Deck 13: Fiscal Policy

Question 1

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

Answer 1

False

Question 2

Discretionary fiscal policy works by shifting the aggregate demand curve.

Answer 2

True

Question 3

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 3

D

Question 4

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

Question 5

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

Question 6

Fiscal policy is concerned with

A)government spending and taxation only
B)government spending and money only
C)money and taxation only
D)government spending, taxation, and money
E)money only

Question 7

Most government purchases are made at the federal, not the state, level of government.

Question 8

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 9

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 interest rate
E)corporate income taxes

Question 10

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 11

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

Question 12

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 powers 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 13

"Net taxes" equals "taxes minus transfer payments."

Question 14

Discretionary fiscal policy is policy that

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

Question 15

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 16

If government purchases increase by $10 billion when the MPC is 0.8, then real GDP will increase by $50 billion.

Question 17

Which of the following are used in fiscal policy?

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

Question 18

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

A)Congress provides $1 billion in relief aid for hurricane victims.
B)Congress appropriates $500 million to help the needy, and the appropriation is financed by a tax on wealth.
C)Income tax receipts are smaller because of a decline in real GDP during a recession.
D)The Federal Reserve tightens credit when it receives news of accelerating inflation.
E)Congress passes a bill authorizing $2 billion in additional spending when it receives news of a deepening recession.

Question 19

An increase in government purchases must always be accompanied by an increase in autonomous net taxes.

Question 20

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

Question 21

Exhibit 12-1

Given the information in Exhibit 12-1, the government spending multiplier is equal to

A)2
B)3
C)4
D)5
E)6

Question 22

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, what would the equilibrium real GDP be equal to if autonomous government spending increased by $100?

A)$400
B)$500
C)$600
D)$700
E)$800

Question 23

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 24

Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increase

A)by $100
B)by $2,000
C)by $1,000
D)to $1,400
E)to $2,000

Question 25

If the government increases its purchases by $100 and the multiplier is 4, then equilibrium real GDP demanded

A)increases by $25
B)decreases by $25
C)increases by $100
D)increases by $400
E)decreases by $400

Question 26

If the MPC = 0.6 and government purchases increase by $2 trillion, then equilibrium real GDP demanded

A)increases by $5 trillion
B)decreases by the government multiplier
C)increases by $2 trillion
D)decreases by $5 trillion
E)is indeterminate

Question 27

Which of the following assumptions is usually made about government purchases?

A)They vary directly with the interest rate.
B)They are autonomous.
C)They vary directly with the level of income.
D)They equal the level of net taxes in equilibrium.
E)They vary inversely with the level of income.

Question 28

If the MPC is 0.75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by

A)$75 billion
B)$100 billion
C)$300 billion
D)$400 billion
E)$500 billion

Question 29

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, how would a $100 decrease in autonomous government spending impact real GDP?

A)decrease real GDP by $200
B)decrease real GDP by $100
C)no impact on real GDP
D)increase real GDP by $100
E)increase real GDP by $200

Question 30

Government purchases are assumed to be autonomous because they are

A)independent of the price level
B)independent of the level of real GDP
C)independent of consumption
D)independent of investment
E)determined by the government independent of the desires of the households in the economy

Question 31

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 32

When government purchases increase, the spending multiplier tells us 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 33

If equilibrium real GDP demanded rises from $4 trillion to $6 trillion when government purchases increase by $1 trillion, how large is the marginal propensity to consume?

A)0.8
B)0.4
C)0.5
D)0.2
E)2

Question 34

Exhibit 12-1

Given the information in Exhibit 12-1, if government purchases increased to $100, equilibrium real GDP demanded would

A)decrease by $100
B)decrease by $300
C)decrease by $500
D)stay the same
E)increase by $100

Question 35

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, what would the equilibrium real GDP be equal to if autonomous government spending decreased by $100?

A)$400
B)$500
C)$600
D)$700
E)$800

Question 36

If government expenditures or taxes are assumed to be autonomous, they

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

Question 37

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, how would a $100 increase in autonomous government spending impact real GDP?

A)decrease real GDP by $200
B)decrease real GDP by $100
C)no impact on real GDP
D)increase real GDP by $100
E)increase real GDP by $200

Question 38

Exhibit 12-1

Given the information in Exhibit 12-1, if government purchases increased to $300, equilibrium real GDP demanded would increase by

A)$300
B)$500
C)$1,200
D)$1,500
E)$2,500

Question 39

If the Naval Research Labs fired a chemist and the Environmental Protection Agency hired her at the same salary, the net effect of these events would to be __________ in aggregate demand.

A)an increase (rightward shift)
B)an increase (leftward shift)
C)a decrease (rightward shift)
D)a decrease (leftward shift)
E)no change

Question 40

If the MPC equals 0.75 and G increases by $100, real GDP demanded will increase by

A)75 percent
B)25 percent
C)$50
D)$200
E)$400

Question 41

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, thereby increasing consumption
E)has no effect on aggregate expenditure

Question 42

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, what would the equilibrium real GDP be equal to if autonomous net taxes increased by $100?

A)$400
B)$500
C)$600
D)$700
E)$800

Question 43

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, if net taxes was independent of the level of real GDP what would the tax multiplier be equal to?

A)0
B)1
C)2
D)3
E)4

Question 44

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, how would a $100 decrease in autonomous net taxes impact real GDP?

A)decrease real GDP by $200
B)decrease real GDP by $100
C)no impact on real GDP
D)increase real GDP by $100
E)increase real GDP by $200

Question 45

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

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

Question 46

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, how would a $100 increase in autonomous net taxes impact real GDP?

A)decrease real GDP by $200
B)decrease real GDP by $100
C)no impact on real GDP
D)increase real GDP by $100
E)increase real GDP by $200

Question 47

A $200 increase in government purchases has a greater effect on the equilibrium level of real GDP than a $200 decrease in autonomous net taxes would.

Question 48

A $200 increase in government purchases has less of an impact on the equilibrium level of real GDP than a decrease in autonomous net taxes of $200 would.

Question 49

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 using net taxes to encourage firms to invest
E)by producing public goods

Question 50

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 51

If government purchases and autonomous net taxes increase by the same amount, the equilibrium level of real GDP will be unchanged.

Question 52

A $100 increase in government purchases will have exactly the same effect on equilibrium real GDP as a $125 decrease in autonomous net taxes regardless of the value of the MPC.

Question 53

An increase in the MPC will increase the simple tax multiplier but have no effect on the simple spending multiplier.

Question 54

A $200 increase in government purchases has the same effect on the equilibrium level of real GDP as a $200 decrease in autonomous net taxes would.

Question 55

Government military spending affects aggregate demand the same way government payments for Social Security would.

Question 56

If autonomous net taxes decrease, which of the following correctly describes the effects?

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 57

The simple tax multiplier must always be smaller than the simple spending multiplier, regardless of the value of the MPC.

Question 58

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, if government spending was independent of the level of real GDP what would the government spending multiplier be equal to?

A)0
B)1
C)2
D)3
E)4

Question 59

A $100 increase in government purchases will have exactly the same effect on equilibrium real GDP as a $125 decrease in autonomous net taxes when the MPC equals 0.8.

Question 60

Exhibit 12-2

In an economy characterized by the aggregate expenditure line in Exhibit 12-2, what would the equilibrium real GDP be equal to if autonomous net taxes decreased by $100?

A)$400
B)$500
C)$600
D)$700
E)$800

Question 61

Of the following fiscal programs, which has the biggest effect, per dollar, on aggregate demand?

A)unemployment compensation during depressions
B)unemployment compensation during near-full employment
C)Aid to Families with Dependent Children
D)the space shuttle program
E)milk subsidies

Question 62

The formula for the multiplier that results from a change in autonomous net taxes is

A)-MPC/(1 - MPC)
B)1
C)MPC/(1 - MPC)
D)1/(1 - MPC)
E)-1/(1 - MPC)

Question 63

A decrease in autonomous 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

Suppose both autonomous taxes and transfer payments increase by $50 billion. If the MPC = 0.75, by how much does equilibrium real GDP demanded change?

A)$0
B)$50 billion
C)-$50 billion
D)$200 billion
E)-$200 billion

Question 65

If the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier

A)equals -4
B)equals -3
C)always equals 1
D)is the same as the original multiplier
E)is invariably equal to 5

Question 66

If transfer payments and autonomous taxes both increase by identical amounts,

A)equilibrium income will increase by the amount of the increase
B)equilibrium income will increase by more than the increase
C)equilibrium income will increase by less than the increase
D)the change in equilibrium income will depend on the value of the MPC
E)there will be no change in equilibrium income

Question 67

The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.7 will, at each level of real GDP,

A)increase consumption by $100
B)decrease consumption by $100
C)increase consumption by $70
D)decrease consumption by $70
E)decrease consumption by $30

Question 68

An increase 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 increasing consumption
D)lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption
E)has no effect on aggregate expenditure

Question 69

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

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

Question 70

Which component of aggregate expenditure is affected when net taxes are cut?

A)net exports; they increase
B)government purchases; they fall
C)government purchases; they rise
D)consumption; it falls
E)consumption; it rises

Question 71

If autonomous net taxes equal $1 trillion at all levels of real GDP, then we can safely assume that net taxes

A)are too burdensome
B)are autonomous
C)equal transfer payments
D)depend on the level of real GDP
E)equal zero when GDP equals zero

Question 72

The simple tax multiplier is

A)1/MPC
B)1
C)1/(1 - MPC)
D)MPC/(1 - MPC)
E)-MPC/(1 - MPC)

Question 73

The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.8 will, at each level of real GDP,

A)increase equilibrium real GDP demanded by $100
B)decrease equilibrium real GDP demanded by $100
C)increase equilibrium real GDP demanded by more than $100
D)decrease equilibrium real GDP demanded by less than $100
E)decrease equilibrium real GDP demanded by more than $100

Question 74

The introduction of an autonomous net tax will

A)have no effect on real GDP, since real GDP = C + I + G, which does not include taxes
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 government to increase spending

Question 75

If autonomous net taxes decline by $40 billion and the MPC = 0.75, then equilibrium real GDP demanded

A)declines by $120 billion
B)increases by $120 billion
C)declines by $160 billion
D)increases by $160 billion
E)increases by $40 billion

Question 76

A tax is considered to be autonomous if it is independent of

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

Question 77

If the MPC = 0.8, then the simple tax multiplier equals

A)0.8
B)4
C)5
D)-4
E)-5

Question 78

If autonomous net taxes increase by $200 billion and the MPC equals 0.75, equilibrium income will

A)decrease by $200 billion
B)decrease by $150 billion
C)decrease by $600 billion
D)decrease by $267 billion
E)decrease, but it is impossible to calculate the exact amount of the change

Question 79

Of the following fiscal programs, which has the smallest effect, per dollar, on aggregate demand?

A)defense spending
B)road construction
C)grants for scientific research and development
D)Social Security
E)government purchases of labor

Question 80

An autonomous net tax will

A)decrease disposable income by the same amount regardless of the level of real GDP
B)increase disposable income by the same amount regardless of the level of real GDP
C)decrease disposable income by more than it increases real GDP
D)increase disposable income by more than it increases real GDP
E)have no effect on disposable income at some levels of real GDP