Deck 11: Fiscal Policy.

Question 1

The distinction between discretionary fiscal policy and the use of automatic stabilizers is that _____

A) only discretionary fiscal policy can stimulate the economy.
B) only automatic stabilizers can stimulate the economy.
C) discretionary fiscal policy, once adopted, is built into the structure of the economy.
D) automatic stabilizers, once adopted, are built into the structure of the economy.
E) only discretionary fiscal policy can be used by the federal government.

Answer 1

automatic stabilizers, once adopted, are built into the structure of the economy.

Question 2

Which of the following is true of government purchases?

A) Government purchases are independent of the price level.
B) Government purchases are independent of the level of real GDP.
C) Government purchases are independent of consumption.
D) Government purchases are independent of investment.
E) Government purchases are independent of the amount saved by households.

Answer 2

Government purchases are independent of the level of real GDP.

Question 3

Which of the following is a component of aggregate demand?

A) transfer payments from the government
B) taxation by the government
C) purchases by the government
D) borrowing by the government
E) saving by consumers

Answer 3

purchases by the government

Question 4

Which of the following are components of fiscal policy?

A) transfer payments only
B) money supply and government purchases
C) government purchases only
D) government purchases, transfer payments, and taxes
E) taxes and money supply

Question 5

Fiscal policy focuses on manipulating _____

A) aggregate demand to smooth out business fluctuations.
B) aggregate supply to smooth out business fluctuations.
C) both aggregate supply and aggregate demand to smooth out business fluctuations.
D) aggregate demand to stimulate the economy and aggregate supply to contract it.
E) short-run aggregate supply to stimulate the economy and aggregate demand to contract it.

Question 6

All of the following are variables that can be manipulated to affect fiscal policy, except one. Which is the exception?

A) personal income taxes
B) government expenditures on goods and services
C) government expenditures on unemployment benefits
D) the federal funds rate
E) corporate income taxes

Question 7

Expansionary fiscal policy _____

A) is a fiscal policy used to close a recessionary gap.
B) is a revenue and spending program in the federal budget that automatically adjusts with the ups and downs of the economy.
C) is an emergency manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
D) is a revenue and spending program in the federal budget that never adjusts with the ups and downs of the economy.
E) is a monetary policy change.

Question 8

Fiscal policy used to close a recessionary gap is known as _____

A) discretionary fiscal policy.
B) an automatic stabilizer.
C) expansionary fiscal policy.
D) contractionary fiscal policy.
E) monetary policy.

Question 9

Which of the following is not a tool of fiscal policy?

A) money supply
B) government purchases
C) taxes
D) Social Security programs
E) unemployment benefits

Question 10

Deliberate manipulation of government spending and taxes to promote macroeconomic goals is effected by _____

A) discretionary fiscal policy.
B) automatic stabilizers.
C) expansionary fiscal policy.
D) contractionary fiscal policy.
E) monetary policy.

Question 11

Which of the following assumptions is true of government spending and taxes?

A) They do not depend on the level of GDP.
B) They may be changed only through direct action by Congress.
C) They change only when the price level changes.
D) They change only upon executive order of the president of the United States.
E) They are autonomous at low levels of GDP but not at higher levels of GDP.

Question 12

Discretionary fiscal policy _____

A) is the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
B) are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy.
C) are emergency manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
D) are revenue and spending programs in the federal budget that never adjust with the ups and downs of the economy.
E) are monetary policy changes.

Question 13

Revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy are known as _____

A) discretionary fiscal policy.
B) automatic stabilizers.
C) expansionary fiscal policy.
D) contractionary fiscal policy.
E) monetary policy.

Question 14

Fiscal policy _____

A) uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP.
B) uses the federal government's control over the money supply and interest rates to affect employment, the price level, and GDP.
C) can affect employment and prices, but not the level of GDP.
D) can affect employment and the level of GDP, but not the price level.
E) is most effective when employed by state governments rather than by the federal government.

Question 15

Fiscal policy is concerned with _____

A) government spending and taxation.
B) government spending and changes in money supply.
C) money supply and taxation.
D) government spending, taxation, and money supply.
E) money supply only.

Question 16

Which of the following macroeconomic variables would likely be affected by a fiscal policy?

A) the nominal interest rate
B) the exchange rate
C) the discount rate
D) employment
E) money supply

Question 17

Deliberate manipulation of government spending and taxes to promote macroeconomic goals is known as _____

A) discretionary fiscal policy.
B) automatic stabilizers.
C) expansionary fiscal policy.
D) contractionary fiscal policy.
E) monetary policy.

Question 18

Automatic stabilizers _____

A) deliberately manipulate government purchases, transfer payments, and taxes to promote macroeconomic goals.
B) are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy.
C) are a method of emergency manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
D) are revenue and spending programs in the federal budget that never adjust with the ups and downs of the economy.
E) are monetary policy changes.

Question 19

All of the following are tools of fiscal policy except one. Which is the exception?

A) taxes
B) transfer payments
C) interest rates
D) government purchases of goods
E) government purchases of services

Question 20

Discretionary fiscal policy is a policy that _____

A) is developed in secret.
B) applies to some states and not all states in an economy.
C) applies to only some specific industries in an economy.
D) works automatically without a public announcement or plan.
E) is an intentional change in taxation or government spending.

Question 21

Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?

A) Transfer payments and taxes affect aggregate spending directly, just as consumption does.
B) Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption.
C) Changes in the amount of transfer payments and taxes cancel each other and therefore have no influence on any economic variable.
D) Transfer payments and taxes affect disposable income but have no effect on consumption.
E) Transfer payments affect disposable income, but taxes do not.

Question 22

A change in net taxes affects the equilibrium quantity of GDP demanded _____

A) in the same way a change in government purchases does.
B) in the same way a change in planned investment does.
C) in the same way a change in net exports does.
D) only indirectly, changing the level of disposable income.
E) in an unpredictable manner.

Question 23

In which of the following ways does government affect the consumption component of planned aggregate expenditures?

A) through net taxes, which change disposable income
B) by purchasing goods and services, which increase consumption
C) by using subsidies to encourage firms to invest
D) by reducing the interest rate to encourage firms to invest
E) by producing public goods

Question 24

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

A) Congress providing $1 billion in relief aid for hurricane victims
B) Congress appropriating $400 million to help the needy and the appropriation being financed by a tax on wealth
C) income tax receipts being smaller because of a decline in real GDP during a recession
D) the Federal Reserve tightening credit when it receives news of accelerating inflation
E) Congress passing a bill authorizing $2 billion in additional spending when it receives news of a deepening recession

Question 25

A new tax introduced by the government will _____

A) decrease disposable income.
B) increase disposable income.
C) lead to a reduction in government spending.
D) lead to an increase in investment.
E) have no effect on disposable income.

Question 26

A federal budget deficit occurs when _____

A) there is deflation.
B) federal government purchases exceed net taxes.
C) there is inflation.
D) aggregate demand is greater than aggregate supply.
E) aggregate supply is greater than aggregate demand.

Question 27

Which of the following will not increase when net taxes decrease?

A) saving
B) disposable income
C) consumption
D) government expenditure
E) GDP

Question 28

A decrease in net taxes _____

A) increases GDP as much as an equal decrease in government purchases.
B) increases GDP less than an equal increase in government purchases.
C) decreases GDP more than an equal decrease in government purchases.
D) changes GDP in an unpredictable manner.
E) has no effect on GDP.

Question 29

If the Naval Research Laboratory fired a chemist and the Environmental Protection Agency hired her at the same salary, the net effect of these events would cause _____

A) an increase in aggregate demand.
B) an increase in aggregate supply.
C) a decrease in aggregate supply.
D) a decrease in aggregate demand.
E) no change in aggregate demand.

Question 30

Which of the following correctly describes the effects of a decrease in net taxes?

A) Disposable income increases, consumption decreases, and saving decreases.
B) Disposable income increases, consumption increases, and saving increases.
C) Disposable income decreases, consumption increases, and saving increases.
D) Disposable income decreases, consumption decreases, and saving decreases.
E) There is no effect on disposable income, consumption, or saving.

Question 31

A decrease in net taxes _____

A) raises aggregate expenditure by raising disposable income, thereby increasing consumption.
B) raises aggregate expenditure by raising disposable income, thereby decreasing consumption.
C) lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption.
D) lowers aggregate expenditure by lowering disposable income, consumption remaining constant.
E) has no effect on aggregate expenditure.

Question 32

A tax is considered to be independent of _____

A) investment.
B) consumption.
C) government spending.
D) real GDP.
E) the price level.

Question 33

If government purchases increase and net taxes decrease, _____

A) the price level will fall.
B) money supply must rise.
C) the aggregate demand curve shifts leftward.
D) aggregate supply shifts rightward.
E) output and employment will increase.

Question 34

When net taxes increase and government purchases decrease, _____

A) the price level will rise.
B) money supply must rise.
C) the aggregate demand curve shifts leftward.
D) output and employment increase.
E) the aggregate supply curve shifts leftward.

Question 35

Which of the following is most likely to close a recessionary gap in the economy?

A) a decrease in the expenditure on infrastructure
B) an increase in the income tax rate
C) an increase in the rate of foreign exchange
D) a decrease in money supply
E) an increase in the compensation for government employees

Question 36

Which of the following fiscal programs is least likely to increase aggregate demand?

A) defense spending
B) road construction
C) grants for scientific research and development
D) an increase in taxes
E) government purchases of labor

Question 37

When spending by the federal government exceeds net taxes, _____

A) the price level tends to fall.
B) the money supply must fall.
C) the aggregate demand curve shifts rightward.
D) aggregate supply moves rightward.
E) there is a federal budget surplus.

Question 38

_____ when net taxes are reduced.

A) Net exports decrease
B) Government purchases remain constant
C) Government purchases rise
D) Consumption falls
E) Consumption rises

Question 39

An increase in the federal budget deficit _____

A) only occurs when there is a deficit in the balance of trade.
B) creates deflation.
C) decreases aggregate demand.
D) decreases the aggregate quantity demanded along a stationary aggregate demand curve.
E) increases aggregate demand.

Question 40

The introduction of a tax by the government will _____

A) have no effect on real GDP since real GDP comprises consumption expenditure, investment expenditure, and government expenditure.
B) affect consumption through a change in disposable income.
C) affect consumption through its effect on investment.
D) reduce government spending since the government levies the tax.
E) increase real GDP since it enables the government to decrease spending.

Question 41

Which of the following is an appropriate fiscal policy prescription that addresses the inflation that occurs when the economy is above potential GDP?

A) decreasing taxes to protect consumers from the effects of inflation.
B) increasing taxes to reduce aggregate demand.
C) increasing government spending to provide some of the goods that consumers can no longer afford at the higher prices.
D) decreasing government spending to cause a decrease in the demand for money.
E) increasing transfer payments to poor people, who are hurt the most by the inflation.

Question 42

Which of the following would increase aggregate demand?

A) a deficit in the government budget
B) an increase in taxes
C) an increase in government borrowing
D) a surplus in the government budget
E) a decrease in government spending

Question 43

When the government closes an expansionary gap with a change in government spending, the _____ in government spending leads to _____.

A) decrease; a decrease in both real GDP and the price level
B) decrease; a decrease in real GDP and an increase in the price level
C) decrease; an increase in both real GDP and the price level
D) decrease; an increase in real GDP and a decrease in the price level
E) increase; a decrease in both real GDP and the price level

Question 44

The exact change in equilibrium output due to a shift in the short-run aggregate demand curve depends on _____

A) the amount of tax imposed.
B) the steepness of the aggregate supply curve.
C) the steepness of the aggregate demand curve.
D) the gap between the supply curve and the demand curve.
E) the consumption pattern in the economy.

Question 45

Suppose the government reduces its budget deficit at the same time that energy prices rise sharply. Which of the following is most likely to happen?

A) The price level will rise, since higher energy prices increase the cost of production.
B) Real GDP will fall since both events will tend to cause an economic contraction.
C) The price level will fall because the aggregate demand curve has shifted leftward.
D) Real GDP will rise as less government spending leads to more opportunities for the private sector.
E) Both the price level and real GDP will fall.

Question 46

Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Suppose the economy is currently at e'. A leftward shift of the short-run aggregate supply curve would return the economy to potential output at _____

A) point e''.
B) point
C) point e*.
D) a point higher than e''.

Question 47

Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Suppose the economy is initially at point

A) Q₁ and Q₂.
B) Q₂ and Q₃.
C) Q₁ and Q₃.
D) AD and AD*.
E) A recessionary gap would be created between _____

Question 48

If fiscal policy is used to close an expansionary gap, the _____

A) short-run aggregate supply curve shifts leftward and the price level falls.
B) short-run aggregate supply curve shifts rightward and the price level increases.
C) short-run aggregate supply curve shifts rightward and the price level falls.
D) aggregate demand curve shifts leftward and the price level falls.
E) aggregate demand curve shifts rightward and the price level falls.

Question 49

To close a recessionary gap using fiscal policy, the government can _____

A) increase government spending by the size of the gap.
B) decrease government spending by the size of the gap.
C) increase government spending by more than the size of the gap.
D) increase government spending by less than the size of the gap.
E) decrease government spending by more than the size of the gap.

Question 50

Exhibit 11.1

Refer to Exhibit 11.1, which shows the relationship between the price level and the real GDP. If the government wants the economy to be at full employment, it should _____

A) increase taxes.
B) decrease transfer payments.
C) decrease government purchases.
D) wait for the SRAS curve to shift to the left.
E) increase its purchases.

Question 51

Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Which of the following is the long-run equilibrium point?

A) A point between e* and e''
B) e''
C) e*
D) e'
E) e

Question 52

When government purchases increase, the spending multiplier indicates the _____

A) amount of movement along the aggregate demand curve.
B) amount of movement along the aggregate supply curve.
C) size of the rightward shift of the aggregate demand curve at a given price level.
D) size of the rightward shift of the aggregate supply curve at a given price level.
E) size of the expansionary gap.

Question 53

Exhibit 11.1

Refer to Exhibit 11.1, which shows the relationship between the price level and the real GDP. Which of the following sets of policies would unambiguously move the economy to full employment?

A) increase in government purchases, increase in taxes, and decrease in transfer payments
B) decrease in government purchases, increase in taxes, and decrease in transfer payments
C) increase in government purchases, decrease in taxes, and increase in transfer payments
D) increase in government purchases, increase in taxes, and increase in transfer payments
E) decrease in government purchases, decrease in taxes, and decrease in transfer payments

Question 54

Contractionary fiscal policy _____

A) is the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
B) is a revenue and spending program in the federal budget that automatically adjusts with the ups and downs of the economy.
C) is an emergency manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
D) is used to close an expansionary gap.
E) is a monetary policy change.

Question 55

Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Suppose the economy is currently at e'. If the government implements a contractionary fiscal policy, the economy would move to _____

A) point e*.
B) point e'.
C) point e''.
D) a point between e* and e'' on the potential output line.
E) a point between e* and e' on the short-run aggregate supply line.

Question 56

The effect of a change in net taxes on the quantity of real GDP demanded equals the resulting shift in the consumption function times _____

A) the marginal propensity to consume.
B) the marginal propensity to save.
C) the autonomous net tax multiplier.
D) the simple spending multiplier.
E) the marginal tax rate.

Question 57

All of the following are likely to be effective at eliminating a recessionary gap, except one. Which is the exception?

A) reducing Social Security payments to beneficiaries
B) reducing personal income taxes
C) increasing government expenditures on the interstate highway network
D) increasing farm subsidies
E) reducing corporate income taxes

Question 58

Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Which of the following would be the result of an increase in government purchases?

A) a movement from Q₃ to Q₂
B) a movement from e' to e*
C) a movement from e'' to e*
D) a movement from Q₂ to Q₃
E) a movement from Q₁ to Q₃

Question 59

Fiscal policy used to close an expansionary gap is known as _____

A) discretionary fiscal policy.
B) automatic stabilizers.
C) expansionary fiscal policy.
D) contractionary fiscal policy.
E) monetary policy.

Question 60

A $0.2 trillion increase in government purchases increases the quantity demanded by $1.0 trillion, the price level remaining constant. This additional spending reflects the _____ effect.

A) recessionary
B) expansionary
C) simple spending multiplier
D) income
E) substitution

Question 61

The steeper the short-run aggregate supply curve, _____

A) the steeper the aggregate demand curve.
B) the larger the value of the spending multiplier.
C) the larger the budget surplus.
D) the larger the impact of a shift in aggregate demand on the equilibrium price level.
E) the larger the impact of a shift in aggregate demand on the equilibrium output level.

Question 62

If the economy is already at its potential output, then the spending multiplier is _____

A) equal to zero in the long run.
B) infinite in the long run.
C) equal to 1 in the long run.
D) equal to zero in the short run.
E) equal to 1 in the short run.

Question 63

Suppose an initial increase in government expenditure increases output by $50,000. If the size of the multiplier was 1.0, the size of the initial increase in government expenditure was _____

A) $25,000.
B) $20,000.
C) $12,500.
D) $50,000.
E) $0.

Question 64

The steeper the short-run aggregate supply curve, _____

A) the smaller the impact of a shift in aggregate demand on equilibrium output.
B) the larger the value of the spending multiplier.
C) the larger the impact of a shift in aggregate demand on equilibrium output.
D) the smaller the change in government spending needed to achieve the desired change in equilibrium output.
E) the flatter the aggregate demand curve.

Question 65

Classical economists believed that if saving were greater than investment, the interest rate would _____, causing saving to _____ and investment to _____ until the two were equal.

A) rise; decrease; increase
B) fall; decrease; increase
C) fall; increase; decrease
D) rise; increase; decrease
E) fall; increase; increase

Question 66

Which of the following best describes the concept of laissez-faire?

A) Government should not intervene in the economy.
B) Government should actively intervene in the economy whenever it judges the action to be beneficial.
C) Government should intervene in the economy only to promote short-term economic stability.
D) Government should intervene in the economy only to maximize long-term growth rates.
E) Government should intervene in the economy only when the economy is not at full employment or there is substantial inflation.

Question 67

_____ is contrary to a laissez-faire economic system.

A) Active government intervention in all economic decisions
B) Reliance on prices to adjust to changing market conditions
C) The theory put forward by classical economics
D) The theory introduced by neoclassical economics
E) The market acting as an invisible hand

Question 68

Suppose the government expenditure increases by $200 and the simple spending multiplier equals 5. The final increase in output will be _____

A) $6,000.
B) $500.
C) $200.
D) more than $200.
E) less than $200.

Question 69

Which of the following did classical economists believe caused depressions and high unemployment?

A) sticky product prices
B) tax increases
C) business expectations
D) sticky wages
E) sticky interest rates

Question 70

What was used to influence the macroeconomy prior to the 1930s?

A) fiscal policy
B) monetary policy
C) socialist policies
D) automatic stabilizers
E) laissez-faire policies

Question 71

Suppose an initial increase in government expenditure increases output by $50,000. If the size of the multiplier is 2.5, the size of the initial increase in government expenditure was _____

A) $25,000.
B) $20,000.
C) $12,500.
D) $50,000.
E) $0.

Question 72

According to classical economists, market oriented economies could _____

A) never experience high unemployment.
B) experience high unemployment from time to time.
C) normalize toward potential GDP with discretionary fiscal policy.
D) normalize toward potential GDP with discretionary monetary policy.
E) never experience potential GDP.

Question 73

Classical economists believed that if investment were greater than saving, the interest rate would _____, causing saving to _____ and investment to _____ until the two were equal.

A) rise; decrease; increase
B) fall; decrease; increase
C) fall; increase; decrease
D) rise; increase; decrease
E) fall; increase; increase

Question 74

According to classical economists, government intervention is _____

A) necessary to maintain a stable price level in the long run.
B) necessary to maintain a stable price level in the short run.
C) necessary to maintain full employment in the long run.
D) necessary to maintain full employment in the short run.
E) not necessary to maintain full employment.

Question 75

If the economy is already producing at its potential, _____

A) the spending multiplier equals 1/(1 − MPC) in the long run.
B) the spending multiplier is less than 1/(1 − MPC) in the long run.
C) the spending multiplier is more than 1/(1 − MPC) in the long run.
D) the spending multiplier equals zero in the long run.
E) the aggregate demand curve is horizontal.

Question 76

A change in government purchases has the greatest effect on the economy in the short run when _____

A) the aggregate demand curve is relatively flat.
B) the aggregate demand curve is relatively steep.
C) the short-run aggregate supply curve is relatively flat.
D) the aggregate demand curve is vertical.
E) the short-run aggregate supply curve is vertical.

Question 77

Suppose government purchases increase by $100 million in an economy, which leads to total output increasing by $500 million. The size of the multiplier is _____

A) $400.
B) 5.
C) $500.
D) 0.5.
E) 50.

Question 78

Which of the following is true about classical economists?

A) They argued that the sources of depressions and high unemployment lay within the market system.
B) They advocated laissez-faire policies to promote economic growth.
C) They believed the economy would naturally tend toward unemployment.
D) They believed prices and wages were rigid.
E) They encouraged government intervention in markets.

Question 79

Suppose an initial increase in government expenditure increases output by $50,000. If the economy is producing at its potential, what is the size of the multiplier?

A) $25,000
B) $20,000
C) $12,500
D) $50,000
E) $0

Question 80

Who argued that the economy should be left to itself to close a recessionary gap?

A) John F. Kennedy
B) John Maynard Keynes
C) mercantilists
D) classical economists
E) socialists