Unit 3: Fiscal Policy

12. Keynesian economists believe that short run fluctuations are caused by: a. flexible prices and wages. b. too much profit. c. a lack of sufficient aggregate demand. d. a surplus of aggregate supply. e. too little inventory

c. a lack of sufficient aggregate demand

Suppose that disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is 0.6. If disposable income then increases by $100, consumption and savings will equal which of the following? Consumption Savings a. $420 $280 b. $600 $400 c. $660 $320 d. $660 $440 e. $760 $340

e. $760 and $340

3. Which of the following will result in the greatest increase in aggregate demand? a. A $100 increase in taxes. b. A $100 decrease in taxes. c. A $100 increase in government expenditures. d. A $100 increase in government expenditures, coupled with a $100 increase in taxes. e. A $100 increase in government expenditures coupled with a $100 decrease in taxes.

e. A $100 increase in government expenditures coupled with a $100 decrease in taxes

1. According to the Keynesian model, which of the following would increase aggregate demand? a. An increase in investment b. An increase in the discount rate. c. A decrease in unemployment compensation payments. d. A decrease in government expenditures accompanied by an equal reduction in taxes e. A decrease in government expenditures on public works.A. An increase in investment

a. An increase in investment

9. Equilibrium real GDP is far below full employment and the government lowers household taxes. Which is the likely result? a. Unemployment falls with little inflation b. Unemployment rises with little inflation c. Unemployment falls with rampant inflation d. Unemployment rises with rampant inflation e. No change occurs in unemployment of inflation

a. Unemployment falls with little inflation

2. In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing tax rates and reducing government expenditures. According to Keynesian theory, implementation of these policies is most likely to increase: a. unemployment b. consumer prices c. aggregate demand d. aggregate supply e. the rate of economic growth

a. unemployment

10. If the economy is suffering from extremely high rates of inflation, which of the following fiscal policies would be an appropriate strategy for the economy? a. Increase government spending and decrease taxes. b. Decrease government spending and increase taxes. c. Increase government spending with no change in taxes. d. The Federal Reserve lowers the discount rate. e. Decrease taxes with no change in government spending.

b. Decrease government spending and increase taxes

7. Which of the following is likely to shift the long run aggregate supply curve to the right? a. A nation that devotes more resources to nondurable consumption goods, rather than durable capital goods. b. Research that improves the productivity of labor and capital c. More restrictive trade policies d. Annual limits to immigration of foreign citizens e. A permanent increase in the price of energy

b. Research that improves the productivity of labor and capital

A severe, sustained increase in oil prices would likely cause short run and long run aggregate supply curves and the production possibilities curve to change in which of the following ways?

c. SRAR decrease, LRAS decrease, PPC shift inward

13. The "crowding out" effect from government borrowing is best described as: a. The rightward shift in AD in response to the decreasing interest rates from contractionary fiscal policy b. The leftward shift in AD in response to rising interest rates from expansionary fiscal policy c. The effect of the President increasing the money supply, which decreases real interest rates and increases AD d. The effect on the economy of hearing the central bank say they believe that the economy is in a recession e. The lower exports due to an appreciating dollar versus other currencies.

b. The leftward shift in AD in response to rising interest rates from expansionary fiscal policy

21. In the simple Keynesian aggregate expenditure model of an economy, changes in investment or government spending will lead to a change in which of the following? a. The price level b. The level of output and employment c. Interest rates d. The aggregate supply e. The demand for money

b. The level of output and employment

8. The long-run aggregate supply curve is likely to shift to the right when there is: a. an increase in the cost of productive resources. b. an increase in productivity. c. an increase in the federal budget deficit. d. a decrease in the money supply e. a decrease in the labor force.

b. an increase in productivity

22. In a closed economy with no taxes in which the average propensity to consume is 0.75, which of the following is true? a. If income is $100, than saving is $75 b. If income is $100, then consumption is $50 c. If income is $200, then saving is $50 d. If income is $200, then consumption is $75 e. If income is $500, then saving is $100

c. If income is $200, then saving is $50.

20. Which of the following would likely cause a rightward shift in an economy's aggregate supply curve? a. An increase in interest rates b. A tax increase of 50 cents per gallon of gasoline c. An across the board reduction of wages in the manufacturing sector d. The passage of legislation mandating a reduction in automobile pollution e. The shutdown of plants and movement of production abroad

c. An across the board reduction of wages in the manufacturing sector

25. A decrease in the prices of inputs will cause which of the following to occur in the short run? a. An increase in the aggregate demand and increase in the price level b. A decrease in the aggregate demand and an increase in the price level c. An increase in the short run aggregate supply and a decrease in the price level d. An increase in the short run aggregate supply and an increase in the price level e. A decrease in the short run aggregate supply and a decrease in the price level

c. An increase in the short run aggregate supply and a decrease in the price level

24. An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in a. A decrease in voluntary unemployment b. A decrease in the natural rate of unemployment c. A decrease in aggregate supply d. An increase in unplanned inventories e. An increase in the rate of inflation

d. An increase inn unplanned inventories

14. Which of the following events would be most likely to increase both aggregate demand and long run aggregate supply? a. The government increases unemployment benefits. b. Businesses replace worn out equipment with comparable new ones. c. Government increases taxes. d. Businesses build more factories and increase capacity. e. Households increase consumption.

d. Businesses build more factories and increase capacity

19. If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during a period of a rapidly increasing consumer price index? I. Reduce government expenditures for defense and space research II. Increase transfer payments to those most severely affected by the rising price index III. Increase personal income taxes a. I only b. II only c. III only d. I and III only e. II and III only

d. I and III only

17. Economic growth is best described as a. An increase in the production possibility frontier and an increase in the natural rate of unemployment b. An increase in the production possibility frontier and leftward shift in the long run aggregate supply c. A decrease in the production possibility frontier and a rightward shift in long run aggregate supply d. A decrease in the production possibility frontier and a leftward shift in long run aggregate supply e. An increase in the production possibility frontier and a rightward shift in the long run aggregate supply

e. An increase in the production possibility frontier and a rightward shift in the long run aggregate supply

11. If the economy were experiencing a recessionary gap, chose the option below that would be an appropriate fiscal policy to eliminate the gap, and the predicted impact of the policy on real GDP and unemployment

e. Decrease taxes, increase Real GDP, Decrease Unemployment

16. Suppose the President plans to cut taxes for consumers and also plans to increase spending on the military. How does this affect real GDP and the price level? a. GDP increases and the price level decreases b. GDP decreases and the price level increases c. GDP stays the same and the price level increases d. GDP decrease and the price level decreases e. GDP increases and the price level increases

e. GDP increases and the price level increases

4. According to the graph above, which of the following will necessarily result in a decrease in output? I. A rightward shift of the aggregate demand curve. II. A leftward shift of the aggregate demand curve. III. A rightward shift of the aggregate supply curve. IV. A leftward shift of the aggregate supply curve. a. I only b. II only c. II and III only d. II and III only e. II and IV only

e. II and IV only

15. Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenues by the same amount. This action will affect output and interest rates in which of the following ways?

e. Output decreases and Interest Rates decrease

6. Which of the following will most likely result from a decrease in government spending? a. An increase in output. b. An increase in the price level. c. An increase in employment. d. A decrease in aggregate supply. e. A decrease in aggregate demand.

e. a decrease in aggregate demand

5. An aggregate supply curve may be horizontal over some range because within that range: a. a higher price level leads to higher interest rates, which reduce the money supply and consumer spending. b. changes in the aggregate price level do not induce substitution. c. output cannot be increased unless prices and interest rates increase. d. rigid prices prevent employment from fluctuating. e. resources are underemployed and increase in demand will be satisfied without any pressure on price level.

e. resources are underemployed and increase in demand will be satisfied without any pressure on price level.