Question 1

An increase or decrease in taxes will have a multiplier effect on equilibrium GDP on the demand side.

Accepted Answer

A) True 
 B)False  True

Question 2

Fiscal policy may be mistimed due to

Accepted Answer

A)  the jet lag. 
B)  the putting lag. 
C)  the impact lag. 
D)  All of these. 
A)  the jet lag. 
B)  the putting lag. 
C)  the impact lag. 
D)  All of these. C

Question 3

Explain why a change in income tax rates causes the consumption schedule to change slope.

Accepted Answer

An income tax rate determines the portion of an increase in income that is taken in taxes. If the rate increases, then for any increase in income, disposable income increases by a smaller amount. When a portion of the increase in disposable income is consumed, the consumption spending is less than it would be if the income tax rate was lower. The smaller increase in consumption for a given increase in income means that the numerical value of the MPC is smaller, and the slope of the consumption schedule is flatter. Conversely, if the income tax rate decreases, then for any increase in income, disposable income increases by a larger amount. The larger increase in consumption for a change in income means that the numerical value of the MPC is larger and the consumption schedule is steeper.

Question 4

Figure 11-2
 
Which graph in Figure 11-2 best reflects a supply-sider's view of the impact of an increase in the personal income tax rate?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
A)  1 
B)  2 
C)  3 
D)  4

Question 5

When the economy has an income tax that is variable, the multiplier is

Accepted Answer

A)  unchanged. 
B)  larger. 
C)  smaller. 
D)  unpredictable. 
A)  unchanged. 
B)  larger. 
C)  smaller. 
D)  unpredictable.

Question 6

One of the practical issues in the choice of government spending or taxes to change aggregate demand is how large a

Accepted Answer

A)  change in demand we want. 
B)  trade deficit we want. 
C)  budget deficit we want. 
D)  government sector we want. 
A)  change in demand we want. 
B)  trade deficit we want. 
C)  budget deficit we want. 
D)  government sector we want.

Question 7

A "conservative" would most likely argue in favor of

Accepted Answer

A)  tax increases when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. 
B)  tax cuts when fiscal restraint is necessary, and spending cuts when fiscal stimulus is necessary. 
C)  tax cuts when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. 
D)  spending increases when fiscal expansion is necessary, and tax increases when fiscal stimulus is necessary. 
A)  tax increases when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. 
B)  tax cuts when fiscal restraint is necessary, and spending cuts when fiscal stimulus is necessary. 
C)  tax cuts when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. 
D)  spending increases when fiscal expansion is necessary, and tax increases when fiscal stimulus is necessary.

Question 8

Suppose that the U.S. personal income tax was eliminated and replaced with a fixed tax that raised the exact same amount of revenue. The multiplier would be

Accepted Answer

A)  larger. 
B)  unchanged. 
C)  smaller. 
D)  incalculable. 
A)  larger. 
B)  unchanged. 
C)  smaller. 
D)  incalculable.

Question 9

An income tax reduces the size of the multiplier

Accepted Answer

A) True 
 B)False

Question 10

Supply-side economists

Accepted Answer

A)  favor a smaller government. 
B)  favor higher marginal tax rates. 
C)  favor deficit spending. 
D)  all of these. 
A)  favor a smaller government. 
B)  favor higher marginal tax rates. 
C)  favor deficit spending. 
D)  all of these.

Question 11

The government's fiscal policy is its plan to influence aggregate demand by changing

Accepted Answer

A)  the money supply. 
B)  minimum wage levels. 
C)  sales taxes. 
D)  taxation and spending. 
A)  the money supply. 
B)  minimum wage levels. 
C)  sales taxes. 
D)  taxation and spending.

Question 12

In order to maintain a balanced budget, Congress has decided to cut taxes and government spending both by $25 billion. What will happen to GDP?

Accepted Answer

A)  It will increase. 
B)  It will remain the same. 
C)  It will decrease. 
D)  It's impossible to know without the multiplier. 
A)  It will increase. 
B)  It will remain the same. 
C)  It will decrease. 
D)  It's impossible to know without the multiplier.

Question 13

If a state government reduces property taxes for residents at the same time that it increases the state income tax, what will happen to the expenditures schedule of the residents of this state?

Accepted Answer

A)  It shifts upward. 
B)  It shifts downward. 
C)  It becomes less steep. 
D)  It becomes steeper. 
E)  It does not change. 
A)  It shifts upward. 
B)  It shifts downward. 
C)  It becomes less steep. 
D)  It becomes steeper. 
E)  It does not change.

Question 14

Government purchases have the same multiplier effect as business investment spending.

Accepted Answer

A) True 
 B)False

Question 15

Explain some of the steps that a government would wish to adopt in an inflationary environment.

Accepted Answer

In the case of an inflationary gap, real

Question 16

Any tax reduction shifts the consumption schedule upward.

Accepted Answer

A) True 
 B)False

Question 17

Tax cuts associated with supply-side economics often lead to increased

Accepted Answer

A)  federal budget surpluses. 
B)  federal budget deficits. 
C)  foreign trade surpluses. 
D)  government spending. 
A)  federal budget surpluses. 
B)  federal budget deficits. 
C)  foreign trade surpluses. 
D)  government spending.

Question 18

Figure 11-1
 
In Figure 11-1, the economy is experiencing a(n)

Accepted Answer

A)  inflationary gap equal to EF. 
B)  inflationary gap equal to ET. 
C)  recessionary gap equal to ET. 
D)  recessionary gap equal to FT. 
A)  inflationary gap equal to EF. 
B)  inflationary gap equal to ET. 
C)  recessionary gap equal to ET. 
D)  recessionary gap equal to FT.

Question 19

If a "liberal" wanted to decrease aggregate demand, which of the following would he or she tend to favor?

Accepted Answer

A)  An increase in government spending, because it will increase the size of the public sector. 
B)  A decrease in government spending, because it keeps the public sector small. 
C)  An increase in transfer payments, because it has a larger multiplier than tax changes. 
D)  An increase in taxes, because it makes the public sector larger. 
A)  An increase in government spending, because it will increase the size of the public sector. 
B)  A decrease in government spending, because it keeps the public sector small. 
C)  An increase in transfer payments, because it has a larger multiplier than tax changes. 
D)  An increase in taxes, because it makes the public sector larger.

Question 20

If all variable taxes in the United States were removed and only fixed taxes remained, what would be the effect on the expenditures schedule?

Accepted Answer

A)  The expenditure schedule will shift upward and become steeper. 
B)  The expenditure schedule will shift upward and become less steep. 
C)  The expenditure schedule will shift downward and become less steep. 
D)  The expenditure schedule will shift downward and become steeper. 
A)  The expenditure schedule will shift upward and become steeper. 
B)  The expenditure schedule will shift upward and become less steep. 
C)  The expenditure schedule will shift downward and become less steep. 
D)  The expenditure schedule will shift downward and become steeper.

Exam 27: Managing Aggregate Demand: Fiscal Policy

An increase or decrease in taxes will have a multiplier effect on equilibrium GDP on the demand side.

Fiscal policy may be mistimed due to

Explain why a change in income tax rates causes the consumption schedule to change slope.

Figure 11-2 Which graph in Figure 11-2 best reflects a supply-sider's view of the impact of an increase in the personal income tax rate?

When the economy has an income tax that is variable, the multiplier is

One of the practical issues in the choice of government spending or taxes to change aggregate demand is how large a

A "conservative" would most likely argue in favor of

Suppose that the U.S. personal income tax was eliminated and replaced with a fixed tax that raised the exact same amount of revenue. The multiplier would be

An income tax reduces the size of the multiplier

Supply-side economists

The government's fiscal policy is its plan to influence aggregate demand by changing

In order to maintain a balanced budget, Congress has decided to cut taxes and government spending both by $25 billion. What will happen to GDP?

If a state government reduces property taxes for residents at the same time that it increases the state income tax, what will happen to the expenditures schedule of the residents of this state?

Government purchases have the same multiplier effect as business investment spending.

Explain some of the steps that a government would wish to adopt in an inflationary environment.

Any tax reduction shifts the consumption schedule upward.

Tax cuts associated with supply-side economics often lead to increased

Figure 11-1 In Figure 11-1, the economy is experiencing a(n)

If a "liberal" wanted to decrease aggregate demand, which of the following would he or she tend to favor?

If all variable taxes in the United States were removed and only fixed taxes remained, what would be the effect on the expenditures schedule?

What Is Economics

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: an Initial Look

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation

Bringing in the Supply Side: Unemployment and Inflation

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate Over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off Between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder

Exchange Rates and the Macroeconomy

Contemporary Issues in the Us Economy

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