Question 1

If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:

Accepted Answer

A) $40 million. 
B) $50 million. 
C) $200 million. 
D) $250 million.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

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 5

Discretionary fiscal policy is the direct result of deliberate actions by policy makers rather than an automatic adjustment.

Accepted Answer

A) True 
 B)False

Question 6

If the government's revenues are greater than its expenditures, then it has a budget:

Accepted Answer

A) deficit. 
B) surplus. 
C) balance. 
D) equality.

Question 7

Use the following to answer questions:
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.

Accepted Answer

A) AD2; left; increase; decrease 
B) AD2; left; decrease; decrease 
C) AD1; right; increase; increase 
D) AD1; right; decrease; increase

Question 8

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government decreases spending by $40 billion, real GDP will decrease by:

Accepted Answer

A) $40 billion. 
B) $80 billion. 
C) $100 billion. 
D) $200 billion.

Question 9

The national debt:

Accepted Answer

A) is the sum of all past federal surpluses. 
B) grows when the government runs a deficit. 
C) grows when the government runs a surplus. 
D) did not exist until 1998.

Question 10

If the tax rate is 0.1 and the marginal propensity to consume is 0.5, the multiplier is:

Accepted Answer

A) 2. 
B) 1.8. 
C) 2.1. 
D) 1.

Question 11

Use the following to answer questions:
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.

Accepted Answer

A) AD2; left; increase; decrease 
B) AD2; left; decrease; decrease 
C) AD1; right; increase; increase 
D) AD1; right; decrease; increase

Question 12

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

Accepted Answer

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

Question 13

A law requiring the federal budget to be balanced each year would likely:

Accepted Answer

A) make business cycles more severe. 
B) make business cycles less severe. 
C) not affect the severity of business cycles. 
D) increase the effectiveness of automatic stabilizers.

Question 14

The effect of a government deficit is:

Accepted Answer

A) contractionary. 
B) expansionary. 
C) neutral. 
D) biased.

Question 15

Discretionary government spending is an automatic stabilizer.

Accepted Answer

A) True 
 B)False

Question 16

The economy is in a recessionary gap. What are the fiscal policy options available to the government?

Accepted Answer

The answer of The economy is in a recessionary gap....

Question 17

If at the beginning of the year the public debt is $12 trillion, government spending and transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the year the public debt is $13 trillion.

Accepted Answer

A) True 
 B)False

Question 18

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts and automatically expansionary when the economy expands.

Accepted Answer

A) True 
 B)False

Question 19

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:

Accepted Answer

A) increase by exactly $30 billion. 
B) decrease by exactly $30 billion. 
C) increase by more than $120 billion. 
D) increase by less than $120 billion.

Question 20

In 1999 many European countries signed a stability pact in which they agreed to limit their actual budget deficits to less than 3% of their country's GDP.

Accepted Answer

A) True 
 B)False

Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

If the marginal propensity to consume is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:

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

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

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

Discretionary fiscal policy is the direct result of deliberate actions by policy makers rather than an automatic adjustment.

If the government's revenues are greater than its expenditures, then it has a budget:

Use the following to answer questions: 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.

Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government decreases spending by $40 billion, real GDP will decrease by:

The national debt:

If the tax rate is 0.1 and the marginal propensity to consume is 0.5, the multiplier is:

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

A law requiring the federal budget to be balanced each year would likely:

The effect of a government deficit is:

Discretionary government spending is an automatic stabilizer.

The economy is in a recessionary gap. What are the fiscal policy options available to the government?

If at the beginning of the year the public debt is $12 trillion, government spending and transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the year the public debt is $13 trillion.

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts and automatically expansionary when the economy expands.

If the marginal propensity to consume is 0.75 and transfer payments increase by $30 billion, real GDP will:

In 1999 many European countries signed a stability pact in which they agreed to limit their actual budget deficits to less than 3% of their country's GDP.