Deck 16: Fiscal Policy: How to Stimulate the Economy

Question 1

Aggregate supply is defined as

A) the total output that business produces and plans to sell at a given price level.
B) the total dollar amount of goods and services that consumers, investors, foreigners, and governments plan to buy at a given price level.
C) the total quantity of goods that sellers would like to sell during a given period, at various prices, holding other things constant.
D) the total quantity of goods that buyers would like to buy during a given period, at various prices, holding other things constant.

Answer 1

A

Question 2

Keynes defined aggregate supply as

A) the total dollar amount of money spent on goods and services by consumers, investors, government and net spending by foreigners at a given price level.
B) the total dollar amount of money spent on goods and services by consumers at a given price level.
C) the total output produced and offered for sale at a given price level by all economic units.
D) the total output produced and offered for sale at a given price level by the private sector.

Answer 2

C

Question 3

What is Monetarism?

A) The belief that the economic system works well except when the government makes mistakes in monetary policy.
B) The belief that monetary policy can stabilize the economy in the short run.
C) The belief that the Federal Reserve should continually adjust the money supply to accommodate fluctuations in demand over the business cycle.
D) The belief that an increase in the money supply will lead to an increase in GDP.

Answer 3

A

Question 4

Critics of Monetarism argue that the factor that is more important than the supply of money is

A) the expansion and contraction of credit.
B) the rise and fall of demand deposits.
C) the quantity of currency in circulation.
D) the frequency of outside shocks that cause booms and busts.

Question 5

What does the term, "fiscal policy," mean?

A) Actions taken by the Federal Reserve to change the interest rate.
B) Actions taken by the Financial Accounting Standards Board to establish standards for accountants.
C) Actions taken by the Surgeon General to set standards for diet and exercise.
D) Actions taken by the government involving spending and collection of revenues.

Question 6

A government budget deficit is defined as

A) the amount that a government owes to bondholders.
B) the amount that a government refunds to taxpayers.
C) the amount the government spends in excess of revenues.
D) the amount the government collects in excess of expenditures.

Question 7

The basic formula developed in the simplified Keynesian model is

A) raise taxes and lower spending to fight unemployment during recessions.
B) lower taxes and increase spending to fight unemployment during recessions.
C) raise taxes and increase spending to fight unemployment during recessions.
D) lower taxes and lower spending to fight unemployment during recessions.

Question 8

The basic formula developed in the simplified Keynesian model is

A) raise taxes and lower spending to fight inflation during expansions.
B) lower taxes and increase spending to fight inflation during expansions.
C) raise taxes and increase spending to fight inflation during expansions.
D) lower taxes and lower spending to fight inflation during expansions.

Question 9

A significant political problem hindering the implementation of Keynesian policies during a recession is

A) reaching agreement on whose taxes should be raised.
B) reaching agreement on whose taxes should be cut.
C) reaching agreement on which government programs should be cut.
D) reaching agreement on reducing the size of the budget deficit.

Question 10

The Keynesian model provides no simple fiscal solution to

A) a situation of high unemployment and low inflation.
B) a situation of low unemployment and high inflation.
C) a situation of high unemployment and high inflation.
D) a situation of low unemployment and low inflation.

Question 11

The fiscal policy that faces the fewest political obstacles is

A) raising taxes.
B) cutting spending.
C) cutting military spending.
D) cutting taxes.

Question 12

When military spending declines at the conclusion of a war, what usually happens?

A) There is a major economic expansion.
B) There is a recession.
C) There is an increase in inflation.
D) There is an increase in aggregate demand.

Question 13

During the Clinton years (1993 to 2001),

A) the economy was characterized by a long period of stagnation.
B) the economy was characterized by a long period of rapid economic growth.
C) the economy was characterized by slow growth and stagnant wages during the first half of the period and by rapid growth and rising wages in the second half.
D) the economy was characterized by rapid growth and rising wages during the first half of the period and by slow growth and stagnant wages during the second half.

Question 14

The economy went into a recession in March 2001, what policies did President Bush implement in response?

A) Tax cuts aimed primarily at middle class and low income consumers in order to stimulate consumption.
B) Tax cuts aimed primarily at wealth individuals in order to stimulate savings and investment.
C) Tax increases across all income groups in order to finance increased government spending.
D) A sharp increase in all discretionary, nonmilitary spending.

Question 15

What were some of the factors that led to a budget surplus toward the end of the Clinton administration?

A) Increased spending for education led to higher economic growth.
B) The government drastically reduced Social Security payments.
C) Spending on infrastructure such as highways and airports led to higher economic growth.
D) Most discretionary spending was frozen, while taxes increased with higher incomes during the expansion.