductions will cause output to rise. 
D) unplanned inventory reductions will cause output to fall.

Question 10

During normal times, the multiplier effect of an increase in government spending financed by taxes will be

Accepted Answer

A) strengthened, if the additional spending flows into sectors of the economy where the unemployment rates are low. 
B) weakened by an offsetting reduction in spending due to the higher taxes. 
C) unaffected, as long as the higher taxes are in the future. 
D) strengthened, if corporate tax rates are increased and personal tax rates remain unchanged. 
A) strengthened, if the additional spending flows into sectors of the economy where the unemployment rates are low. 
B) weakened by an offsetting reduction in spending due to the higher taxes. 
C) unaffected, as long as the higher taxes are in the future. 
D) strengthened, if corporate tax rates are increased and personal tax rates remain unchanged.

Question 11

Figure 11-4  
-According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?

Accepted Answer

A) increase both taxes and government transfer payments 
B) reduction in government purchases and increase in taxes 
C) increase in government purchases and reduction in taxes 
D) increase in taxes to reduce the government deficit 
A) increase both taxes and government transfer payments 
B) reduction in government purchases and increase in taxes 
C) increase in government purchases and reduction in taxes 
D) increase in taxes to reduce the government deficit

Question 12

Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?

Accepted Answer

Programs that act as automatic stabilize

Question 13

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

Accepted Answer

A) Congress legislates lower tax rates to increase consumption and investment. 
B) Tax rates are increased during a recession to maintain a balanced budget. 
C) A regressive income tax system reduces tax revenues (as a share of income) as income expands. 
D) Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted. 
A) Congress legislates lower tax rates to increase consumption and investment. 
B) Tax rates are increased during a recession to maintain a balanced budget. 
C) A regressive income tax system reduces tax revenues (as a share of income) as income expands. 
D) Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted.

Question 14

According to the Keynesian view, if purchasers buy more goods and services than businesses expect,

Accepted Answer

A) the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels. 
B) the inventories of firms would increase, and the firms would reduce output until inventories were cut back to the desired level. 
C) the current level of income would persist in the future. 
D) firms would reduce their investment, and the economy would fall into a recession. 
A) the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels. 
B) the inventories of firms would increase, and the firms would reduce output until inventories were cut back to the desired level. 
C) the current level of income would persist in the future. 
D) firms would reduce their investment, and the economy would fall into a recession.

Question 15

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

Accepted Answer

A) a balanced federal budget 
B) the minimum wage 
C) unemployment compensation program 
D) discretionary fiscal policy 
A) a balanced federal budget 
B) the minimum wage 
C) unemployment compensation program 
D) discretionary fiscal policy

Question 16

Which of the following is the primary source of changes in output within the framework of Keynesian analysis?

Accepted Answer

A) changes in the price level 
B) changes in aggregate demand 
C) changes in interest rates 
D) changes in wage rates 
A) changes in the price level 
B) changes in aggregate demand 
C) changes in interest rates 
D) changes in wage rates

Question 17

When the unemployment rate is low, the impact of additional spending on real output will

Accepted Answer

A) be larger than when the unemployment rate is high. 
B) be smaller than when the unemployment rate is high. 
C) be the same as when the unemployment rate is high. 
D) place downward pressure on the general level of prices, leading to deflation. 
A) be larger than when the unemployment rate is high. 
B) be smaller than when the unemployment rate is high. 
C) be the same as when the unemployment rate is high. 
D) place downward pressure on the general level of prices, leading to deflation.

Question 18

In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when

Accepted Answer

A) actual saving equals actual investment. 
B) planned aggregate expenditures equal total output. 
C) consumption equals income times the marginal propensity to consume. 
D) the marginal propensity to consume equals planned output. 
A) actual saving equals actual investment. 
B) planned aggregate expenditures equal total output. 
C) consumption equals income times the marginal propensity to consume. 
D) the marginal propensity to consume equals planned output.

Question 19

Within the Keynesian model, if the output of an economy is less than the full-employment level, then

Accepted Answer

A) a reduction in government expenditures will direct the economy back to full-employment equilibrium. 
B) a reduction in wage rates and resource prices will quickly restore full-employment equilibrium. 
C) a reduction in the real interest rate will soon restore full-employment equilibrium. 
D) output will tend to remain below full-employment capacity unless aggregate expenditures increase. 
A) a reduction in government expenditures will direct the economy back to full-employment equilibrium. 
B) a reduction in wage rates and resource prices will quickly restore full-employment equilibrium. 
C) a reduction in the real interest rate will soon restore full-employment equilibrium. 
D) output will tend to remain below full-employment capacity unless aggregate expenditures increase.

Question 20

The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $82 billion, real GDP

Accepted Answer

A) will increase by less than $82 billion if the economy was initially operating well below capacity. 
B) will increase by more than $82 billion if the economy was initially operating well below capacity. 
C) will increase by more than $82 billion if the economy was initially operating at full-employment capacity. 
D) will decline if the marginal propensity to consume is less than 1. 
A) will increase by less than $82 billion if the economy was initially operating well below capacity. 
B) will increase by more than $82 billion if the economy was initially operating well below capacity. 
C) will increase by more than $82 billion if the economy was initially operating at full-employment capacity. 
D) will decline if the marginal propensity to consume is less than 1.

Keynesian analysis indicates that an unexpected decline in aggregate demand will lead to

Which of the following is a major deficiency of fiscal policy as a stabilization tool?

What three types of timing problems might policy makers experience when conducting discretionary fiscal policy?

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

The marginal propensity to consume (MPC) is

The major advantage of automatic stabilizers is that they

If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

Within the Keynesian model, when total spending is less than the full-employment level of output, firms will

When aggregate demand exceeds current output, Keynesian analysis indicates that

During normal times, the multiplier effect of an increase in government spending financed by taxes will be

Figure 11-4 -According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?

Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?

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

According to the Keynesian view, if purchasers buy more goods and services than businesses expect,

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

Which of the following is the primary source of changes in output within the framework of Keynesian analysis?

When the unemployment rate is low, the impact of additional spending on real output will

In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when

Within the Keynesian model, if the output of an economy is less than the full-employment level, then

The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $82 billion, real GDP

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Exam 11: Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Keynesian analysis indicates that an unexpected decline in aggregate demand will lead to

Which of the following is a major deficiency of fiscal policy as a stabilization tool?

What three types of timing problems might policy makers experience when conducting discretionary fiscal policy?

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

The marginal propensity to consume (MPC) is

The major advantage of automatic stabilizers is that they

If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

Within the Keynesian model, when total spending is less than the full-employment level of output, firms will

When aggregate demand exceeds current output, Keynesian analysis indicates that

During normal times, the multiplier effect of an increase in government spending financed by taxes will be

Figure 11-4 -According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?

Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?

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

According to the Keynesian view, if purchasers buy more goods and services than businesses expect,

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

Which of the following is the primary source of changes in output within the framework of Keynesian analysis?

When the unemployment rate is low, the impact of additional spending on real output will

In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when

Within the Keynesian model, if the output of an economy is less than the full-employment level, then

The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $82 billion, real GDP

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters