Deck 16: Fiscal Policy

Question 1

Which of the following would not be considered an automatic stabilizer?

A) legislation increasing funding for job retraining passed during a recession
B) decreasing unemployment insurance payments due to decreased jobless during an expansion
C) rising income tax collections due to rising incomes during an expansion
D) declining food stamp payments due to more persons finding jobs during an expansion

Answer 1

legislation increasing funding for job retraining passed during a recession

Question 2

Social Security began as a "pay-as-you-go" system,meaning that payments to current retirees were paid

A) from taxes collected from current workers.
B) from taxes collected from retired workers.
C) as long as the government had funds available.
D) as the government collected revenues from tariffs and excise taxes in the years Social Security payments were made.

Answer 2

from taxes collected from current workers.

Question 3

Since the Social Security system began in 1935,the number of workers per retiree has

A) stayed roughly the same.
B) continually risen.
C) continually declined.
D) risen and declined with different generations.

Answer 3

continually declined.

Question 4

The three categories of federal government expenditures,in addition to government purchases,are

A) interest on the national debt, grants to state and local governments, and transfer payments.
B) interest on the national debt, defense spending, and transfer payments.
C) defense spending, budgets of federal agencies, and transfer payments.
D) defense spending, Social Security, and Medicare.

Question 5

Which of the following would be classified as fiscal policy?

A) The federal government passes tax cuts to encourage firms to reduce air pollution.
B) The Federal Reserve cuts interest rates to stimulate the economy.
C) A state government cuts taxes to help the economy of the state.
D) The federal government cuts taxes to stimulate the economy.
E) States increase taxes to fund education.

Question 6

The largest and fastest-growing category of federal government expenditures is

A) grants to state and local governments.
B) interest on the national debt.
C) national park spending.
D) transfer payments.

Question 7

From the 1960s to 2010,transfer payments

A) have risen from about 25 percent to 46 percent of federal government expenditures.
B) remained the same percentage of total federal government expenditures.
C) have declined by half as a percentage of total federal government expenditures.
D) have grown very slowly as a percentage of total federal government expenditures.

Question 8

If Congress passed a one-time tax cut in order to stimulate the economy in 2010,and tax rate levels returned to their pre-2010 level in 2011,how should this tax cut affect the economy?

A) Households on average would save an amount equal to the tax cut.
B) The tax cut would stimulate spending by households.
C) The tax cut would shift the aggregate demand curve to the right.
D) The tax cut would raise the price level in 2010.

Question 9

Government transfer payments include which of the following?

A) interest on the national debt
B) grants to state and local governments
C) Social Security and Medicare programs
D) national defense

Question 10

Which of the following is an objective of fiscal policy?

A) energy independence from Middle East oil
B) health care coverage for all Americans
C) discovering a cure for AIDs
D) high rates of economic growth
E) homeland security

Question 11

Automatic stabilizers refer to

A) the money supply and interest rates that automatically increase or decrease along with the business cycle.
B) government spending and taxes that automatically increase or decrease along with the business cycle.
C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Question 12

The largest source of federal government revenue in 2010 was

A) sales taxes.
B) corporate income taxes.
C) individual income taxes.
D) payroll taxes to fund Social Security and Medicare programs.

Question 13

Which of the following provides health-care coverage to people age 65 and over?

A) Medicaid
B) Medicare
C) Social Security
D) Health-Aid

Question 14

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

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

Question 15

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act,which is an example of ________ aimed at increasing real GDP and employment.

A) discretionary fiscal policy
B) an automatic stabilizer
C) contractionary fiscal policy
D) a transfer payment

Question 16

Federal government purchases,as a percentage of GDP,

A) have risen since the early 1950s.
B) have fallen since the early 1950s.
C) have remained roughly the same since the early 1950s.
D) rose from the early 1950s until the mid 1980s, and then fell.

Question 17

Fiscal policy refers to changes in

A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
C) federal taxes and purchases that are intended to fund the war on terrorism.
D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

Question 18

Before the Great Depression of the 1930s,the majority of government spending took place at the ________ and after the Great Depression the majority of government spending took place at the ________.

A) state and local levels; federal level
B) local level; federal level
C) federal level; state and local levels
D) federal level; state level

Question 19

Federal government expenditures,as a percentage of GDP,

A) have risen since the early 1950s to the present.
B) have fallen since the early 1950s to the present.
C) rose from 1950 to 1991, fell from 1992 to 2001, and have risen from 2001 to the present.
D) rose from 1950 to 2001 and then fell from 2001 to the present.
E) rose from 1950 to 1980, fell from 1981 to 2001, and have risen from 2001 to the present.

Question 20

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of

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

Question 21

Refer to Figure 27-1.Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from

A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.

Question 22

The tax increases necessary to fund future Social Security and Medicare benefit payments would be

A) small, and have little effect on economic growth.
B) small, but could discourage work effort, entrepreneurship and investment, thereby slowing economic growth.
C) large, but would have little effect on economic growth.
D) large, and could discourage work effort, entrepreneurship and investment, thereby slowing economic growth.

Question 23

An increase in individual income taxes ________ disposable income,which ________ consumption spending.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 24

List the five categories of federal government expenditures.

Question 25

The Social Security and Medicare programs have been a failure in terms of reducing poverty among elderly U.S.citizens.

Question 26

Tax cuts on business income increase aggregate demand by increasing

A) business investment spending.
B) consumption spending.
C) government spending.
D) wage rates.

Question 27

Fiscal policy is determined by

A) the Federal Reserve.
B) the president and the Federal Reserve.
C) Congress and the Federal Reserve.
D) Congress and the president.

Question 28

Refer to Figure 27-1.Suppose the economy is in a recession and expansionary fiscal policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.

Question 29

What is the difference between fiscal policy and monetary policy?

Question 30

A decrease in the marginal income tax rate is a fiscal policy which will increase aggregate demand.

Question 31

Figure 27-1

Refer to Figure 27-1.An increase in taxes would be depicted as a movement from ________,using the static AD-AS model in the figure above.

A) E to B
B) B to C
C) A to B
D) B to A
E) C to D

Question 32

An increase in government purchases will increase aggregate demand because

A) government expenditures are a component of aggregate demand.
B) consumption expenditures are a component of aggregate demand.
C) the decline in the price level will increase demand.
D) the decline in the interest rate will increase demand.

Question 33

Refer to Figure 27-1.Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising.If contractionary policy is used to move the economy back to long run equilibrium,this would be depicted as a movement from ________ using the static AD-AS model in the figure above.

A) D to C
B) C to B
C) A to E
D) B to A
E) E to A

Question 34

The income tax system serves as an automatic stabilizer over the course of the business cycle.

Question 35

Refer to Figure 27-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from

A) D to C.
B) A to E.
C) C to B.
D) B to A.
E) E to A.

Question 36

Refer to Figure 27-1.Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.

Question 37

Expansionary fiscal policy involves

A) increasing government purchases or decreasing taxes.
B) increasing taxes or decreasing government purchases.
C) increasing the money supply and decreasing interest rates.
D) decreasing the money supply and increasing interest rates.

Question 38

Refer to Figure 27-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.Using the static AD-AS model in the figure above,this would be depicted as a movement from

A) D to C.
B) A to E.
C) C to D.
D) C to B.
E) E to A.

Question 39

Congress and the president carry out fiscal policy through changes in

A) interest rates and the money supply.
B) taxes and the interest rate.
C) government purchases and the money supply.
D) government purchases and taxes.

Question 40

Tax cuts on business income ________ aggregate demand.

A) would decrease
B) would increase
C) would not change
D) may increase or decrease

Question 41

Figure 27-3

Refer to Figure 27-3.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,and no fiscal or monetary policy is pursued,then at point B

A) the unemployment rate is very low.
B) firms are operating at below capacity.
C) the economy is below full employment.
D) income and profits are falling.
E) there is pressure on wages and prices to fall.

Question 42

What is expansionary fiscal policy? What is contractionary fiscal policy?

Question 43

If the economy is falling below potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices.
D) taxes.

Question 44

From an initial long-run equilibrium,if aggregate demand grows faster than long-run and short-run aggregate supply,then Congress and the president would most likely

A) decrease the required reserve ratio.
B) decrease government spending.
C) decrease oil prices.
D) decrease tax rates.

Question 45

Lowering the individual income tax will increase household disposable income and consumption spending.

Question 46

Figure 27-3

Refer to Figure 27-3.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely pursue

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

Question 47

From an initial long-run equilibrium,if aggregate demand grows more slowly than long-run and short-run aggregate supply,then Congress and the president would most likely

A) increase the required reserve ratio and decrease government spending.
B) decrease government spending.
C) decrease oil prices.
D) decrease taxes.
E) lower interest rates.

Question 48

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 49

If real GDP exceeded potential real GDP and inflation was increasing,which of the following would be an appropriate fiscal policy?

A) a decrease in the money supply and an increase in the interest rate
B) an increase in government spending
C) an increase in taxes
D) an increase in oil prices

Question 50

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 51

Figure 27-2

Refer to Figure 27-2.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely

A) decrease government spending.
B) increase government spending.
C) increase oil prices.
D) increase taxes.
E) lower interest rates.

Question 52

The problem typically during a recession is not that there is too little money,but too little spending.If the problem was too little money,what would be its cause? If the problem was too little spending,what could be its cause?

Question 53

Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant

A) decrease in investment spending.
B) decrease in oil prices.
C) increase in consumption spending.
D) increase in net exports.

Question 54

Figure 27-3

Refer to Figure 27-3.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely

A) increase the money supply and decrease the interest rate.
B) increase taxes.
C) increase government spending.
D) increase oil prices.
E) raise interest rates.

Question 55

Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation.

Question 56

Which of the following is considered contractionary fiscal policy?

A) Congress increases the income tax rate.
B) Congress increases defense spending.
C) Legislation removes a college tuition deduction from federal income taxes.
D) The New Jersey legislature cuts highway spending to balance its budget.

Question 57

Does expansionary fiscal policy directly increase the money supply? Isn't it true that the president and Congress fight recessions by spending more money?

Question 58

Expansionary fiscal policy involves increasing government purchases or increasing taxes.

Question 59

Figure 27-2

Refer to Figure 27-2.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,and no fiscal or monetary policy is pursued,then at point B

A) the unemployment rate is very low.
B) firms are operating below capacity.
C) the economy is above full employment.
D) income and profits are rising.
E) there is pressure on wages and prices to rise.

Question 60

Figure 27-2

Refer to Figure 27-2.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely pursue

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

Question 61

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented,what is the change in GDP,holding everything else constant? (Assume the price level stays constant.)

A) a $300 billion decrease in GDP
B) a $300 billion increase in GDP
C) a $30 billion increase in GDP
D) a $133.33 billion decrease in GDP
E) a $133.33 billion increase in GDP

Question 62

Figure 27-4

Refer to Figure 27-4.In the graph above,the shift from AD1 to AD2 represents the total change in aggregate demand.If government purchases increased by $50 billion,then the distance from point A to point B ________ $50 billion.

A) would be equal to
B) would be greater than
C) would be less than
D) may be greater than or less than

Question 63

The aggregate demand curve will shift to the right ________ the initial increase in government purchases.

A) by less than
B) by more than
C) by the same amount as
D) sometimes by more than and other times by less than

Question 64

Suppose the government spending multiplier is 2.The federal government cuts spending by $40 billion.What is the change in GDP if the price level is not held constant?

A) an increase of less than $80 billion
B) an increase equal to $80 billion
C) an increase of greater than $80 billion
D) a decrease of less than $80 billion
E) a decrease of more than $80 billion

Question 65

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the

A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.
B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods.
C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods.
D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.

Question 66

If real equilibrium GDP is above potential GDP,expansionary fiscal policy should be pursued.

Question 67

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.

A) multiplier
B) expenditure
C) consumption
D) aggregate demand

Question 68

The tax multiplier equals the change in ________ divided by the change in ________.

A) taxes; equilibrium real GDP
B) equilibrium real GDP; taxes
C) taxes; consumption spending
D) consumption spending; taxes

Question 69

A change in consumption spending caused by income changes is ________ change in spending,and a change in government spending that occurs to improve roads and bridges is ________ change in spending.

A) an induced; an autonomous
B) an expansionary; a contractionary
C) an autonomous; an induced
D) a contractionary; an expansionary

Question 70

The aggregate demand curve will shift to the right ________ the initial decrease in taxes.

A) by less than
B) by more than
C) by the same amount
D) sometimes by more than and other times by less than

Question 71

The aggregate demand curve will shift to the left ________ the initial decrease in government purchases.

A) by less than
B) by more than
C) by the same amount as
D) sometimes by more than and other times by less than

Question 72

Table 27-1

Refer to Table 27-1.Suppose the economy is in the state described by the table above.What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation.

Question 73

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium.For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce the president and the Congress to conduct expansionary fiscal policy.Briefly explain the condition of the economy and what the president and the Congress are attempting to do.

Question 74

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant

A) decrease in oil prices.
B) decrease in real GDP.
C) increase in inflation.
D) increase in labor productivity.

Question 75

What are the key differences between how we illustrate an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

Question 76

An appropriate fiscal policy response when aggregate demand is growing at a slower rate than aggregate supply is to cut taxes.

Question 77

The government purchases multiplier equals the change in ________ divided by the change in ________.

A) government purchases; equilibrium real GDP
B) equilibrium real GDP; government purchases
C) government purchases; consumption spending
D) consumption spending; government purchases

Question 78

If the economy is slipping into a recession,which of the following would be an appropriate fiscal policy?

A) an increase in the money supply and a decrease in interest rates
B) a decrease in government purchases
C) a decrease in taxes
D) a decrease in oil prices

Question 79

The multiplier effect refers to the series of

A) autonomous increases in consumption spending that result from an initial increase in induced expenditures.
B) induced increases in consumption spending that result from an initial increase in autonomous expenditures.
C) autonomous increases in investment spending that result from an initial increase in induced expenditures.
D) induced increases in investment spending that result from an initial increase in autonomous expenditures.

Question 80

Which of the following would increase the size of the government purchases multiplier?

A) an increase in the tax rate
B) an increase in the quantity of imports purchased by households from an increase in income
C) a decrease in the amount of consumption spending by households from an increase in income
D) a decrease in the amount saved by households from an increase in income