Deck 18: Theory Versus Reality

Question 1

Fiscal policy includes

A)Open market operations.
B)Deregulation.
C)Infrastructure development.
D)Discretionary government spending.

Answer 1

D

Question 2

Income taxes are an automatic stabilizer because when income rises,ceteris paribus,tax receipts

A)Fall because automatic stabilizers work against the cyclical movements of the GDP.
B)Rise because taxes are computed on the basis of income.
C)Fall because income taxes are regressive.
D)Fall as taxpayers experience bracket creep.

Answer 2

B

Question 3

Which of the following does not determine fiscal policy?

A)The president.
B)Congress through government expenditures.
C)Congress through tax laws.
D)The Federal Reserve.

Answer 3

D

Question 4

Fiscal policy includes all of the following except

A)Tax cuts.
B)Tax increases.
C)Interest rate increases.
D)Discretionary spending by the government.

Question 5

Assume the economy is in a recession and has a budget deficit.Ceteris paribus,if the economy starts expanding,automatic stabilizers will cause

A)A decrease in tax revenues.
B)An increase in government spending.
C)A decrease in the budget deficit.
D)A decrease in inflation.

Question 6

Policy tools include

A)Population growth,spending behavior,and invention.
B)Wars,natural disasters,and trade disruptions.
C)Tax policy,government spending,and the availability of money.
D)External shocks and internal market forces.

Question 7

When the chairman of the Federal Reserve announced a goal of "zero inflation," which of the following economic policies was most likely being changed?

A)Fiscal policy.
B)Monetary policy.
C)Supply-side policy.
D)Congressional policy.

Question 8

Which of the following is a responsibility of Congress?

A)Monetary policy.
B)Fiscal policy and supply-side policy.
C)Monetary and fiscal policy.
D)Monetary,fiscal,and supply-side policy.

Question 9

The belief that monetary policy can be effective in changing aggregate demand and that interest rates are the critical monetary variable is associated with

A)Modern Keynesians.
B)New classical economists.
C)Monetarists.
D)Supply-siders.

Question 10

A tax cut can best be characterized as

A)Both fiscal and supply-side policy.
B)Both monetary and supply-side policy.
C)Fiscal policy only.
D)Monetary policy only.

Question 11

Which of the following is a monetary policy action?

A)Open market operations.
B)Changes in transfer payments.
C)Changes in government spending.
D)Deregulation.

Question 12

Automatic stabilizers include

A)Open market operations.
B)Unemployment benefits.
C)Deregulation.
D)Discretionary tax cuts.

Question 13

Monetarists believe that

A)Monetary policy is effective only in a recession.
B)Interest rates are the critical policy lever.
C)The money supply should be expanded at a steady,predictable rate.
D)Government spending and taxes are the critical policy levers.

Question 14

Monetary policy tools include:

A)Income taxes and the discount rate.
B)Open market operations and government spending.
C)The reserve ratio and the discount rate.
D)Open market operations and deregulation.

Question 15

Monetarists believe that an increase in the money supply shifts the aggregate

A)Supply curve to the left.
B)Supply curve to the right.
C)Demand curve to the left.
D)Demand curve to the right.

Question 16

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

A)Fed discount rate.
B)Discretionary fiscal policy that must be determined by Congress and the president.
C)Changes that are triggered by the economy and not by government decision makers.
D)Supply-side policies that Congress designs to stimulate the economy.

Question 17

The structural deficit is

A)The deficit that would exist if the economy were at full employment.
B)Computed on the basis of the current value of automatic stabilizers.
C)Determined by the president of the United States.
D)Equivalent to the GDP gap.

Question 18

Which of the following is not true about a structural deficit?

A)It exists even if the economy is at full employment.
B)It is influenced by discretionary fiscal spending.
C)It definitely gets larger as unemployment increases.
D)It is determined in part by the actions of Congress.

Question 19

Which of the following policy options would tend to offset each other?

A)A decrease in the discount rate and a decrease in the reserve requirement.
B)An increase in the discount rate and a decrease in the tax rate.
C)An increase in the reserve requirement and an open market sale by the Fed.
D)An increase in the tax rate and a decrease in government spending.

Question 20

Income taxes are an automatic stabilizer because when income falls,ceteris paribus,tax receipts

A)Fall as taxpayers experience bracket creep.
B)Fall because income taxes are regressive.
C)Rise because automatic stabilizers work against the cyclical movements of the GDP.
D)Fall because taxes are computed on the basis of income.

Question 21

In a recession Keynesians emphasize the need to ________ government spending or ________ taxes,which will cause a multiplier reaction.

A)increase; decrease
B)decrease; decrease
C)increase; increase
D)decrease; increase

Question 22

The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles is the

A)Business cycle.
B)GDP gap.
C)Velocity of money.
D)Multiplier.

Question 23

Which of the following is a Keynesian approach for dealing with a recession?

A)Raise interest rates.
B)Increase government expenditure.
C)Raise taxes.
D)Increase supply incentives for producers.

Question 24

Which of the following is an example of supply-side policy?

A)Selling bonds in the open market.
B)The purchase of military goods by the government.
C)Tax incentives for business investment.
D)Changes in the reserve requirement.

Question 25

In a recession,monetarists believe

A)Velocity varies in response to fiscal policy.
B)Interest rates rise to eliminate the recession.
C)Fiscal policy is ineffective.
D)Marginal tax rates will automatically decrease.

Question 26

Which of the following supply-side efforts did the Clinton administration embrace?

A)Expansion of the money supply.
B)Additional investment in education and skills training.
C)Reduction in immigration of highly skilled workers.
D)Increase in taxes on capital gains.

Question 27

Which of the following believe that lower tax rates will increase the incentives to work,invest,and produce?

A)Keynesians.
B)New classical economists.
C)Monetarists.
D)Supply-siders.

Question 28

Which of the following would a Keynesian macro model include to describe the effect of a tax cut?

A)Labor supply and production responses.
B)Interest rate rises.
C)Multiplier spending responses.
D)A positive relationship between interest rates and investment.

Question 29

The modern Keynesian approach to cure a recession might include

A)Expanding the money supply or increasing government spending.
B)Expanding the money supply or reducing government spending.
C)Contracting the money supply or increasing government spending.
D)Contracting the money supply or reducing government spending.

Question 30

Which of the following believes that the money supply is the critical policy lever?

A)Marxists.
B)Monetarists.
C)Supply-siders.
D)New classical economists.

Question 31

Which of the following is an accurate statement about supply-side policy?

A)The aggregate supply curve should be shifted to the right during periods of inflation and to the left during a recession.
B)The aggregate supply curve should be shifted to the left during periods of inflation and to the right during a recession.
C)The aggregate supply curve should be shifted to the right during periods of both inflation and recession.
D)The aggregate supply curve should be left alone.

Question 32

Which of the following is most consistent with supply-side policy?

A)The Workforce Investment Act,which increased funds for skill training.
B)The increase in the interest rate six times during 1999-2000 by the Fed.
C)The decrease in the growth of the money supply in 1994.
D)The Budget Enforcement Act of 1990.

Question 33

Which of the following supply-side efforts was embraced by the second Bush administration?

A)Reduction of the deficit.
B)Increase in government environmental regulations.
C)Reduction in marginal tax rates.
D)Reduction in spending on infrastructure.

Question 34

If the economy is experiencing a recessionary GDP gap from a demand shock,then aggregate

A)Supply must be increased so that producers can sell more goods.
B)Supply must be decreased so that producers will have fewer goods to sell.
C)Demand must be increased so that producers can sell more goods.
D)Demand must be decreased so that producers will have fewer goods to sell.

Question 35

Which of the following believes that the money supply should be expanded at a steady,predictable rate to ensure a natural rate of unemployment?

A)New classical economists.
B)Keynesians.
C)Supply-siders.
D)Monetarists.

Question 36

The recessionary GDP gap is

A)Equal to the spending multiplier.
B)The amount by which equilibrium GDP falls short of full-employment GDP.
C)Small unless the unemployment rate is very low.
D)Reduced by shifting aggregate demand to the left.

Question 37

During a severe recession,appropriate economic policy might include

A)An open market purchase by the Fed,a decrease in the discount rate,or a decrease in government regulation.
B)An open market sale by the Fed,a decrease in the discount rate,or an increase in the budget deficit.
C)A decrease in government spending,a decrease in the discount rate,or a decrease in government regulation.
D)An open market purchase by the Fed,a decrease in the tax rates,or a decrease in the budget deficit.

Question 38

Supply-side policy is designed to

A)Move the economy from a point inside the production possibilities curve to a point on the curve and shift the aggregate supply curve to the left.
B)Move the economy from a point inside the production possibilities curve to a point on the curve and shift the aggregate supply curve to the right.
C)Shift the production possibilities curve outward and shift the aggregate supply curve to the left.
D)Shift the production possibilities curve outward and shift the long-run aggregate supply curve to the right.

Question 39

The natural rate of unemployment is the

A)Rate that would occur if the structural deficit were zero.
B)Rate that corresponds to 3 percent inflation on the Phillips curve.
C)Long-term rate determined by structural forces in labor and product markets.
D)Amount of cyclical unemployment minus the anticipated rate of unemployment.

Question 40

Which of the following is a monetary policy action to eliminate a recession?

A)Increased investment in job training programs.
B)The sale of securities in the open market by the Fed.
C)A decrease in the marginal tax rate.
D)A decrease in the discount rate.

Question 41

An inflationary GDP gap is equal to the

A)Recessionary GDP gap.
B)Difference between equilibrium GDP and full-employment GDP.
C)Difference between potential GDP and full-employment GDP.
D)Increase in the price level caused by the inflation.

Question 42

Monetary policy to cure inflation might include

A)A decrease in discretionary spending.
B)The purchase of securities in the open market by the Fed.
C)An increase in automatic stabilizers.
D)An increase in the discount rate.

Question 43

An inflationary GDP gap is the amount by which ________ exceeds _______.

A)potential GDP; actual GDP
B)equilibrium output; actual output
C)full-employment GDP; potential GDP
D)equilibrium GDP; full-employment GDP

Question 44

Which of the following is not a supply-side policy to cure inflation?

A)Reduced marginal tax rates.
B)Incentives to encourage saving.
C)Lower interest rates.
D)Reduced import barriers.

Question 45

Fiscal and monetary policy can be used to change the price level but not output when the aggregate

A)Supply curve is horizontal.
B)Supply curve is vertical.
C)Supply curve is upward-sloping but not vertical.
D)Demand curve is vertical.

Question 46

Which of the following is a supply-side policy action to eliminate a recession?

A)Increased investment in infrastructure.
B)The purchase of securities in the open market by the Fed.
C)An increase in the marginal tax rate.
D)A decrease in the reserve requirement.

Question 47

Which of the following groups believes that the velocity of money is constant in the long run?

A)Keynesians.
B)Monetarists.
C)Supply-side economists.
D)New classical economists.

Question 48

A fiscal policy cure for inflation might include

A)A reduction in government spending.
B)An increase in the reserve requirement.
C)Reductions in marginal tax rates for corporations and households.
D)Infrastructure development.

Question 49

Which of the following is not a policy to reduce stagflation?

A)Restricting immigration.
B)Developing infrastructure.
C)Investing in human capital.
D)Deregulation.

Question 50

The simultaneous occurrence of high inflation and high unemployment is called

A)Reflation.
B)Stagflation.
C)Deflation.
D)Depression.

Question 51

Who believes the government should react to inflation by tightening the money supply?

A)Modern Keynesians and supply-siders.
B)Monetarists and modern Keynesians.
C)New classical economists and monetarists.
D)Supply-siders and monetarists.

Question 52

A supply-side policy to cure inflation would include

A)A minimum wage increase.
B)Tax increases.
C)Deregulation.
D)A reserve requirement decrease.

Question 53

A supply-side policy to cure a recession might include

A)A decrease in government spending.
B)Elimination of the minimum wage.
C)A tax increase.
D)A decrease in the reserve requirement.

Question 54

Which of the following groups designs policies that are best at eliminating stagflation?

A)Keynesians.
B)Monetarists.
C)Supply-side economists.
D)New classical economists.

Question 55

Fiscal and monetary policies are most effective in reducing inflation when the aggregate

A)Supply curve is horizontal.
B)Supply curve is vertical.
C)Supply curve is upward-sloping but not vertical.
D)Demand curve is vertical.

Question 56

A supply-side policy to cure stagflation would include

A)Reduced government spending.
B)Reduced government regulation.
C)The purchase of securities in the open market by the Fed.
D)A higher reserve requirement.

Question 57

Which of the following is both a supply-side and a fiscal policy tool during a recession?

A)Deregulation.
B)Tax cuts.
C)Welfare programs.
D)Liberalized immigration laws.

Question 58

Supply-side policy to reduce inflation would focus on

A)Decreasing the money supply.
B)Decreasing the interest rates to encourage investment.
C)Increasing the incentives to produce goods and services.
D)Raising marginal tax rates to reduce aggregate demanD.Actions such as tax cuts and deregulation will increase AS,thereby leading to a reduction in inflation.

Question 59

Which of the following is true about stagflation?

A)It can be corrected by policies that increase aggregate supply.
B)It results in a lower value of the misery index.
C)It can be corrected by demand-side policies.
D)The best policy to treat it is to do nothing.

Question 60

The number of times per year,on average,that a dollar is used to purchase final goods and services is the

A)Business cycle.
B)Multiplier.
C)Velocity of money.
D)Money magnifier.

Question 61

Which of the following statements is consistent with economists who favor fine-tuning?

A)Political disagreements make economic policies difficult to implement.
B)Measuring economic performance is complicated because of the size of the economy.
C)Designing economic policies that please everyone is complex.
D)Changing economic policies in response to market changes is reasonable.

Question 62

Which of the following is true about the U.S.economy?

A)It has been able to do away with the business cycle.
B)It still experiences periods of inflation and unemployment.
C)It had greater economic problems than other Western countries in the 1990s.
D)It has experienced 30 years of outright recession in the last 50 years.

Question 63

Which of the following is an accurate statement concerning the macroeconomy of the United States?

A)The goals of full employment,price stability and vigorous economic growth are frequently met.
B)The economy continues to experience the ups and downs of the business cycle.
C)The ups and downs of the business cycle have been more severe since World War II.
D)Politics never takes precedence over the country's economic problems.

Question 64

The opportunity costs of different policies must be weighed to solve which of the following obstacles?

A)Rational expectations problems.
B)Measurement problems.
C)Goal conflicts.
D)Implementation problems.

Question 65

Fine-tuning is most consistent with

A)Keynesian or Modern Keynesian economics.
B)Monetarism or new classical economics.
C)Supply-side economics or new classical economics.
D)Marxism.

Question 66

If the data collected by policy makers overstate inflation,this is an example of

A)A goal conflict.
B)A measurement problem.
C)A design problem.
D)An implementation problem.

Question 67

Which of the following is true about the U.S.economy from 1992 to 1999?

A)It performed above average based on most measures.
B)It had the lowest unemployment levels of the century.
C)It experienced zero inflation most years.
D)It experienced sluggish growth in GDP most years.

Question 68

Efforts to fine-tune the economy have been used for several decades,and as a result

A)We have successfully achieved our major economic goals at all times.
B)We still experience periods of recession,high unemployment,and inflation.
C)Employment goals have been met,but price stability has not been attained.
D)Price stability goals have been met,but full employment has not been attaineD.Fine-tuning sounds great,but it does not ultimately prevent the economy from slipping into recessions.

Question 69

The correction of any and all macroeconomic problems that arise

A)Is compatible with our design capabilities.
B)Has been easy to accomplish over the last decade.
C)Is the concept of fine-tuning.
D)Is the policy approach favored by most economists.

Question 70

Many economists argue that government price indexes overstate inflation by 1 to 2 percent.From the point of view of those designing economic policy,this is an example of

A)A measurement problem.
B)A goal conflict.
C)A design problem.
D)An implementation problem.

Question 71

The decision concerning how the dollars left over from a defense cutback will be distributed is an example of

A)A goal conflict.
B)A design problem.
C)A velocity problem.
D)An implementation problem.

Question 72

Alternating periods of economic growth and contraction are referred to as

A)Fiscal policy.
B)A policy lever.
C)The business cycle.
D)The fiscal cycle.

Question 73

Which of the following is not a leading indicator for economic activity?

A)Orders for new equipment.
B)The level of inventories.
C)Natural disasters.
D)Building permits.

Question 74

Business cycles in the United States

A)Are remarkably similar in length but vary greatly in intensity.
B)Vary greatly in length,frequency,and intensity.
C)Are similar in frequency and intensity.
D)Are similar in length,frequency,and intensity.

Question 75

The index of leading indicators is a factor that

A)We can observe today that is logically linked to future economic performance.
B)Generally moves in a positive direction before recessions.
C)Is published weekly and provides forecasts of the economy three to six months in advance.
D)Is a mathematical summary of the economy's past performance.

Question 76

A growth recession is characterized by

A)An increasing unemployment rate with moderate inflation.
B)An increasing unemployment rate with substantial inflation.
C)A positive growth rate below 3 percent annually.
D)A negative growth rate with a low inflation rate.

Question 77

Since World War II,the business cycle has been characterized by

A)Increasingly longer recessions.
B)Shorter periods of growth.
C)Alternating periods of expansion and contraction.
D)Steady,continued growth.

Question 78

Which of the following concepts does not represent basic trade-offs faced by a government?

A)The production possibilities curve.
B)Fine-tuning.
C)Opportunity costs.
D)The Phillips curve.

Question 79

Which of the following is not true about macroeconomic models?

A)They are based on theories of macroeconomic behavior.
B)They are mathematical summaries of the economy's performance.
C)They attempt to identify key determinants of macro performance.
D)They tend to agree with each other about how the economy works.

Question 80

Many economic policies fail for all of the following reasons except

A)It is difficult to accurately measure economic performance.
B)Economic forecasts may be inaccurate.
C)There are significant lags in response to policy implementation.
D)Politicians and economists work together in formulating policies.