Deck 11: Fiscal Policy

Question 1

Classical economists believed that the economy automatically moves toward equilibrium at full employment.​

Answer 1

True

Question 2

Most government purchases are made at the federal level and not at the state level.​

Answer 2

False

Question 3

Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded.​

Answer 3

False

Question 4

The simple spending multiplier understates the amount by which output changes.​

Question 5

An increase in government purchases must always be accompanied by an increase in autonomous net taxes to boost aggregate demand.​

Question 6

Discretionary fiscal policy works by shifting the aggregate demand curve.​

Question 7

The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.​

Question 8

A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.

Question 9

According to Keynesian theory,the natural forces in the economy may not quickly move the economy toward potential real GDP.​

Question 10

The only way by which government can affect aggregate demand is through changes in its own purchases.​

Question 11

A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve.​

Question 12

Keynes believed that the economy does not automatically move toward an equilibrium at full employment.​

Question 13

At a level of output equal to the economy's potential,the simple spending multiplier in the long run equals one.​

Question 14

Expansionary and contractionary gaps are automatically eliminated by shifts in aggregate demand.​

Question 15

​One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output,but at the cost of increasing the price level.

Question 16

A $100 billion increase in government purchases will have the same effect on real GDP as a $100billion decrease in net taxes.​

Question 17

The unemployment problem becomes more severe if prices are sticky downward.​

Question 18

Discretionary fiscal policy works by shifting the short-run aggregate supply curve.​

Question 19

A decrease in net taxes during a recession increases aggregate demand and helps the economy return to its potential output level.​

Question 20

Either an increase in autonomous net taxes or a decrease in government purchases can close an expansionary gap.​

Question 21

The American Recovery and Reinvestment Act passed in February 2009 was the largest measure of discretionary fiscal policy in US history.​

Question 22

​Government transfer payments are a good example of an automatic stabilizer.

Question 23

Growing capital spending and privatization were two of the factors due to which the U.S.economy experienced a strong recovery in 1994.​

Question 24

​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 25

There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.​

Question 26

It has been estimated that the marginal propensity to consume out of tax rebate money is around 1/3.​

Question 27

The government's $168 billion plan to stimulate the softening economy in 2008 failed partly because the tax cuts were temporary.​

Question 28

Because of automatic stabilizers,disposable income varies proportionately less than real GDP during periods of economic fluctuations.​

Question 29

​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)only money supply

Question 30

The natural rate of unemployment is that rate at which the economy achieves its potential real GDP.​

Question 31

​The one-time tax cuts used by the Bush administration to stimulate the economy in 2008 proved to be very successful.

Question 32

Military spending is a good example of an automatic stabilizer.​

Question 33

One drawback of fiscal policy is the time it takes to enact the legislation necessary to activate it.​

Question 34

The supply-side effect of higher tax rates would include a fall in the economy's potential GDP.​

Question 35

The existence of stagflation in the 1970s undermined the credibility of demand-management policies.​

Question 36

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

A)Money supply
B)Government purchases
C)Taxes
D)Social Security program​
E)Unemployment benefits

Question 37

​Recent studies on the effectiveness of fiscal policy tend to suggest that the government spending multiplier is less than 1.0.

Question 38

Unemployment insurance is an example of a discretionary fiscal policy.​

Question 39

One of the difficulties in using discretionary fiscal policy effectively is that the legislative decision-making process is sometimes very long and drawn out.​

Question 40

Recent studies on the effectiveness of fiscal policy tend to suggest that increases in government spending are more effective than tax cuts in stimulating real GDP.​

Question 41

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 either disposable income,consumption,or saving.

Question 42

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 43

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 government spending
E)have no effect on disposable income.

Question 44

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)affect government spending since the government levies the tax.
E)increase real GDP since it enables the government to increase spending.

Question 45

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 46

​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.

Question 47

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 48

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

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

Question 49

​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 50

Which of the following is a component of aggregate demand?​

A)Transfer payments from government
B)Taxation by government
C)Purchases by government
D)Borrowing by government
E)Saving by consumers

Question 51

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 52

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 53

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

A)Saving
B)Disposable income
C)Consumption
D)Government expenditure
E)GDP

Question 54

Discretionary fiscal policy is a policy that _____.​

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

Question 55

​A tax is considered to be independent of:

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

Question 56

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 57

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 58

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 _____ in aggregate demand.​

A)an increase
B)an increase
C)a decrease
D)a decrease
E)no change

Question 59

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 60

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.

Question 61

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 62

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 63

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 64

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 65

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

A)Defense spending
B)Road construction
C)Grants for scientific research and development
D)Social Security for women
E)Government purchases of labor

Question 66

_____ 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 67

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)raises the equilibrium level of output and employment.

Question 68

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

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 69

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 70

The exact change in equilibrium output due to a shift in short-run aggregate demand 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 71

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 72

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

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

Question 73

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 74

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 75

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 76

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 77

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 78

​Figure 11.1 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? ​
Figure 11.1​

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 79

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 80

A change in net taxes affects the equilibrium quantity of GDP demanded_____.​

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