Question 1

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

Accepted Answer

A)  an increase in government purchases
B)  an increase in the supply of money
C)  an increase in individual income taxes
D)  a decrease in transfer paymentsE) A) and B)
F) A) and C)

Question 2

During the twentieth century,the largest budget deficits as a percentage of GDP occurred

Accepted Answer

A)  during the 1990s.
B)  during the 1980s.
C)  during the Vietnam war.
D)  during World Wars I and II.E) A) and B)
F) B) and D)

Question 3

Give an example of an automatic stabilizer.Explain how automatic stabilizers work in the case of recession.

Accepted Answer

Examples of automatic stabilizers are un...

Question 4

If policymakers implement an expansionary fiscal policy but do not take into account the potential for crowding out,the new equilibrium level of GDP is likely to

Accepted Answer

A)  be at potential GDP.
B)  be above potential GDP.
C)  be below potential GDP.
D)  There is insufficient information given here to draw a conclusion.E) A) and D)
F) A) and C)

Question 5

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.

Accepted Answer

A) True 
 B)False

Question 6

From an initial long-run equilibrium,if aggregate demand grows more slowly than long-run and short-run aggregate supply,then Congress and the president would most likely

Accepted Answer

A)  increase the required reserve ratio and decrease government spending.
B)  decrease government spending.
C)  decrease oil prices.
D)  decrease taxes.
E)  lower interest rates.F) D) and E)
G) None of the above

Question 7

Federal government expenditures,as a percentage of GDP

Accepted Answer

A)  have risen since the early 1950s to the present.
B)  have fallen since the early 1950s to the present.
C)  rose from 1950 to 1991,fell from 1992 to 2001,and have risen from 2001 to the present.
D)  rose from 1950 to 2001 and then fell from 2001 to the present.
E)  rose from 1950 to 1980,fell from 1981 to 2001,and have risen from 2001 to the present.F) A) and E)
G) A) and B)

Question 8

Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion.Will decreasing government purchases by $200 billion,or raising taxes by $200 billion,restore the economy to potential GDP? Explain.

Accepted Answer

Neither policy is appropriate because th...

Question 9

In preparing their estimates of the stimulus package's effect on GDP,Obama administration economists estimated a government purchases multiplier of 1.57.This indicates that a ________ increase in government purchases would increase equilibrium real GDP by $157 billion

Accepted Answer

A)  $1 billion
B)  $10 billion
C)  $100 billion
D)  $157 billionE) B) and C)
F) B) and D)

Question 10

Reducing the marginal tax rate on income will

Accepted Answer

A)  reduce the tax wedge faced by workers and increase labor supplied.
B)  raise the return to entrepreneurship and encourage the opening of new businesses.
C)  increase the after-tax return on saving,and encourage saving.
D)  All of the above are correct.E) B) and D)
F) B) and C)

Question 11

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

Accepted Answer

A)  automatic stabilizers.
B)  discretionary fiscal policy.
C)  discretionary monetary policy.
D)  automatic monetary policy.E) A) and B)
F) C) and D)

Question 12

The federal government debt equals

Accepted Answer

A)  tax revenues minus government spending.
B)  government spending minus tax revenues.
C)  the accumulation of past budget deficits.
D)  the total value of U.S.Treasury bonds outstanding.E) B) and C)
F) A) and D)

Question 13

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Accepted Answer

A)  increase;rise;falls
B)  increase;fall;rises
C)  decrease;rise;falls
D)  decrease;fall;risesE) A) and D)
F) C) and D)

Question 14

Government transfer payments include which of the following?

Accepted Answer

A)  interest on the national debt
B)  grants to state and local governments
C)  Social Security and Medicare programs
D)  national defenseE) C) and D)
F) All of the above

Question 15

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A)  higher;higher
B)  higher;lower
C)  lower;higher
D)  lower;lowerE) B) and C)
F) A) and D)

Question 16

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion.To move the economy back to potential GDP,Congress should

Accepted Answer

A)  lower taxes by an amount less than $500 billion.
B)  raise government purchases by $500 billion.
C)  raise government purchases by more than $500 billion.
D)  lower taxes by $500 billion.
E)  lower government purchases by $500 billion.F) A) and E)
G) C) and D)

Question 17

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75,the tax rate is 0.2,and the marginal propensity to import equals 0.3.

Accepted Answer

A)  1.43
B)  1.6
C)  3.33
D)  4E) B) and D)
F) C) and D)

Question 18

Crowding out will be greater

Accepted Answer

A)  the less sensitive consumption spending is to changes in the interest rate.
B)  the further equilibrium GDP is below potential GDP.
C)  the more sensitive investment spending is to changes in the interest rate.
D)  if the economy is in recession,rather than at full employment.E) None of the above
F) A) and C)

Question 19

Tax increases on business income decrease aggregate demand by decreasing

Accepted Answer

A)  business investment spending.
B)  consumption spending.
C)  government spending.
D)  wage rates.E) B) and D)
F) All of the above

Question 20

Which of the following would not be considered an automatic stabilizer?

Accepted Answer

A)  legislation increasing funding for job retraining passed during a recession
B)  decreasing unemployment insurance payments due to decreased joblessness during an expansion
C)  rising income tax collections due to rising incomes during an expansion
D)  declining food stamp payments due to more persons finding jobs during an expansionE) A) and B)
F) None of the above

Exam 27: Fiscal Policy

Reducing the marginal tax rate on income will

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Crowding out will be greater

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The federal government debt equals

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Federal government expenditures,as a percentage of GDP

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Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

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In preparing their estimates of the stimulus package's effect on GDP,Obama administration economists estimated a government purchases multiplier of 1.57.This indicates that a ________ increase in government purchases would increase equilibrium real GDP by $157 billion

Correct AnswerverifiedShow Answer

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

Correct AnswerverifiedShow Answer

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

Correct AnswerverifiedShow Answer

Tax increases on business income decrease aggregate demand by decreasing

Correct AnswerverifiedShow Answer

Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion.Will decreasing government purchases by $200 billion,or raising taxes by $200 billion,restore the economy to potential GDP? Explain.

Correct AnswerverifiedNeither policy is appropriate because th...View AnswerShow Answer

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75,the tax rate is 0.2,and the marginal propensity to import equals 0.3.

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Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion.To move the economy back to potential GDP,Congress should

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Government transfer payments include which of the following?

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From an initial long-run equilibrium,if aggregate demand grows more slowly than long-run and short-run aggregate supply,then Congress and the president would most likely

Correct AnswerverifiedShow Answer

During the twentieth century,the largest budget deficits as a percentage of GDP occurred

Correct AnswerverifiedShow Answer

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.

Correct AnswerverifiedShow Answer

Give an example of an automatic stabilizer.Explain how automatic stabilizers work in the case of recession.

Correct AnswerverifiedExamples of automatic stabilizers are un...View AnswerShow Answer

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Correct AnswerverifiedShow Answer

If policymakers implement an expansionary fiscal policy but do not take into account the potential for crowding out,the new equilibrium level of GDP is likely to

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Which of the following would not be considered an automatic stabilizer?

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Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be and real GDP to be .

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Neither policy is appropriate because th...
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Examples of automatic stabilizers are un...
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An economic expansion tends to cause the federal budget deficit to because tax revenues and government spending on transfer payments .

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