Unit 3 Test- Fiscal Policy

In the Keynesian aggregate-expenditure model, if the MPC is .75 and gross investment increases by $6 billion, equilibrium GDP will increase by

$24 Billion

In the diagram below, the economy's short-run AS curve is line ___ and its long-run AS curve is line ___.

2;1

Which of the following will result in the greatest increase in aggregate demand?

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

Which of the following will most likely result from a decrease in government spending?

A decrease in aggregate demand

Which of the following is a fiscal policy that would increase aggregate demand in the Keynesian model?

A decrease in personal income taxes

Which of the following best describes aggregate supply?

A schedule indicating the level of real output that will be produced at each possible price level

A rightward shift in the aggregate demand curve with a horizontal aggregate supply curve (Keynesian portion) will cause unemployment and the price level to change in which of the following ways?

A; Employment increases, Price Level no change

Refer to the diagram below, in which Qf is the fullemployment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

AD0

According to the Keynesian Model, which of the following would increase aggregate demand?

An increase in autonomous investment

An increase in labor productivity would most likely cause Real GDP and the price level to change in which of the following ways?

B. Real GDP: Increase; Price Level: Decrease

The investment demand curve will shift to the right as a result of

Businesses becoming more optimistic with respect to future business conditions

According to Keynesian Theory, decreasing taxes and increasing government spending will most likely change consumption expenditures and unemployment in which of the following ways?

C; Consumption Expenditures: Increase Unemployment: Decrease

In order to be called an automatic stabilizer, or builtin, stabilizer, which of the following must taxes automatically do in a recessionary period and inflationary period?

C; Taxes decrease, Taxes increase

An inward shift in the PPF of an economy can be caused by an decrease in

Capital resources

If Maria Escalera's disposable income increases from $600 to $650 and her level of personalconsumption expenditures increase from $480 to $520, you may conclude that her marginal propensity to

Consume is .8

A change in which of the following will cause the aggregate demand curve to shift?

Consumer Wealth

A contractionary U.S fiscal policy that reduces domestic interest rates is most likely to:

Depreciate the international value of the dollar and increase U.S net exports

Other things equal, a decrease in the real interest rate will:

Expand investment and shift the AD curve to the right

If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating production?

Government spending increases

The circular flow of economic activity between consumers and producers includes which of the following? I. Households buy factor services from firms II. Households sell factor services to firms III. Households buy outputs from firms IV. Households sell outputs to firms

II and III

Fiscal policy refers to the:

Manipulation of government spending and taxes to stabilize domestic output, employment, and the price level

the short-run aggregate supply curve will shift to the right when

Prices of inputs decrease

An increase in which of the following is most likely to cause an improvement in the standard of living over time?

Productivity of labor

The consumer price index measures which of the following?

The change over time of the weighted prices of a particular group of goods and services

When current government expenditures exceed current tax revenues and the economy is achieving full employment:

The full-employment budget has a deficit

An increase in which of the following will increase the value of the spending multiplier?

The marginal propensity to consume

A distinguishing characteristic of public transfer payments is that:

The recipients make no contribution to current production in return for them

In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increaseing income tax rates and reducing government expenditures. This is most likely to increase

Unemployment

In what circumstances would lenders most benefit?

When there is an unanticipated decrease in inflation

Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy?

a reduction in Federal tax rates on personal and corporate income

Refer to the diagram in which Qf is the fullemployment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to:

do nothing since the economy appears to be achieving full-employment real output.

Automatic stabilizers in the economy include which of the following? i.A progressive personal income tax ii. Unemployment compensation iii. Congressional action that increases tax rates

i and ii only

Other things equal, a reduction in personal and business taxes can be expected to:

increase both aggregate demand and aggregate supply

Current equilibrium output equals $2,500,000 potential output equals $2,600,000 and the marginal propensity to consume equals 0.75. Under these conditions, a Keynesian economist is most likely to recommend

increasing government spending by $25,000

Contractionary fiscal policy is so named because it:

is aimed at reducing aggregate demand and thus achieving price stability

An increase in the capital stock will cause the

long-run aggregate supply curve to shift rightward

The aggregate supply curve (short-run) is up-sloping because

per-unit production costs rise as the economy moves toward and beyond its full-employment output.

If the price index is 130, this means that:

prices are 30 percent higher than in the base year.

Refer to the above diagram in which Qf is the fullemployment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to:

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2

An aggregate supply curve may be horizontal over some range because within that range

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

A expansionary fiscal policy is shown as a:

rightward shift in the economy's aggregate demand curve

Graphically, demand-pull inflation is shown as a:

rightward shift of the AD curve along an upsloping AS curve

Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a:

rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve.

Other things equal, an improvement in productivity will:

shift the aggregate supply curve to the right.

Which of the diagrams below best portrays the effects of an increase in foreign spending on U.S. products?

C

The long-run aggregate supply curve is likely to shift to the right when there is

an increase in productivity

An inflationary gap could be reduced by

an increase in the tax rate

The foreign purchases effect suggests that an increase in the U.S price level relative to other countries will:

increase U.S. imports and decrease U.S. exports.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by:

panels (A) and (B).

What would be the effect of a large increase in labor productivity on the RGDP and the price level?

B; RGDP increases, Price Level decreases