Chapter 11: Fiscal Policy

If AD excess equals $40 billion and the MPC equals 0.75, then the desired fiscal restraint equals A. $10 billion. B. $53.33 billion. C. $30 billion. D. $160 billion.

A. $10 billion.

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.80, the government should increase transfer payments by A. $25 billion. B. $100 billion. C. $80 billion. D. $20 billion.

A. $25 billion.

If the government purchases multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand, we can conclude that A. Government spending decreased by $125 million. B. Taxes increased by $500 million. C. Taxes decreased by $100 million. D. Government spending decreased by $100 million.

A. Government spending decreased by $125 million.

Keynesians would recommend A. Higher taxes when there is excess aggregate demand. B. Lower government expenditures when there is a shortfall in aggregate demand. C. Reliance on the market rather than the government for adjustment when an undesirable level of aggregate demand occurs. D. Lower taxes when there is excess aggregate demand.

A. Higher taxes when there is excess aggregate demand.

The total change in aggregate spending generated by increased government spending depends on the A. Marginal propensity to consume. B. Size of the recessionary GDP gap. C. AD shortfall. D. AD excess.

A. Marginal propensity to consume.

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion. What effect would there be on aggregate demand? A. No impact. B. $50 billion increase. C. More than $50 billion increase after the multiplier effect. D. $50 billion decrease.

A. No impact.

If the desired fiscal restraint is $80 billion and the AD excess is $160 billion, we can conclude that A. The MPS is 0.50. B. The multiplier is 0.50. C. There is a recessionary gap. D. The MPC is 2.0.

A. The MPS is 0.50.

Which of the following gave the U.S. federal government the power to tax income? A. The Sixteenth Amendment to the Constitution. B. The Full Employment and Balanced Growth Act of 1978. C. The Social Security Act. D. The capital gains tax of the Bush administration.

A. The Sixteenth Amendment to the Constitution.

According to Keynes, the level of economic activity is predominantly determined by the level of A. Aggregate supply B. Aggregate demand. C. Unemployment. D. Interest rates.

B. Aggregate demand.

A tax cut A. Directly decreases the disposable income of consumers. B. Contains less fiscal stimulus than an increase in government spending of the same size. C. Shifts the AD curve to the left. D. Indirectly increases the disposable income of consumers.

B. Contains less fiscal stimulus than an increase in government spending of the same size.

The desired tax cut to close a GDP gap is given by A. AD shortfall ×MPS. B. Desired fiscal stimulus ÷ MPC. C. AD shortfall ÷ MPC. D. Desired fiscal stimulus ×MPC.

B. Desired fiscal stimulus ÷ MPC.

Ceteris paribus, if the AD shortfall equals $600 billion, then the federal government can close it by increasing A. Government spending by exactly $600 billion. B. Government spending by less than $600 billion. C. Taxes by more than $600 billion. D. Taxes by exactly $600 billion.

B. Government spending by less than $600 billion.

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will A. Increase by $400 billion. B. Increase by $100 billion. C. Decrease by $400 billion. D.Not change.

B. Increase by $100 billion.

Disposable income refers to A. Personal income before personal taxes. B. Personal income after personal taxes. C. The corporate tax paid from income. D. None of the choices are correct.

B. Personal income after personal taxes.

Which of the following is a policy option to eliminate an AD shortfall? A. Decrease government purchases. B. Reduce taxes. C. Reduce transfer payments. D. All of the choices are correct.

B. Reduce taxes.

Fiscal policy works primarily through A. Shifts of the AS curve. B. Shifts of the AD curve. C. The improvement of worker skills through subsidized training programs. D. Shifts of both AD and AS, as a result of changes in the interest rate.

B. Shifts of the AD curve.

Which of the following is the best choice to eliminate a recessionary gap if the desired fiscal stimulus is $10 billion and the aggregate demand shortfall is $100 billion, while the MPC is 0.90? A. Tax hike of $11.11 billion. B. Tax cut of $11.11 billion. C. Tax hike of $10 billion. D. Tax cut of $10 billion.

B. Tax cut of $11.11 billion.

Which of the following is an income transfer? A. Free medical care made available to the poor by a private physician. B. Unemployment benefits paid to a factory worker who was laid off. C. A new highway built by the federal government. D. A gift of money from a parent to a child.

B. Unemployment benefits paid to a factory worker who was laid off.

Assume the MPC is 0.80. The change in total spending for the economy due to a $200 billion government spending increase is A. $160 billion. B. $200 billion. C. $800 billion. D. $1,000 billion.

D. $1,000 billion.

If the MPC equals 0.75, $100 billion tax increase will decrease consumption in the first round by A. $100 billion. B. $300 billion. C. $400 billion. D. $75 billion.

D. $75 billion.

Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be A. A $2 trillion increase in government expenditures. B. A $375 billion increase in government expenditures. C. A $500 billion increase in government expenditures. D. A $125 billion increase in government expenditures.

D. A $125 billion increase in government expenditures.

Jack has an MPC of 0.82 and Jill has an MPC of 0.78. Ceteris paribus, if the government transfers income from people who behave like Jack to people who behave like Jill, A. It is not possible to predict what will happen to aggregate demand. B. Aggregate demand will increase. C. Aggregate demand will remain the same. D. Aggregate demand will decrease.

D. Aggregate demand will decrease.

Which of the following fiscal policies cause a decrease in aggregate expenditures? A. An increase in transfer payments and an increase in government spending. B. An increase in transfer payments and a decrease in taxes. C. A decrease in taxes and an increase in government spending. D. An increase in taxes and a decrease in government spending.

D. An increase in taxes and a decrease in government spending.

Which of the following is a fiscal policy tool used to stimulate the economy? A. Lower interest rates. B. Increased imports. C. Reducing inefficient employment of resources. D. Increased government purchases.

D. Increased government purchases.

If the desired fiscal stimulus is $20 billion and the desired AD increase is $50 billion, we can conclude that A. The MPS is 0.60. B. The multiplier is 2.0. C. There is an inflationary gap. D. The MPC is 0.60.

D. The MPC is 0.60.

If the MPC is 0.80 and the government increases transfer payments by $45 billion, then the initial fiscal stimulus will equal A. $9 billion. B. $56.25 billion. C. $36 billion. D. $225 billion.

C. $36 billion.

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by A. $200 billion. B. $100 billion. C. $50 billion. D. $500 billion.

C. $50 billion.

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward-sloping, A. The economy will move to full employment. B. An AD surplus will occur. C. A recessionary GDP gap will still exist. D. An inflationary GDP gap will develop.

C. A recessionary GDP gap will still exist.

Which of the following would cause the level of income to change by the greatest amount, ceteris paribus? A. An increase in Social Security payments of $10 billion. B. A reduction in personal income taxes of $10 billion. C. An increase in defense spending of $10 billion. D. All of the other choices have equal impacts on the level of income.

C. An increase in defense spending of $10 billion.

Crowding out is caused by A. An increase in consumer spending. B. A decline in overall spending. C. An increase in government borrowing. D. A decline in tax revenues.

C. An increase in government borrowing.

A tax cut intended to increase aggregate demand is an example of A. Fiscal restraint. B. Monetary restraint. C. Fiscal stimulus. D. Fiscal targeting.

C. Fiscal stimulus.

In a diagram of aggregate demand and supply curves, the AD shortfall is measured as the A. Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment. B. Horizontal distance between the equilibrium output and the full-employment output. C. Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price. D. Vertical distance between the recessionary GDP gap and the inflationary GDP gap.

C. Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price.

Nearly half of the federal government's tax revenues come from A. Social Security payroll taxes. B. Customs, whiskey, and tobacco taxes. C. Individual income taxes. D. Corporate income taxes.

C. Individual income taxes.

Which of the following would not be a policy option to eliminate an AD shortfall? A. Increase government purchases. B. Reduce taxes. C. Reduce transfer payments. D. Increase transfer payments.

C. Reduce transfer payments.

If the recessionary GDP gap is $500, then the proper fiscal stimulus when faced with an upward-sloping AS curve is to A. Shift the AD curve rightward by $500. B. Shift the AD curve rightward by more than $500. C. Shift the AD curve leftward by $500. D. Shift the AS curve rightward by less than $500.

C. Shift the AD curve leftward by $500.