Question 1

When an economy is operating below its potential capacity, Keynesian economists argue that

Accepted Answer

A) taxes should be raised if the government is currently running a budget deficit. 
B) taxes should be lowered but only if the government is running a budget surplus. 
C) the government should cut taxes and/or increase expenditures in order to stimulate aggregate demand. 
D) both a and b are correct. 
E) all of the above are correct. 
A) taxes should be raised if the government is currently running a budget deficit. 
B) taxes should be lowered but only if the government is running a budget surplus. 
C) the government should cut taxes and/or increase expenditures in order to stimulate aggregate demand. 
D) both a and b are correct. 
E) all of the above are correct.

Question 2

What happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to achieve full employment?

Accepted Answer

A) The AD curve shifts to the right, the SRAS curve shifts to the left, and long-run equilibrium is achieved. 
B) The AD curve shifts to the right, the price level increases, and long-run equilibrium is achieved. 
C) The AD curve shifts to the right, the price level increases, and unemployment increases. 
D) The AD curve shifts to the left, the price level increases, and employment decreases. 
E) The SRAS curve shifts to the left, the price level decreases, and long-run equilibrium is achieved. 
A) The AD curve shifts to the right, the SRAS curve shifts to the left, and long-run equilibrium is achieved. 
B) The AD curve shifts to the right, the price level increases, and long-run equilibrium is achieved. 
C) The AD curve shifts to the right, the price level increases, and unemployment increases. 
D) The AD curve shifts to the left, the price level increases, and employment decreases. 
E) The SRAS curve shifts to the left, the price level decreases, and long-run equilibrium is achieved.

Question 3

If fiscal policy is going to exert a stabilizing impact on the economy, it must be

Accepted Answer

A) instituted by the Federal Reserve system. 
B) expansionary during an economic boom but restrictive during a recession. 
C) timed correctly. 
D) passed by a three-fifths majority in Congress. 
A) instituted by the Federal Reserve system. 
B) expansionary during an economic boom but restrictive during a recession. 
C) timed correctly. 
D) passed by a three-fifths majority in Congress.

Question 4

Use the figure below to answer the following question(s).
Figure 11-1  
-Refer to Figure 11-1. Consider the short-run aggregate supply curve SRAS. What is the segment between a and b called?

Accepted Answer

A) the new classical range 
B) the Keynesian range 
C) the flexible wage and price range 
D) the balanced budget range 
A) the new classical range 
B) the Keynesian range 
C) the flexible wage and price range 
D) the balanced budget range

Question 5

Because of automatic stabilizers, government budget deficits are

Accepted Answer

A) positive during both expansions and contractions. 
B) negative during both expansions and contractions. 
C) zero if averaged out over the entire business cycle. 
D) larger during expansions and smaller during contractions. 
E) smaller during expansions and larger during contractions. 
A) positive during both expansions and contractions. 
B) negative during both expansions and contractions. 
C) zero if averaged out over the entire business cycle. 
D) larger during expansions and smaller during contractions. 
E) smaller during expansions and larger during contractions.

Question 6

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?

Accepted Answer

A) Congress provides $90 billion in relief aid for hurricane victims. 
B) Congress appropriates $50 billion to help the needy, and the appropriation is financed by a tax on wealth. 
C) Income tax receipts are smaller because of a decline in real GDP during a recession. 
D) Congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession. 
A) Congress provides $90 billion in relief aid for hurricane victims. 
B) Congress appropriates $50 billion to help the needy, and the appropriation is financed by a tax on wealth. 
C) Income tax receipts are smaller because of a decline in real GDP during a recession. 
D) Congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession.

Question 7

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

Accepted Answer

A) a decrease in tax rates 
B) an increase in tax rates 
C) a reduction in government expenditures 
D) a budget surplus 
A) a decrease in tax rates 
B) an increase in tax rates 
C) a reduction in government expenditures 
D) a budget surplus

Question 8

The marginal propensity to consume is defined as the

Accepted Answer

A) fraction of total income not spent on consumption. 
B) proportion of any change in income that is spent on consumption. 
C) fraction of total income spent on consumption. 
D) fraction of a change in income that is saved. 
A) fraction of total income not spent on consumption. 
B) proportion of any change in income that is spent on consumption. 
C) fraction of total income spent on consumption. 
D) fraction of a change in income that is saved.

Question 9

Why does a tax change affect aggregate demand?

Accepted Answer

A) A tax change alters saving by an equal amount. 
B) A tax change alters imports and net exports. 
C) A tax change alters government spending by an equal amount. 
D) A tax change alters disposable income and consumption spending. 
A) A tax change alters saving by an equal amount. 
B) A tax change alters imports and net exports. 
C) A tax change alters government spending by an equal amount. 
D) A tax change alters disposable income and consumption spending.

Question 10

Within the framework of the Keynesian model, which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?

Accepted Answer

A) The rate of inflation would decline. 
B) The rate of inflation would rise. 
C) A recession would develop. 
D) Interest rates would fall. 
A) The rate of inflation would decline. 
B) The rate of inflation would rise. 
C) A recession would develop. 
D) Interest rates would fall.

Question 11

According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?

Accepted Answer

A) a tax cut 
B) a budget deficit 
C) a budget surplus 
D) an increase in the money supply 
A) a tax cut 
B) a budget deficit 
C) a budget surplus 
D) an increase in the money supply

Question 12

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

Accepted Answer

A) counteract the recession. 
B) prolong the recession and increase its severity. 
C) end the recession sooner. 
D) increase the level of real GDP. 
A) counteract the recession. 
B) prolong the recession and increase its severity. 
C) end the recession sooner. 
D) increase the level of real GDP.

Question 13

Long lags make discretionary policy less effective because

Accepted Answer

A) by the time the impact of a policy is felt, the problem may have been corrected by market forces. 
B) it is easier to forecast an expansion than a recession. 
C) it is easier to forecast a recession than an expansion. 
D) automatic stabilizers are subject to longer lags than are discretionary policies. 
A) by the time the impact of a policy is felt, the problem may have been corrected by market forces. 
B) it is easier to forecast an expansion than a recession. 
C) it is easier to forecast a recession than an expansion. 
D) automatic stabilizers are subject to longer lags than are discretionary policies.

Question 14

Use the figure below to answer the following question(s).
Figure 11-1  
-Refer to Figure 11-2. Which of the following will a Keynesian most likely favor if the economy is operating at point a?

Accepted Answer

A) a tax cut 
B) an increase in government expenditures 
C) restrictive fiscal policy 
D) an increase in the budget deficit 
A) a tax cut 
B) an increase in government expenditures 
C) restrictive fiscal policy 
D) an increase in the budget deficit

Question 15

The government is pursuing an expansionary fiscal policy if it

Accepted Answer

A) decreases government spending and increases taxes. 
B) increases government spending or increases taxes. 
C) decreases government spending or reduces taxes. 
D) increases government spending and/or reduces taxes. 
A) decreases government spending and increases taxes. 
B) increases government spending or increases taxes. 
C) decreases government spending or reduces taxes. 
D) increases government spending and/or reduces taxes.

Question 16

What is fiscal policy? What is the relationship between fiscal policy and the federal budget?

Accepted Answer

Fiscal policy is using the government's

Question 17

If an economy is experiencing both full employment and price stability, within the Keynesian model, a major tax reduction probably would cause

Accepted Answer

A) an increase in unemployment in the near future. 
B) an increase in the general level of prices unless government expenditures are also reduced. 
C) an increase in the interest rate since individuals will reduce their savings in response to the tax cut. 
D) a decrease in consumption unless the expected budget deficit is financed by selling bonds to foreigners. 
A) an increase in unemployment in the near future. 
B) an increase in the general level of prices unless government expenditures are also reduced. 
C) an increase in the interest rate since individuals will reduce their savings in response to the tax cut. 
D) a decrease in consumption unless the expected budget deficit is financed by selling bonds to foreigners.

Question 18

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the

Accepted Answer

A) demand for government-provided public goods. 
B) level of aggregate demand required to achieve full employment of resources. 
C) size and quality of the labor force. 
D) need to expand or contract the supply of money. 
A) demand for government-provided public goods. 
B) level of aggregate demand required to achieve full employment of resources. 
C) size and quality of the labor force. 
D) need to expand or contract the supply of money.

Question 19

Keynesian analysis suggests that a planned budget surplus

Accepted Answer

A) will affect aggregate demand only if the money supply decreases by the size of the surplus. 
B) will stimulate both consumption and income. 
C) will stimulate output and employment. 
D) is proper during periods of inflation but may increase unemployment if timed improperly. 
A) will affect aggregate demand only if the money supply decreases by the size of the surplus. 
B) will stimulate both consumption and income. 
C) will stimulate output and employment. 
D) is proper during periods of inflation but may increase unemployment if timed improperly.

Question 20

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

Accepted Answer

A) the sharp reduction in the supply of money during 1929-1933 and another monetary contraction in 1938. 
B) the high interest rates of the 1930s. 
C) the double-digit inflation of the 1930s. 
D) insufficient aggregate demand and the failure of market forces to direct the economy back to full employment. 
A) the sharp reduction in the supply of money during 1929-1933 and another monetary contraction in 1938. 
B) the high interest rates of the 1930s. 
C) the double-digit inflation of the 1930s. 
D) insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.

When an economy is operating below its potential capacity, Keynesian economists argue that

What happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to achieve full employment?

If fiscal policy is going to exert a stabilizing impact on the economy, it must be

Use the figure below to answer the following question(s). Figure 11-1 -Refer to Figure 11-1. Consider the short-run aggregate supply curve SRAS. What is the segment between a and b called?

Because of automatic stabilizers, government budget deficits are

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

The marginal propensity to consume is defined as the

Why does a tax change affect aggregate demand?

Within the framework of the Keynesian model, which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?

According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

Long lags make discretionary policy less effective because

Use the figure below to answer the following question(s). Figure 11-1 -Refer to Figure 11-2. Which of the following will a Keynesian most likely favor if the economy is operating at point a?

The government is pursuing an expansionary fiscal policy if it

What is fiscal policy? What is the relationship between fiscal policy and the federal budget?

If an economy is experiencing both full employment and price stability, within the Keynesian model, a major tax reduction probably would cause

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the

Keynesian analysis suggests that a planned budget surplus

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

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

When an economy is operating below its potential capacity, Keynesian economists argue that

What happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to achieve full employment?

If fiscal policy is going to exert a stabilizing impact on the economy, it must be

Use the figure below to answer the following question(s). Figure 11-1 -Refer to Figure 11-1. Consider the short-run aggregate supply curve SRAS. What is the segment between a and b called?

Because of automatic stabilizers, government budget deficits are

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

The marginal propensity to consume is defined as the

Why does a tax change affect aggregate demand?

Within the framework of the Keynesian model, which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?

According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

Long lags make discretionary policy less effective because

Use the figure below to answer the following question(s). Figure 11-1 -Refer to Figure 11-2. Which of the following will a Keynesian most likely favor if the economy is operating at point a?

The government is pursuing an expansionary fiscal policy if it

What is fiscal policy? What is the relationship between fiscal policy and the federal budget?

If an economy is experiencing both full employment and price stability, within the Keynesian model, a major tax reduction probably would cause

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the

Keynesian analysis suggests that a planned budget surplus

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

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