Chapter 16 Final Exam Review

Government transfer payments included which of the following? a. Social Security and Medicare programs b. interest on the national debt c. grants to state and local governments d. national defense

a. Social Security and Medicare programs

Which of the following would increase the size of the government purchases multiplier? a. a decrease in the amount saved by households from an increase in income b. an increase in the quality of imports purchased by households from an increase in income c. a decrease in the amount of consumption spending by households from an increase in income d. an increase in the tax rate

a. a decrease in the amount saved by households from an increase in income

During the twentieth century, the largest budget deficits as a percentage of GDP occurred a. during World Wars I and II b. during the 1990's c. during the 1980's d. during the Vietnam war

a. during World Wars I and II

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant a. increase in inflation. b. increase in labor productivity. c. decrease in real GDP. d. decrease in oil prices.

a. increase in inflation.

A recession tends to cause the federal budget deficit to ____ because tax revenues ____ and government spending on transfer payments ___. a. increase; fall; rises b. decrease; fall; rises c. decrease; rise; falls d. increase; rise; falls

a. increase; fall; rises

The three categories of federal government expenditures, in addition to government purchases, are a. interest on the national debt, grants to state and local governments, and transfer payments b. defense spending, budgets of federal agencies, and transfer payments c. interest on national debt, defense spending, and transfer payments d. defense spending, Social Security, and Medicare.

a. interest on the national debt, grants to state and local governments, and transfer payments

Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally a. more difficult than with monetary policy. b. less difficult than with monetary policy. c. about the same difficulty as with monetary policy. d. far less difficult than with monetary policy.

a. more difficult than with monetary policy

The largest and fastest-growing category of federal government expenditures is a. transfer payments b. interest on the national debt c. national park spending d. grants to state and local governments

a. transfer payments

Which of the following is considered contractionary fiscal policy? a. Legislation removes a college tuition deduction from federal income taxes. b. Congress increase the income tax rate. c. The New Jersey legislature cuts highway spending to balance its budget d. Congress increases defense spending

b. Congress increases the income tax rate

If the federal government's expenditures are less than its tax revenues, then a. the budget is balanced b. a budget surplus results c. a budget deficit results d. No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays

b. a budget surplus results

If the economy is slipping into a recession, which of the following would be appropriate fiscal policy? a. a decrease in government purchases b. a decrease in taxes c. a decrease in oil prices d. an increase in the money supply and a decrease in interest rates

b. a decrease in taxes

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the a. budget deficit or surplus as a percentage of government spending. b. budget deficit or surplus as a percentage of GDP. c. absolute size of the budget deficit or surplus. d. budget deficit or surplus as a percentage of tax revenues.

b. budget deficit or surplus as a percentage of GDP.

In the long run, most economists agree that a permanent increase in government spending leads to ___ crowding out of private spending. a. no b. complete c. more than complete d. partial

b. complete

An increase in individual income taxes _____ disposable income, which _____ consumption spending. a. increases; decreases b. decreases; decreases c. increases; increases d. decreases; increases

b. decreases; decreases

The tax multiplier equals the change in ____ divided by the change in ___. a. consumption spending; taxes b. equilibrium real GDP; taxes c. taxes; equilibrium real GDP d. taxes; consumption spending

b. equilibrium real GDP; taxes

Congress and the president carry out fiscal policy through changes in a. taxes and interest rate b. government purchases and taxes c. interest rates and the money supply d. government purchases and the money supply

b. government purchases and taxes

Automatic stabilizers refer to a. changes in federal taxes an purchases that are intended to achieve macroeconomic policy b. government spending and taxes that automatically increase or decrease along with the business cycle c. changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives d. the money supply and interest rates that automatically increase or decrease along with the business cycle

b. government spending and taxes that automatically increase or decrease along with the business cycle

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ____ and real GDP to be ____. a. higher; lower b. higher; higher c. lower; higher d. lower; lower

b. higher; higher

The largest source of federal government revenue is 2012 was a. payroll taxes to fund Social Security and Medicare programs b. individual income taxes c. sales taxes d. corporate income taxes

b. individual income taxes

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because a. changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. b. the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy c. changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time. d. the Federal Reserve can immediately recognize when real GDP is below or above potential GDP.

b. the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

The use of fiscal policy to stabilize the economy is limited because a. the Internet Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code. b. the legislative process can be slow, which means hat it is difficult to make fiscal policy actions in a timely way. c. changes in government spending and tax rates have a small effect on aggregate demand. d. changes in government spending and tax rates have a small effect on interest rates.

b. the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.

Which of the following is an example of discretionary policy? a. an increase in income tax receipts with rising income during an expansion b. the tax cuts passed by Congress in 2001 to combat the recession c. a decrease in food stamps issued during an expansion or boom d. an increase in unemployment insurance payments during a recession

b. the tax cuts passed by Congress in 2001 to combat the recession

Fiscal policy is determined by a. the president and the Federal Reserve b. the Federal Reserve c. Congress and the president d. Congress and the Federal Reserve

c. Congress and the president

Which of the following is a government expenditure, but is not a government purchase? a. The federal government pays the salary of an FBI agent b. The federal government buys a Humvee c. The federal government pays out an unemployment insurance claim d. The federal government pays to support research on Aids

c. The federal government pays out an unemployment insurance claim

To combat a recession with discretionary fiscal policy, Congress and the president should a. raise taxes on interest and dividends, but not on personal income. b. lower interest rates and increase investment by increasing the money supply. c. decrease taxes to increase consumer disposable income. d. decrease government spending to balance the budget.

c. decrease taxes to increase consumer disposable income.

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act, which is an example of ______ aimed at increasing real GDP and employment. a. a transfer payment b. contractionary fiscal policy c. discretionary fiscal policy d. an automatic stabilizer

c. discretionary fiscal policy

Expansionary fiscal policy involves a. increasing taxes or decreasing government purchases. b. decreasing the money supply and increasing interest rates. c. increasing government purchases or decreasing taxes. d. increasing the money supply and decreasing interest rates.

c. increasing government purchases or decreasing taxes.

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 ____. a. higher; lower b. lower; higher c. lower; lower d. higher; higher

c. lower; lower

Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ____ effect. a. expenditure b. aggregate demand c. multiplier d. consumption

c. multiplier

Crowding out refers to a decline in ____ as a result of an increase in ____. a. tax revenues; unemployment b. government purchases; private expenditures c. private expenditures; government purchases d. government purchases; tax rates

c. private expenditures; government purchases

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act, which is an example of discretionary fiscal policy aimed at increasing a. disposable income and interest rates b. the money supply and money demand c. real GDP and employment d. tax revenues and the federal budget surplus

c. real GDP and employment

Expansionary fiscal policy will a. shift the aggregate demand curve to the left. b. not shift the aggregate demand curve. c. shift the aggregate demand curve to the right. d. shift the short-run aggregate supply curve to the left.

c. shift the aggregate demand curve to the right.

Which of the following would be classified as fiscal policy? a. The Federal Reserve cuts interest rates to stimulate the economy b. States increase taxes to fund education c. The federal government passes tax cuts to encourage firms to reduce air pollution d. The federal government cuts taxes to stimulate the economy e. A state government cuts taxes to help the economy of the state.

d. The federal government cuts taxes to stimulate the economy

Fiscal policy refers to changes in a. federal taxes and purchases that are intended to fund the war on terrorism b. the money supply and interest rates that are intended to achieve macroeconomic policy objectives c. state and local taxes and purchases that are intended to achieve macroeconomic policy objectives d. federal taxes and purchases that are intended to achieve macroeconomic policy objectives

d. federal taxes and purchases that are intended to achieve macroeconomic policy objectives

An increase in government purchases will increase aggregate demand because a. the decline in the price level will increase demand. b. the decline in the interest rate will increase demand. c. consumption expenditures are a component of aggregate demand. d. government expenditures are a component of aggregate demand.

d. government expenditures are a component of aggregate demand

If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to a. increase government spending. b. increase interest rates. c. use expansionary fiscal policy. d. increase taxes.

d. increase taxes.

The fastest growing category of government expenditure is a. government purchases b. defense spending c. grants to state and local governments d. transfer payments

d. transfer payments

Cutting taxes a. will lower disposable income and raise spending b. will lower disposable income and lower spending c. will raise disposable income and lower spending d. will raise disposable income and raise spending.

d. will raise disposable income and raise spending.

Tax cuts on business income ____ aggregate demand. a. would not change b. would decrease c. may increase or decrease d. would increase

d. would increase