Deck 12: Fiscal Policy

Question 1

The total quantity of output demanded at alternative price levels refers to:

A) Macro equilibrium.
B) Consumption.
C) Market demand.
D) Aggregate demanD.

Answer 1

D

Question 2

In a graph of the aggregate demand curve,an increase in investment by businesses is represented by a:

A) Movement down the curve.
B) Movement up the curve.
C) Rightward shift of the curve.
D) Leftward shift of the curve.

Answer 2

C

Question 3

Which of the following is not an example of investment spending?

A) Construction of a new factory
B) The purchase of stock in the stock market
C) Inventory expenditures
D) New equipment

Answer 3

B

Question 4

Which of the following could cause a recession?

A) A decline in aggregate demand
B) A decline in unemployment
C) An increase in aggregate supply
D) An increase in government spending

Question 5

The four components of aggregate demand are:

A) Net exports,income,interest,and investment.
B) Consumption,investment,government spending,and net exports.
C) Consumption,interest,and government spending.
D) Net exports,government spending,investment,and foreign trade.

Question 6

Fiscal policy includes:

A) An increase in interest rates.
B) An increase in taxes.
C) A reduction in trade barriers.
D) An increase in the minimum wage.

Question 7

Which of the following is the largest component of aggregate demand for the U.S.economy?

A) Consumption
B) Government expenditures
C) Business investment
D) Net exports

Question 8

In a graph of the aggregate demand curve,a decrease in investment by businesses is represented by a:

A) Leftward shift of the curve.
B) Rightward shift of the curve.
C) Movement up the curve.
D) Movement down the curve.

Question 9

An improvement in consumer confidence will cause:

A) A movement down the aggregate demand curve.
B) The aggregate supply curve to shift to the right.
C) The aggregate demand curve to shift to the right.
D) The aggregate demand curve to shift to the left.

Question 10

Expenditures on new plant and equipment plus changes in business inventories defines:

A) Aggregate demand.
B) Investment.
C) Net exports.
D) Fiscal policy.

Question 11

Fiscal policy includes:

A) A decrease in immigration restrictions.
B) A decrease in import barriers.
C) An increase in government spending.
D) An increase in the discount rate.

Question 12

Which of the following relies on government taxes and spending to change macro outcomes?

A) Fiscal policy
B) Monetary policy
C) Income policy
D) Foreign-trade policy

Question 13

Ceteris paribus,an increase in _______ will cause an increase in _______.

A) Disposable income;government spending
B) Consumer confidence;aggregate demand
C) Taxes;consumption
D) Imports;disposable income

Question 14

What fiscal policy tools are used to shift the aggregate demand curve?

A) Government spending and interest rates
B) Taxes and interest rates
C) Government spending and taxes
D) Taxes and employment rates

Question 15

All of the following represent government spending as a part of aggregate demand except for:

A) Flood control.
B) National parks.
C) Police and fire protection.
D) Social Security checks.

Question 16

Inflation occurs when:

A) Aggregate demand increases faster than unemployment.
B) Unemployment increases faster than the labor force.
C) Aggregate demand increases faster than output.
D) Output increases faster than unemployment.

Question 17

Ceteris paribus,_______ in consumer confidence will cause _______ in aggregate demand.

A) A decrease;a decrease
B) A decrease;no change
C) An increase;a decrease
D) An increase;no change

Question 18

Which of the following is not a component of aggregate demand?

A) Consumption
B) Net exports
C) Investment
D) Income transfers

Question 19

Expenditure by households on final goods and services is referred to as:

A) Investment.
B) Disposable income.
C) Consumption.
D) Aggregate demanD.

Question 20

During the Great Depression,Keynes advocated the use of _____ policy to increase the _____ goods and services.

A) Monetary;demand for
B) Fiscal;demand for
C) Monetary;supply of
D) Fiscal;supply of

Question 21

Net exports in the United States are:

A) Always positive.
B) Greater than federal government expenditures as a percentage of GDP.
C) Included in the calculation of GDP.
D) The sum of exports and imports.

Question 22

When calculating aggregate demand,government expenditure:

A) Includes income transfers.
B) Includes expenditures by the federal government but not state and local government.
C) Represents the largest component of aggregate demand for the United States.
D) Includes spending by federal,state,and local governments on goods and services.

Question 23

When calculating aggregate demand,government expenditure:

A) Includes only federal government spending on goods and services.
B) Includes spending by federal,state,and local governments on goods and services.
C) Includes income transfers.
D) Represents the largest component of aggregate demand in the United States.

Question 24

When the economy overheats,the government sometimes cools it down with higher taxes,spending reductions,and less money.Which of the following indicates the appropriate change in the U.S.economy after government intervention?

A) Aggregate demand shifts to the left
B) Aggregate demand shifts to the right
C) The economy moves up along the aggregate demand curve
D) The economy moves down along the aggregate demand curve

Question 25

Ceteris paribus,which of the following changes in the aggregate demand curve best characterizes a cutback in exports?

A) A rightward shift
B) A leftward shift
C) An upward movement along the curve
D) A downward movement along the curve

Question 26

The combination of price level and real output that is compatible with both aggregate demand and aggregate supply is known as:

A) Full employment.
B) Fiscal policy.
C) Inflation.
D) Equilibrium.

Question 27

Which of the following is consistent with what Keynes believed?

A) Markets automatically self-adjust to full employment very quickly
B) The economy is inherently stable
C) Monetary policy should be used to shift the aggregate supply curve
D) Fiscal policy should be used to shift the aggregate demand curve

Question 28

Which of the following will occur if aggregate demand is above full-employment GDP?

A) Recession
B) Unemployment
C) Inflation
D) A stable economy

Question 29

Which of the following is true about Keynes?

A) He focused primarily on reducing inflation by shifting aggregate supply
B) He was a classical economist and prescribed a policy of laissez faire
C) He believed aggregate demand could be inadequate to ensure full employment
D) He was opposed to government intervention in the economy

Question 30

Net exports for the United States are:

A) Negative if American exports are less than imports.
B) Negative if American exports are greater than imports.
C) Zero if American exports are greater than imports.
D) Positive if American exports are less than imports.

Question 31

On October 24,1929,the stock market crashed.By the end of the year,over $40 billion of wealth had vanished.Which of the following indicates the appropriate change in the U.S.economy?

A) The economy moved up along the aggregate demand curve.
B) The economy moved down along the aggregate demand curve.
C) Aggregate demand shifted to the left.
D) Aggregate demand shifted to the right.

Question 32

According to Keynes,which of the following is possible at the intersection of aggregate supply and aggregate demand?

A) Full employment or high levels of unemployment,but not inflation
B) Inflation,full employment,or high levels of unemployment
C) Inflation and high levels of unemployment,but not full employment
D) Full employment,but not high levels of unemployment or inflation

Question 33

Exports minus imports are referred to as:

A) Net imports.
B) Net exports.
C) Sub imports.
D) Sub exports.

Question 34

Equilibrium:

A) Will only occur at full employment.
B) Can occur at any output level.
C) Will occur at or below full employment.
D) Will occur at or above full employment.

Question 35

Most of the countries in the world suffered long and deep losses of output and employment between 1930 and 1935,which in turn meant fewer purchases of U.S.goods and services.Which of the following indicates the appropriate change in the U.S.economy?

A) Aggregate demand shifted to the left
B) Aggregate demand shifted to the right
C) The economy moved up along the aggregate demand curve
D) The economy moved down along the aggregate demand curve

Question 36

According to Keynes,which of the following is always true at macro equilibrium?

A) The economy achieves full employment
B) Aggregate demand is inadequate
C) Prices are at the appropriate level
D) Aggregate demand equals aggregate supply

Question 37

Between 1921 and 1927,the stock market's value more than doubled,adding billions of dollars to the wealth of U.S.households and businesses.Which of the following indicates the appropriate change in the U.S.economy?

A) The economy moved up along the aggregate demand curve
B) The economy moved down along the aggregate demand curve
C) Aggregate demand shifted to the left
D) Aggregate demand shifted to the right

Question 38

Which of the following will occur if aggregate demand is below full-employment GDP?

A) Recession
B) Excessive aggregate demand
C) Inflation
D) A stable economy

Question 39

All economists agree that in the short run:

A) Equilibrium may not be possible.
B) Macro failure is possible.
C) Full employment will occur.
D) Demand-side policies are the best option.

Question 40

All of the following represent government spending as a part of aggregate demand except for:

A) Federal government spending on roads.
B) State and local government spending on schools.
C) Income transfers.
D) National defense.

Question 41

Fiscal stimulus includes all of the following except:

A) Government spending for highways.
B) Government purchase of military goods.
C) An increase in saving.
D) A tax cut.

Question 42

The GDP gap is:

A) The difference between equilibrium output and full-employment output.
B) The amount of output at the ideal price level.
C) Equal to the difference between imports and exports.
D) Equal to the multiplier.

Question 43

Saving:

A) Is the part of disposable income that is not yet spent.
B) Only includes dollars deposited in a financial institution.
C) Is a part of aggregate demand.
D) Is equal to income plus consumption.

Question 44

The purpose of fiscal stimulus is to shift aggregate:

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

Question 45

The fraction of each additional dollar of disposable income not spent on consumption is referred to as:

A) The money multiplier.
B) The MPC.
C) The MPS.
D) Fiscal stimulus.

Question 46

Which of the following will definitely result in fiscal stimulus?

A) Greater government spending and lower taxes
B) Greater government spending and higher taxes
C) Lower government spending and lower taxes
D) Lower government spending and higher taxes

Question 47

Which of the following is an example of fiscal stimulus?

A) An increase in government spending on new military jet fighters
B) An increase in consumption because of improved consumer confidence
C) An increase in personal income taxes for families with children
D) An increase in the purchase of office buildings by foreign investors

Question 48

The terrorist attacks in September 2001 reduced consumer confidence.Which of the following indicates the resulting change in the U.S.economy?

A) The economy moved up along the aggregate demand curve
B) The economy moved down along the aggregate demand curve
C) Aggregate demand shifted to the left
D) Aggregate demand shifted to the right

Question 49

Which of the following does not meet the economic definition of saving?

A) A graduate assistant spends all of his income on tuition
B) A student deposits money in her savings account
C) A professor spends less than he makes each month
D) The president's secretary puts cash under her mattress

Question 50

Which of the following provides fiscal stimulus to the economy?

A) Higher interest rates
B) Increased imports
C) More efficient employment of resources
D) Increased government purchases

Question 51

If an economy has a GDP gap,such that equilibrium output is less than full-employment output,which of the following is a correct fiscal-policy action?

A) A reduction in Social Security payments
B) An increase in the money supply
C) An increase in government expenditures
D) An increase in the tax rate

Question 52

The marginal propensity to consume is:

A) Total consumption in a given period divided by total disposable income.
B) The percentage of total disposable income spent on consumption.
C) That part of the average consumer dollar that goes to the purchase of final goods.
D) The fraction of each additional dollar of disposable income spent on consumption.

Question 53

The Tax Equity and Fiscal Responsibility Act of 1982 increased taxes in an effort to reduce inflationary pressure.Which of the following indicates the appropriate change in the U.S.economy?

A) Aggregate demand shifted to the left
B) Aggregate demand shifted to the right
C) The economy moved up along the aggregate demand curve
D) The economy moved down along the aggregate demand curve

Question 54

If consumers spend 98 cents out of every extra dollar received,the:

A) MPC is 98.
B) MPS is 1.02.
C) MPC is 0.98.
D) MPC is 0.

Question 55

Fiscal stimulus is:

A) An increase or decrease in government spending.
B) An increase in government spending or a decrease in taxes.
C) Achieved when government dollars are spent on consumer goods but not on military goods.
D) The difference between equilibrium output and full-employment output.

Question 56

A tax cut or government spending increase intended to shift aggregate demand to the right is known as:

A) Aggregate demand excess.
B) The GDP gap.
C) Fiscal stimulus.
D) Fiscal restraint.

Question 57

If consumers spend 79 cents out of every extra dollar received,the:

A) Multiplier is 0.79.
B) MPC is 0.79.
C) MPS is 0.79.
D) MPC is 0.

Question 58

Which of the following is a fiscal policy prescription for ending a recession?

A) Raise taxes to pay for greater transfer payments to stimulate the economy
B) Increase government expenditures to let the multiplier work
C) Raise interest rates to stimulate saving
D) Restrict exports to increase injections in the domestic economy

Question 59

If the value of the dollar plummets in international currency markets,initially this causes foreigners to buy more American goods.Which of the following indicates the appropriate change in the U.S.economy?

A) The economy moves up along the aggregate demand curve
B) The economy moves down along the aggregate demand curve
C) Aggregate demand shifts to the left
D) Aggregate demand shifts to the right

Question 60

Which of the following is the correct formula for the marginal propensity to consume?

A) MPC = 1 ÷ (1 - MPC).
B) MPC = (total consumption)÷ (total disposable income).
C) MPC = 1 - MPS.
D) MPC = (change in consumption)+ (change in disposable income).

Question 61

Ceteris paribus,based on the circular flow model,a spending injection results in:

A) A decrease in total income for consumers.
B) An increase in total income for consumers.
C) An increase in the MPS.
D) A decrease in the MPS.

Question 62

What is the total impact on aggregate demand because of a fiscal stimulus?

A) The amount of the initial increase in government spending
B) The changes in consumer spending,but not the change in government spending
C) The initial injection plus all subsequent increases in consumer spending triggered by the stimulus
D) The initial injection plus the consumption increase in the first round

Question 63

If consumers save 21 cents out of every dollar received,the:

A) MPS is 0.79.
B) MPC is 0.21.
C) Multiplier is 0.21.
D) MPS is 0.

Question 64

If government spending increases,which causes producers to hire more workers,and as a result households have more income to spend,which causes aggregate demand to increase even more,this is known as the:

A) Magnifying process.
B) Multiplier process.
C) Saving effect.
D) Fiscal effect.

Question 65

The marginal propensity to save is equal to:

A) 1 - MPC.
B) 1 - multiplier.
C) 1 ÷ MPC.
D) (Total savings)÷ (total disposable income).

Question 66

If the marginal propensity to save is 0.1 and government spending is raised by $5 billion,then total aggregate spending will rise by:

A) $500 million.
B) $5 billion.
C) $10 billion.
D) $50 billion.

Question 67

If consumers spend 85 cents out of every extra dollar received,the:

A) MPC is 0.85.
B) MPC is 0.15.
C) MPC is 6.67.
D) MPS is 0.

Question 68

The multiplier is equal to:

A) 1 - MPC.
B) MPS ÷ MPC.
C) 1 ÷ MPS.
D) 1 ÷ MPC.

Question 69

Ceteris paribus,if the government transfers income from individuals with a high MPC to those with a low MPC,in the short run,spending and output will:

A) Increase.
B) Decrease.
C) Stay the same.
D) Increase or decrease depending on the level of saving.

Question 70

If consumers spend 75 cents out of every extra dollar received,the:

A) MPS is 0.75.
B) MPC is 0.25.
C) Multiplier is 4.
D) Multiplier is 7.

Question 71

Which of the following helps explain the multiplier effect?

A) Income is spent and re-spent in the circular flow model.
B) People buy a lot of luxury items.
C) Incomes tend to increase with inflation.
D) Banks only hold a fraction of their deposits on reserve.

Question 72

If consumers save 8 cents out of every dollar received,the:

A) MPC is 0.08.
B) MPS is 0.08.
C) Multiplier is 0.08.
D) Multiplier is 0.

Question 73

Assume an MPC of 0.75.The change in total spending for the economy as a result of a $20 billion new government spending injection would be:

A) $80 billion.
B) $27 billion.
C) $22 billion.
D) $15 billion.

Question 74

Which of the following economies has the largest multiplier?

A) Economy A with an MPS of 0.08
B) Economy B with an MPS of 0.12
C) Economy C with an MPC of 0.94
D) Economy D with an MPC of 0.

Question 75

If consumers save 15 cents out of every dollar received,the:

A) Multiplier is 15.
B) MPS is 0.85.
C) MPS is 0.15.
D) Multiplier is 0.

Question 76

Assume an MPC of 0.6.The change in total spending for the economy as a result of a $10 billion new government spending injection would be:

A) $6 billion.
B) $25 billion.
C) $60 billion.
D) $600 billion.

Question 77

If the current level of spending falls short of full employment,the government can close the GDP gap by:

A) Increasing government spending by an amount less than the GDP gap.
B) Increasing government spending by an amount greater than the GDP gap.
C) Decreasing government spending by an amount less than the GDP gap.
D) Decreasing government spending by an amount greater than the GDP gap.

Question 78

The marginal propensity to save is:

A) Equal to (1 + MPC).
B) The fraction of each additional dollar of saving that goes to the stock market.
C) The fraction of each additional dollar of disposable income that goes to saving.
D) (Total savings)÷ (total disposable income).

Question 79

If consumers spend 80 cents out of every extra dollar received,the:

A) MPS is 0.80.
B) MPC is 0.20.
C) Multiplier is 20.
D) Multiplier is 5.

Question 80

Which of the following economies has the largest multiplier?

A) Economy A with an MPS of 0.5
B) Economy B with an MPS of 0.1
C) Economy C with an MPC of 0.8
D) Economy D with an MPC of 0.