Deck 13: Fiscal Policy Appendix Taxes and the Multiplier

Question 1

Social insurance programs are:

A)government programs intended to protect families against economic hardships.
B)private insurance policies to protect families from hardships caused by government actions.
C)private insurance policies that cover gaps in government-provided health care.
D)programs to help unemployed people have a social life.

Answer 1

A

Question 2

The largest source of federal tax revenues is:

A)property taxes.
B)personal income taxes.
C)corporate income taxes.
D)sales taxes.

Answer 2

B

Question 3

All of the following are sources of federal tax revenue EXCEPT:

A)the personal income tax.
B)sales taxes.
C)social insurance taxes.
D)the corporate profits tax.

Answer 3

B

Question 4

Which of the following is NOT a government transfer payment?

A)the federal payroll
B)Social Security
C)Medicare
D)Medicaid

Question 5

Spending for Medicare and Medicaid accounts for approximately _____ of federal spending.

A)10%
B)20%
C)30%
D)40%

Question 6

Consumer spending will likely fall if:

A)government transfers rise.
B)the government raises tax rates.
C)the government lowers tax rates.
D)government transfers rise or tax rates are lowered.

Question 7

Which of the following is NOT an example of government purchases of goods and services?

A)a federal prosecutor's salary
B)new pavement for interstate highway I-95
C)a surgeon's bill reimbursed under the Medicare program
D)equipping U.S. air marshals with electroshock weapons

Question 8

Which of the following is NOT an example of government transfers?

A)Medicaid-paid prescription drugs for low-income individuals
B)unemployment insurance
C)a Social Security disability pension
D)a reimbursement of personal income tax withheld from wages

Question 9

The federal government's largest source of revenue is:

A)property taxes.
B)personal income and corporate profit taxes.
C)sales taxes.
D)social insurance taxes.

Question 10

Which of the following is a government transfer?

A)wages paid to U.S. senators
B)purchases of tanks for the army
C)Social Security payments to retired auto workers
D)payments to contractors for repairs on interstate highways

Question 11

Which of the following is the largest source of tax revenue for the U.S. federal government?

A)personal income taxes
B)corporate profit taxes
C)sales taxes
D)social insurance taxes

Question 12

All of the following are sources of state and local revenue EXCEPT:

A)social insurance taxes.
B)property taxes.
C)sales taxes.
D)income taxes.

Question 13

Which of the following is NOT a tool of fiscal policy?

A)changing tax rates
B)government transfers
C)government purchases of goods and services
D)changes in the money supply

Question 14

Medicaid, Medicare, and Social Security are examples of:

A)unilateral payments.
B)transfer payments.
C)monetary policy.
D)taxes.

Question 15

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy.

A)G; C and I
B)T; G and C
C)C; X and M
D)I; G and T

Question 16

The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand.

A)expansionary; increased
B)expansionary; decreased
C)contractionary; increased
D)contractionary; decreased

Question 17

The basic equation of national income accounting is GDP = C + I + G + X - IM. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects:

A)IM.
B)I)
C)C)
D)X)

Question 18

Government payments to households for which no good or service is provided in return are called:

A)transfer payments.
B)government purchases.
C)consumption expenditures.
D)investment expenditures.

Question 19

A change in taxes or a change in government transfers affects consumption through its effect on:

A)autonomous consumption.
B)the marginal propensity to save.
C)disposable income.
D)government spending.

Question 20

Consumer spending will likely rise if:

A)government transfers rise.
B)the government raises tax rates.
C)government transfers fall.
D)the government raises tax rates or government transfers fall.

Question 21

Use the following to answer questions 30-33:
Figure: Short- and Long-Run Equilibrium
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. The government should _____ aggregate demand by _____ taxes to close the _____ gap.

A)expand; increasing; inflationary
B)reduce; cutting; inflationary
C)expand; cutting; recessionary
D)reduce; increasing; recessionary

Question 22

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

A)increase government purchases; AD; left
B)increase transfer payments; AS; right
C)increase tax rates; AD; right
D)increase government purchases; AD; right

Question 23

Use the following to answer questions 30-33:
Figure: Short- and Long-Run Equilibrium
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____ .

A)expansionary; right
B)expansionary; left
C)contractionary; right
D)contractionary; left

Question 24

Use the following to answer questions 40-43:
Figure: Short- and Long-Run Equilibrium II
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy?

A)Increase government spending to close the recessionary gap.
B)Decrease government spending to close the recessionary gap.
C)Lower tax rates to close the inflationary gap.
D)Raise tax rates to close the inflationary gap.

Question 25

Use the following to answer questions 30-33:
Figure: Short- and Long-Run Equilibrium
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, the appropriate policy to return the economy to potential output is a(n):

A)increase in transfer payments.
B)decrease in transfer payments.
C)increase in taxes.
D)decrease in government spending.

Question 26

If the economy is at equilibrium below potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.

A)recessionary; expansionary
B)inflationary; expansionary
C)recessionary; contractionary
D)inflationary; contractionary

Question 27

Use the following to answer questions 25-29:
Figure: Short-Run Equilibrium
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. Appropriate fiscal policy action is:

A)a decrease in transfer payments.
B)an increase in government purchases.
C)a decrease in tax rates.
D)an increase in transfer payments.

Question 28

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

A)decrease government purchases.
B)decrease taxes.
C)decrease government transfers.
D)increase real interest rates.

Question 29

Expansionary fiscal policy:

A)increases long-run aggregate supply.
B)decreases long-run aggregate supply.
C)increases aggregate demand.
D)decreases aggregate demand.

Question 30

Suppose the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

A)lower tax rates.
B)decrease government purchases.
C)increase the investment tax credit.
D)lower the real interest rate.

Question 31

Use the following to answer questions 25-29:
Figure: Short-Run Equilibrium
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y₁ and P₁, it is in a(n):

A)recessionary gap.
B)inflationary gap.
C)high level of unemployment.
D)liquidity trap.

Question 32

Use the following to answer questions 25-29:
Figure: Short-Run Equilibrium
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y₁ and P₁, the appropriate policy to return the economy to potential output would be a(n):

A)increase in transfer payments.
B)increase in government spending.
C)increase in taxes.
D)decrease in taxes.

Question 33

Use the following to answer questions 25-29:
Figure: Short-Run Equilibrium
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. It reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:

A)P₂ - P₁.
B)Y₁ - Y_P.
C)P₂ - P₀.
D)P₁ - P₀.

Question 34

If overall spending declines and thus the economy contracts, the government could counter this by:

A)raising tax rates.
B)decreasing government transfers.
C)increasing government spending.
D)decreasing government spending.

Question 35

If the economy is at equilibrium above potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.:

A)recessionary; expansionary
B)inflationary; contractionary
C)recessionary; contractionary
D)inflationary; expansionary

Question 36

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

A)a decrease in government transfers.
B)an increase in government spending.
C)a decrease in government spending.
D)an increase in the money supply to decrease interest rates.

Question 37

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____.

A)decrease government purchases; right
B)increase government purchases; left
C)decrease government purchases; left
D)raise tax rates; right

Question 38

Use the following to answer questions 25-29:
Figure: Short-Run Equilibrium
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y₁ and P₁, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

A)expansionary; right
B)expansionary; left
C)contractionary; right
D)contractionary; left

Question 39

Which of the following is an expansionary fiscal policy?

A)an increase in the money supply that decreases interest rates
B)an increase in taxes that reduces the budget deficit and decreases consumption
C)a decrease in government spending
D)an increase in unemployment benefits

Question 40

Use the following to answer questions 30-33:
Figure: Short- and Long-Run Equilibrium
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E₁, it is in a(n):

A)recessionary gap.
B)inflationary gap.
C)high level of unemployment.
D)liquidity trap.

Question 41

To close an inflationary gap with fiscal policy, the government could:

A)reduce budget allocations to interstate highway maintenance.
B)increase federal subsidies to state universities.
C)lower the corporate income tax rate.
D)raise the average amount awarded for a disability pension.

Question 42

An inflationary gap occurs when:

A)prices are too low.
B)real output is too low.
C)potential output exceeds actual output.
D)actual output exceeds potential output.

Question 43

A reduction in government transfers _____, therefore shifting the aggregate demand curve to the _____.

A)increases labor costs to companies, increasing investment; left
B)decreases government purchases of goods and services, decreasing consumption; right
C)increases the marginal propensity to save, decreasing consumption; right
D)decreases disposable income and consumption; left

Question 44

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. Which of the following measures an inflationary gap?

A)Y₃ - Y₁
B)Y₃ - Y₂
C)Y₂ - Y₁
D)Y₃ - Y₀

Question 45

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. Which of the following measures a recessionary gap?

A)Y₃ - Y₁
B)Y₃ - Y₂
C)Y₂ - Y₁
D)Y₃ - Y₀

Question 46

Use the following to answer questions 40-43:
Figure: Short- and Long-Run Equilibrium II
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E₁, the appropriate policy to return the economy to potential output would be a(n):

A)increase in government spending.
B)decrease in government spending.
C)increase in transfer payments.
D)decrease in taxes.

Question 47

Use the following to answer questions 40-43:
Figure: Short- and Long-Run Equilibrium II
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E₁, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

A)expansionary; right
B)expansionary; left
C)contractionary; right
D)contractionary; left

Question 48

A government might want to increase aggregate demand to:

A)close an inflationary gap.
B)close a recessionary gap.
C)reduce prices.
D)reduce employment.

Question 49

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E₃, the economy:

A)is in equilibrium.
B)has an inflationary gap.
C)has a recessionary gap.
D)is stagnating.

Question 50

Contractionary fiscal policy includes:

A)increasing government purchases.
B)increasing government transfers.
C)raising tax rates.
D)decreasing money growth.

Question 51

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E₂, the economy:

A)is in equilibrium.
B)has an inflationary gap.
C)has a recessionary gap.
D)has high unemployment.

Question 52

A cut in taxes _____, shifting the aggregate demand curve to the _____.

A)decreases government transfers and consumption; right
B)increases disposable income and consumption; right
C)decreases the marginal propensity to save, increasing consumption; left
D)increases corporate profits and investment; left

Question 53

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD₁ to AD₃ could be caused by:

A)increased government purchases.
B)decreased government transfers.
C)higher tax rates.
D)decreased government purchases.

Question 54

Use the following to answer questions 59-63:
Figure: Fiscal Policy I
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E₁. If there is an increase in government purchases,_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; right; decrease; increase

Question 55

Use the following to answer questions 59-63:
Figure: Fiscal Policy I
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E₂. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; right; decrease; increase

Question 56

To close a recessionary gap with fiscal policy, the government could:

A)increase national savings so that the interest rate falls.
B)lower the annual income exempt from paying the personal income tax.
C)lower the corporate income tax rate.
D)lower the amount of unemployment insurance benefits.

Question 57

Use the following to answer questions 40-43:
Figure: Short- and Long-Run Equilibrium II
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. If the economy is at equilibrium at E₁, it is in a(n):

A)recessionary gap.
B)inflationary gap.
C)high level of unemployment.
D)liquidity trap.

Question 58

An increase in government transfers is an example of _____ fiscal policy because it shifts the aggregate demand curve to the _____ aggregate output.

A)expansionary; left, increasing
B)contractionary; left, decreasing
C)expansionary; right, increasing
D)contractionary; right, decreasing

Question 59

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. At E₁, the economy:

A)is in equilibrium.
B)has an inflationary gap.
C)has a recessionary gap.
D)has low unemployment.

Question 60

Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD₃ to AD₁ could be caused by:

A)increased government purchases.
B)increased government transfers.
C)higher tax rates.
D)lower tax rates.

Question 61

Fiscal policy that decreases aggregate demand is:

A)balanced.
B)supplemental.
C)contractionary.
D)expansionary.

Question 62

Expansionary fiscal policy includes:

A)increasing taxes.
B)increasing the money supply.
C)decreasing government expenditures.
D)increasing government expenditures.

Question 63

A contractionary fiscal policy either _____ government spending or _____ taxes.

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

Question 64

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₂. If there is an increase in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; right; increase; increase
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; left; decrease; decrease

Question 65

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; left; decrease; decrease

Question 66

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is an increase in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_1; left; increase; decrease
B)AD_1; left; decrease; decrease
C)AD_2; right; increase; increase
D)AD_2; right; decrease; increase

Question 67

Use the following to answer questions 59-63:
Figure: Fiscal Policy I
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E₂. If there is an increase in taxes_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; right; decrease; increase

Question 68

A contractionary fiscal policy:

A)decreases a government budget deficit or increases a government budget surplus.
B)may include increases in government spending.
C)may include reductions in taxes.
D)may include discretionary increases in transfer payments.

Question 69

Contractionary fiscal policy includes:

A)decreasing taxes.
B)increasing taxes.
C)increasing the money supply.
D)increasing government expenditures.

Question 70

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₂. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; left; decrease; decrease

Question 71

Use the following to answer questions 59-63:
Figure: Fiscal Policy I
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E₂. If there is an increase in government transfers_____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; right; increase; increase
B)AD_2; left; decrease; decrease
C)AD₁; right; increase; increase
D)AD₁; right; decrease; increase

Question 72

An expansionary fiscal policy either _____ government spending or _____ taxes.

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

Question 73

Fiscal policy that increases aggregate demand is:

A)balanced.
B)supplemental.
C)contractionary.
D)expansionary.

Question 74

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_1; right; increase; increase
B)AD_1; left; decrease; decrease
C)AD_2; right; increase; increase
D)AD_2; right; decrease; increase

Question 75

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; right; decrease; increase

Question 76

Use the following to answer questions 59-63:
Figure: Fiscal Policy I
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E₁. If there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; right; decrease; increase

Question 77

Contractionary fiscal policy includes:

A)decreasing taxes.
B)decreasing the money supply.
C)decreasing government expenditures.
D)increasing government expenditures.

Question 78

Expansionary fiscal policy includes:

A)decreasing taxes.
B)increasing taxes.
C)increasing the money supply.
D)decreasing government expenditures.

Question 79

An expansionary fiscal policy:

A)usually decreases a government budget deficit or increases a government budget surplus.
B)may include decreases in government spending.
C)may include increases in taxes.
D)may include decreases in taxes.

Question 80

Use the following to answer questions 64-70:
Figure: Fiscal Policy II
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E₁. If there is a decrease in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

A)AD_2; left; increase; decrease
B)AD_2; left; decrease; decrease
C)AD_1; right; increase; increase
D)AD_1; left; decrease; decrease