Deck 15: Fiscal Policy

Question 1

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

A) $120 billion increase in government spending and $50 billion increase in tax revenue.
B) $140 billion increase in government spending and $70 billion increase in tax revenue.
C) $160 billion increase in government spending and $120 billion increase in tax revenue.
D) $220 billion increase in government spending and $100 billion increase in tax revenue.

Answer 1

A

Question 2

If the spending multiplier is 3 and the desired amount of increase in real GDP is $90 million, then by how much would government spending have to increase?

A) $270 million.
B) $90 million.
C) $30 million.
D) $0.

Answer 2

C

Question 3

If the marginal propensity to consume (MPC) is 0.75 and if policy makers wish  to increase real GDP by $300 million to fight a recession, then by how much  would taxes have to change?

A)  -$30 million
B)  -$50 million
C) -100 million
D) -300 million

Answer 3

C

Question 4

A balanced budget is present when:

A) the economy is at full employment.
B) the actual level of aggregate spending equals the planned level of spending.
C) public sector spending equals private sector spending.
D) government revenues equal government expenditures.

Question 5

A change in government spending and/or taxes as the result of legislation is called:

A) open market operations of the Federal Reserve.
B) discretionary fiscal policy.
C) balanced budget operations.
D) discretionary monetary policy.

Question 6

In the _______ range of the aggregate supply curve, expansionary fiscal policy that causes aggregate ______ to increase will lead to a higher price level and a higher equilibrium level of real GDP.

A) Keynesian, supply
B) Classical, demand
C) Intermediate, demand
D) Intermediate, supply

Question 7

The formula to compute the spending multiplier is:

A) 1 / (MPC + MPS).
B) 1 / (1 − MPC).
C) 1 / (1 − MPS).
D) 1 / (C + I).

Question 8

Which of the following is an example of expansionary fiscal policy?

A) Increase taxes.
B) Decrease government spending.
C) Increase government spending.
D) Increase taxes and decrease government spending equally.

Question 9

If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

A) − $240 million.
B) − $200 million.
C) − $180 million.
D) − $50 million.

Question 10

If an economy were experiencing a high rate of unemployment as the result of insufficient aggregate demand, a Keynesian economist would favor:

A) an increase in taxes coupled with a reduction in government expenditures of equal size .
B) an increase in taxes .
C) a reduction in taxes, without any offsetting reduction in government expenditures.
D) maintenance of a balanced budget.

Question 11

The Keynesian analysis of fiscal policy argues that:

A) fiscal policy should generally be expansionary except during periods of economic recession.
B) fiscal policy should generally be restrictive except during inflationary booms.
C) the federal budget should be balanced annually except during war.
D) the federal budget should be used to maintain aggregate demand at a level consistent with full employment.

Question 12

If the marginal propensity to consume (MPC) is 0.96, the value of the spending multiplier is:

A) 25.
B) 40.
C) 96.
D) 100.

Question 13

If the marginal propensity to consume (MPC) is 0.75, and if the goal is to increase real GDP by $400 million, then by how much would government spending have to change to generate this increase in real GDP?

A) $140 million.
B) $100 million.
C) $200 million.
D) $400 million.

Question 14

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:

A) expanding and contracting the money supply.
B) encouraging business to expand or contract investment.
C) regulating net exports.
D) decreasing government spending or increasing taxes.

Question 15

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?

A) a reduction in the money supply
B) less government regulation
C) increase federal spending
D) higher taxes

Question 16

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

A) $240 million.
B) $200 million.
C) $180 million.
D) $40 million.

Question 17

As the marginal propensity to consume (MPC) decreases, the spending multiplier:

A) increases.
B) decreases.
C) remains constant.
D) becomes undefinable.

Question 18

A government spending and taxation policy to achieve macroeconomic goals is known as:

A) countercyclical policy.
B) fiscal policy.
C) monetary policy.
D) a balanced budget.

Question 19

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

A) increased government spending
B) higher taxes
C) a balanced-budget reduction in both spending and taxes
D) an expansion in the money supply

Question 20

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

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 21

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

A) MPC − 1.
B) (MPC − 1) / MPC.
C) 1 / MPC.
D) 1 − [1 / (1 − MPC)].

Question 22

If the MPC = 1, the spending multiplier is:

A) infinite.
B) zero.
C) 1.
D) 10.

Question 23

Assume that an economy's spending multiplier is 4. If this economy is in equilibrium at $2,000 billion, then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?

A) $500 billion spending cut.
B) $500 billion spending increase.
C) $125 billion spending cut.
D) $125 billion spending increase.

Question 24

If the marginal propensity to consume = 0.75, then:

A) the marginal propensity to save = 0.75.
B) the marginal propensity to save = 1.33.
C) the marginal propensity to save = 0.20.
D) the marginal propensity to save = 0.25.

Question 25

A tax multiplier equal to − 4.30 would imply that a $100 tax increase would lead to a:

A) $430 decline in real GDP.
B) $430 increase in real GDP.
C) 4.3 percent increase in real GDP.
D) 4.3 percent decrease in real GDP.

Question 26

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always equals:

A) 1.
B) 0.
C) the interest rate.
D) the marginal propensity to invest (MPI).

Question 27

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

A) 1.
B) 9.
C) 10.
D) 90.

Question 28

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:

A) decreasing government tax revenue by approximately $33 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.

Question 29

Find the tax multiplier if the MPC is 0.75.

A) − 4.
B) − 3.
C) 0.33.
D) 3.

Question 30

If the marginal propensity to consume (MPC) is 0.75, the value of the spending multiplier is:

A) 0.
B) 1.
C) 4.
D) 5.

Question 31

Exhibit 15-1 Disposable income and consumption data $$\begin{array} { | c | c | c | } \hline \text { Income (Y) } & \begin{array} { c } \text { Change in } \\\text { Disposable Income }\end{array} & \text { Consumption (C) } \\\hline 0 & & 500 \\1,000 & 1,000 & 1,400 \\2,000 & 1,000 & 2,200 \\3,000 & 1,000 & 2,900 \\4,000 & 1,000 & 3,500 \\5,000 & 1,000 & 4,000 \\\hline\end{array}$$ In Exhibit 15-1, when disposable income is increased from $2,000 to $3,000 to $4,000,

A) total consumption increases by $1,000.
B) the marginal propensity to consume remains constant.
C) the marginal propensity to consume decreases from 0.7 to 0.6.
D) the marginal propensity to consume decreases from 0.8 to 0.7.

Question 32

An increase in government spending by $100 would, if the MPC = 0.90, result in an increase in real GDP by:

A) $1,000.
B) $9,000.
C) $900.
D) $190.

Question 33

The change in saving divided by the change in income is the:

A) marginal propensity to save.
B) saving function.
C) average propensity to save.
D) extra propensity to save.

Question 34

If your income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC) is:

A) 0.20.
B) 0.40.
C) 0.50.
D) 0.80.

Question 35

If your income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

A) 0.2.
B) 0.4.
C) 0.5.
D) 0.8.

Question 36

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?

A) $300 decrease in taxes.
B) $75 increase in government spending.
C) $75 decrease in taxes.
D) $75 decrease in government spending.

Question 37

If the marginal propensity to consume (MPC) is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:

A) increase by $50.
B) decrease by $50.
C) increase by $200.
D) decrease by $200.

Question 38

The spending multiplier is defined as:

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).

Question 39

Assume the marginal propensity to consume (MPC) is 0.80 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:

A) left by $80 billion.
B) right by $200 billion.
C) right by $400 billion.
D) left by $400 billion.

Question 40

If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is:

A) 1.
B) 2.
C) 4.
D) 9.

Question 41

To help reduce the price level, the government could :

A) run budget deficits.
B) decrease taxes.
C) increase government spending.
D) run budget surpluses.

Question 42

Exhibit 15-6 Aggregate demand and supply model

In Exhibit 15-6, if the aggregate demand curve is at AD₃, the government should:

A) raise taxes to move to AD₁.
B) cut taxes to move to AD₂.
C) not change its behavior.
D) cut spending to move to AD₂.

Question 43

Exhibit 15-6 Aggregate demand and supply model

In Exhibit 15-6, if the aggregate demand curve is at AD₂, the government should:

A) raise taxes to move to AD₁.
B) not change its policy.
C) cut taxes to move to AD₃.
D) cut spending to move to AD₃.

Question 44

When the federal government is running a budget deficit:

A) government tax revenues exceed government expenditures.
B) government expenditures exceed government tax revenues.
C) the economy must be in an economic recession.
D) the size of the national debt will decline.

Question 45

Which of the following would most likely occur if the federal government decreased its spending and reduced the size of the budget deficit during a period of full employment?

A) The rate of inflation would decline.
B) The rate of inflation would rise.
C) The government spending multiplier would double .
D) Interest rates would fall.

Question 46

"Last month unemployment fell to 4 percent, its lowest level in years. The economy is growing rapidly, but consumer prices have risen at an annual rate of 10 percent during the last six months." Which of the following policies would be most appropriate under these circumstances?

A) both an increase in government spending and a decrease in taxes
B) an increase in taxes
C) a reduction in taxes
D) an increase in government spending

Question 47

Exhibit 15-6 Aggregate demand and supply model

In Exhibit 15-6, if the aggregate demand curve is at AD ₁ , in order to reach the full-employment levl of GDP the government should :

A) raise taxes to move to AD₂.
B) cut taxes to move to AD₂.
C) cut taxes to move to AD₃.
D) cut spending to move to AD₂.

Question 48

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?

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 49

If the economy is experiencing unemployment, then the most appropriate government policy would be to:

A) shift the aggregate demand curve by using a tax increase coupled with spending cuts.
B) shift the aggregate supply  curve by using a tax increase coupled with more spending .
C) shift the aggregate supply curve by using a tax cut coupled with spending cuts.
D) shift the aggregate demand curve by using a tax cut coupled with more spending.

Question 50

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:

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.

Question 51

When the government levies a $100 million tax on people's income and puts the $100 million back into the economy in the form of a spending program, such as new interstate highway construction, the:

A) tax, then, generates a $100 million decline in real GDP.
B) level of real GDP expands by $100 million.
C) effect on real GDP is uncertain.
D) tax multiplier overpowers the income multiplier, triggering a rollback in real GDP.

Question 52

If the economy is experiencing inflation, then the most appropriate government policy would be to:

A) shift the aggregate demand curve by using a tax increase coupled with spending cuts.
B) shift the aggregate demand curve by using a tax increase coupled with more spending.
C) shift the aggregate demand curve by using a tax cut coupled with spending cuts.
D) shift the aggregate supply curve by using a tax cut coupled with more spending.

Question 53

According to Keynesian economics, what impact would a balanced budget amendment to our constitution have on our national economy?

Question 54

Describe appropriate discretionary fiscal policy according to Keynesian economics to smooth out the business cycle.

Question 55

Automatic stabilizers are government programs that:

A) exaggerate the ups and downs in aggregate demand without legislative action.
B) bring expenditures and revenues automatically into balance without legislative action.
C) shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion.
D) increase tax collections automatically during a recession.

Question 56

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

A) $500 billion decrease in aggregate demand.
B) $500 billion increase in aggregate demand.
C) $1,000 billion increase in aggregate demand.
D) $1,000 billion decrease in aggregate demand.

Question 57

The government wishes to reduce he price level  by reducing real GDP by $400 billion. Assuming a tax multiplier of 4 and a government spending multiplier of 5, which of the following policy prescriptions would reduce the aggregate demand curve  by $400 billion?

A) Decreasing government spending by $400 billion and increasing taxes by $100 billion .
B) Decreasing government spending by $160 billion and decreasing taxes by $100 billion.
C) Decreasing government spending by $40 billion and decreasing taxes by $40 billion.
D) Decreasing government spending by $100 billion  and keeping taxes the same.

Question 58

Automatic stabilizers create ________ during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _________ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

A) fiscal stimulus, fiscal contraction
B) fiscal stimulus, fiscal stimulus
C) fiscal contraction, fiscal stimulus
D) fiscal contraction, fiscal contraction

Question 59

The balanced budget multiplier is always equal to:

A) 0.50.
B) 0.75.
C) 1 / MPC.
D) 1.

Question 60

A decrease in real GDP would affect the U.S. economy by:

A) cutting tax revenues and raising government expenditures.
B) cutting government expenditures and raising tax revenues.
C) raising both tax revenues and government expenditures.
D) cutting both government expenditures and tax revenues.

Question 61

Automatic stabilizers stabilize the level of real GDP because:

A) Congress quickly passes laws that change spending and tax revenue.
B) federal expenditures and tax revenues change as the level of real GDP changes.
C) the spending and tax multiplier are constant.
D) wages are controlled by the minimum wage law.

Question 62

Unemployment compensation payments:

A) rise during a recession and thus reduce the severity of the recession.
B) rise during a recession and thus increase the severity of the recession.
C) rise during inflationary episodes and thus reduce the severity of the inflation.
D) fall during a recession and thus increase the severity of the recession.

Question 63

When an economy dips into recession, automatic stabilizers will:

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.

Question 64

Programs that automatically increase government spending (relative to revenue) during a recession and automatically decrease government spending (relative to revenue) during an economic boom are called:

A) discretionary fiscal policy.
B) supply-side programs.
C) automatic stabilizers.
D) tax credits.

Question 65

Suppose the economy was at full employment GDP and then consumer optimism soars. If automatic stabilizers are in place, the stabilizers will result in:

A) higher tax collection and higher government spending on transfer payments, which helps offset a recession.
B) higher tax collection and lower government spending on transfer payments, which helps slow growth in real GDP.
C) lower tax collection and higher government spending on transfer payments, which helps slow growth in real GDP.
D) lower tax collection and lower government spending on transfer payments, which helps offset a recession.

Question 66

Unemployment insurance payments act as automatic stabilizers by:

A) allowing for more consumer spending during prosperity.
B) making the unemployment rate worse during a recession.
C) allowing for more consumer spending during a recession.
D) changing the Phillips curve to a Laffer curve.

Question 67

Income tax collections:

A) fall during periods of prosperity, thus increase federal budget deficits.
B) rise during periods of prosperity, thus reduce federal budget deficits.
C) fall during recessions, thus increase the problem of unemployment.
D) rise during recessions, thus increase the problem of unemployment.

Question 68

Automatic stabilizers "lean against the prevailing wind" of the business cycle because:

A) wages are controlled by the minimum wage law.
B) federal expenditures and tax revenues change as the level of real GDP changes.
C) the spending and tax multipliers are constant.
D) they include the power of special interests.

Question 69

Structures in the economy increase aggregate demand when the economy is in recession and decrease aggregate demand when the economy is inflationary are known as:

A) tax transfers.
B) automatic stabilizers.
C) accelerators.
D) depreciation.

Question 70

Which of the following is not an automatic stabilizer?

A) Personal income tax revenue.
B) Corporate income tax revenue.
C) Unemployment compensation benefits.
D) Property tax revenue.

Question 71

Because of the automatic stabilizers, a decline in the level of economic activity will cause:

A) a reduction in tax revenues collected.
B) a reduction in government expenditures.
C) a greater budget surplus.
D) Congress to vote for a tax cut.

Question 72

When the economy enters a recession, automatic stabilizers create:

A) higher taxes.
B) more discretionary spending.
C) budget deficits.
D) budget surpluses.

Question 73

An advantage of automatic stabilizers is that this type of fiscal policy

A) requires precise knowledge of full-employment real GDP.
B) can be influenced by special interest groups when their concerns are valid.
C) is not subject to lag time problems.
D) accelerates the direction in which the economy is moving at the time.

Question 74

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?

A) Congress votes for a federal investment in infrastructure.
B) corporate subsidies for green energy investments
C) unemployment benefits
D) a stimulus package that reduces personal income taxes

Question 75

Personal income taxes:

A) make recessions and inflationary episodes more severe.
B) make recessions and inflationary episodes less severe.
C) make recessions more severe and inflationary episodes less severe.
D) make recessions less severe and inflationary episodes more severe.

Question 76

The unemployment compensation program:

A) makes recessions more severe.
B) makes recession less severe.
C) makes recessions more severe and inflationary episodes less severe.
D) makes recessions less severe and inflationary episodes more severe.

Question 77

On a graph showing the influence of automatic stabilizers on the economy, tax revenues and real GDP have a(n):

A) direct relationship as shown by an upward-sloping line T.
B) direct relationship as shown by a downward-sloping line T.
C) inverse relationship as shown by an upward-sloping line T.
D) inverse relationship as shown by a downward-sloping line T.

Question 78

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

A) welfare payments
B) foreign aid
C) defense spending
D) highway construction

Question 79

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

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 80

Income tax collections:

A) rise during a recession, thus reduce the severity of the recession.
B) rise during a recession, thus increase the severity of the recession.
C) fall during inflationary episodes, thus increase the severity of the inflation.
D) fall during a recession, thus reducing the severity of the recession.