Chapter 12 Test banks

The political business cycle refers to the possibility that:

politicians will manipulate the economy to enhance their chances of being reelected.

Increases in the Federal budget deficit from 2007 to 2009 were caused:

primarily by a combination of recession and expansionary fiscal policy.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should:

reduce tax rates and/or increase government spending.

Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should:

reduce taxes by $80 billion.

(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy: GDP: $100 200 300 400 500 Consumption: $140 200 260 320 380 Refer to the above data. A 10 percent proportional tax on income would:

reduce the size of the multiplier and make the economy more stable.

If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by:

reducing government expenditures by $20 billion.

Recessions have contributed to the public debt by:

reducing national income and therefore tax revenues.

The immediate primary cause of the swing from Federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was:

the recession of 2001.

The cyclically-adjusted budget refers to:

the size of the Federal government's budgetary surplus or deficit when the economy is operating at full employment.

The cyclically-adjusted budget tells us:

what the size of the Federal budget deficit or surplus would be if the economy was at full employment.

The largest proportion of the U.S. public debt is held by:

the U.S. public (individuals, businesses, financial institutions, etc.) and state and local governments.

To say that "the U.S. public debt is mostly held internally" is to say that:

the bulk of the public debt is owned by U.S. citizens and institutions.

Which of the following did not contribute directly to the Great Recession?

Bursting of the Dot.Com stock market bubble.

The public debt is held as:

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

In 2009, the U.S. public debt was about:

$11.9 trillion.

Security: Amount: Treasury Bills $220 Corporate Bonds 140 Treasury Notes 80 Corporate stock 200 US savings bonds 60 treasury bonds 100 The public debt for the above economy is:

$460 billion.

Answer the question on the basis of the following before-tax consumption schedule for a closed economy: GDP: $0 100 200 300 400 Consumption: $40 120 200 280 360 Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is:

.8 both before and after taxes.

Which of the following is not considered a legitimate concern of a large public debt?

Bankruptcy of the Federal government

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. Refer to the above information. The recognition lag of fiscal policy is reflected in events:

1 and 2.

In 2009, about ____ percent of the U.S. public debt was held by people and institutions abroad.

29

Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?

29 percent

In 2009, about ____ percent of the U.S. public debt was held by the Federal government and Federal Reserve.

43

What percentage of the U.S. public debt is held by Federal agencies and the Federal Reserve?

43 percent.

(Last Word) In 1960 the ratio of workers to Social Security and Medicare beneficiaries was ______; by 2040 it is projected to be _________.

5:1; 2:1

(Last Word) The combined cost of Social Security and Medicare programs was what percent of U.S. GDP in 2008?

7.6

Which of the following statements is correct?

Built-in stability only partially offsets fluctuations in economic activity.

The group of three economists appointed by the President to provide fiscal policy recommendations is the:

Council of Economic Advisers.

Which of the following is considered a legitimate concern of a large public debt?

Crowding-out of private investment

Which of the following statements is correct?

The cyclically-adjusted budget is less likely to show a deficit than is the actual budget.

Which of the following statements is correct?

There is a tendency for the public debt to grow during recessions.

Which of the following is a true statement?

Fiscal policy swung from contractionary to expansionary in 2002.

Answer the question on the basis of the following before-tax consumption schedule for a closed economy: GDP: $0 100 200 300 400 Consumption: $40 120 200 280 360 Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is now imposed in this economy, the consumption schedule will be:

GDP: $0 100 200 300 400 Consumption: $8 88 168 248 320

(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy: GDP: $100 200 300 400 500 Consumption: $140 200 260 320 380 Refer to the above data. If a 10 percent proportional tax on income is imposed, the consumption schedule will now be:

GDP: $100 200 300 400 500 Consumption: $134 188 242 296 350

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Which of the following best describes the idea of a political business cycle?

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

(Last Word) Which of the following would not help to relieve the Social Security and Medicare shortfalls?

Restricting immigration of skilled working-age adults.

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

An appropriate fiscal policy for a severe recession is:

a decrease in tax rates.

Year: Actual Budget: Adjusted budget: 1998 0 0 1999 -3 0 2000 -5 -2 2001 -2 -2 2002 +2 +1 Refer to the above data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect:

a recession.

Year: Actual Budget: Adjusted budget: 1998 0 0 1999 -3 0 2000 -5 -2 2001 -2 -2 2002 +2 +1 Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:

a recession.

An appropriate fiscal policy for severe demand-pull inflation is:

a tax rate increase.

In 2009, the U.S. Federal debt held by the public was:

about a third as large as the GDP.

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward:

an excess of government expenditures over tax receipts.

Year: Actual Budget: Adjusted budget: 1998 0 0 1999 -3 0 2000 -5 -2 2001 -2 -2 2002 +2 +1 Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:

an expansion of real GDP and an automatic increase in tax revenues.

Which one of the following might offset a crowding-out effect of financing a large public debt?

an increase in public investment

The effect of a government surplus on the equilibrium level of GDP is substantially the same as:

an increase in saving.

(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy: GDP: $100 200 300 400 500 Consumption: $140 200 260 320 380 Refer to the above data. The 10 percent proportional tax on income would cause:

both consumption and saving to increase by smaller and smaller absolute amounts as GDP rises.

The amount by which government expenditures exceed revenues during a particular year is the:

budget deficit.

The amount by which Federal tax revenues exceed Federal government expenditures during a particular year is the:

budget surplus.

The actual budget deficit of the Federal government in 2009 was about $1.4 trillion. On the basis of this information it:

cannot be determined whether the government engaged in expansionary or contractionary fiscal policy in 2009.

The U.S. public debt:

consists of the historical accumulation of all past Federal deficits and surpluses.

Which of the following is the best example of public investment?

construction of highways

Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n):

contractionary fiscal policy.

Year: Actual Budget: Adjusted budget: 1998 0 0 1999 -3 0 2000 -5 -2 2001 -2 -2 2002 +2 +1 Refer to the above table for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n):

contractionary fiscal policy.

The Federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the:

crowding-out effect.

Economists refer to a budget deficit that exists when the economy is achieving full employment as a:

cyclically-adjusted deficit.

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

is financed by borrowing.

Suppose the Federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:

decreased by $150 billion.

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:

decreasing taxes by $25 billion.

The crowding-out effect suggests that:

government borrowing to finance the public debt increases the real interest rate and reduces private investment.

Payment of interest on the U.S. public debt:

is thought to increase income inequality.

The portion of the public debt held outside Federal agencies and the Federal Reserve is:

larger than the portion held by Federal Agencies and the Federal Reserve.

The real burden of an increase in the public debt:

may be very small or conceivably zero when the economy is in a severe depression.

The most likely way the public debt burdens future generations, if at all, is by:

reducing the current level of investment.

Built-in stability means that:

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. Refer to the above information. The administrative lag of fiscal policy is reflected in events:

3 and 4

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. Refer to the above information. The operational lag of fiscal policy is reflected in event(s):

5.

Which of the following fiscal policy actions is most likely to increase aggregate supply?

An increase in government spending on infrastructure that increases private sector productivity.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in Federal tax rates on personal and corporate income.

Year: Actual Budget: Adjusted budget: 1998 0 0 1999 -3 0 2000 -5 -2 2001 -2 -2 2002 +2 +1 Refer to the above data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect:

an expansionary fiscal policy.

If government increases the size of its cyclically-adjusted surplus, we can:

assume that government is having a contractionary effect on the economy.

Discretionary fiscal policy will stabilize the economy most when:

deficits are incurred during recessions and surpluses during inflations.

Countercyclical discretionary fiscal policy calls for:

deficits during recessions and surpluses during periods of demand-pull inflation.

Which of the following is not a significant contributor to the U.S. public debt?

demand-pull inflation

If Congress adjusted the U.S. tax system so that the MPC was reduced, the

economy would become more stable.

Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n):

expansionary fiscal policy.

The crowding-out effect of expansionary fiscal policy suggests that:

government spending increases at the expense of private investment.

The American Recovery and Reinvestment Act of 2009:

implemented a $787 billion package of tax cuts and government expenditure increases.

Suppose the price level is fixed, the MPC is .8, the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should:

increase government expenditures by $40 billion.

Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should:

increase government expenditures by $50 billion.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:

increase tax rates and/or reduce government spending.

An effective expansionary fiscal policy will:

increase the cyclically-adjusted deficit but reduce the actual deficit.

Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the above economy would:

increase the public debt from $460 billion to $480 billion.

Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:

increased by $20 billion.

An economist who favored expanded government would recommend:

increases in government spending during recession and tax increases during inflation.

The crowding-out effect of expansionary fiscal policy suggests that:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:

increasing government spending by $4 billion.

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:

increasing taxes by $20 billion.

Council of Economic Advisers.

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

The average tax rate required to service the public debt is roughly measured by:

interest on the debt as a percentage of the GDP.

Discretionary fiscal policy is so named because it:

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

Contractionary fiscal policy is so named because it:

is aimed at reducing aggregate demand and thus achieving price stability.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP.

Answer the question on the basis of the following before-tax consumption schedule for a closed economy: GDP: $0 100 200 300 400 Consumption: $40 120 200 280 360 Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system:

is regressive

Since 2002, the United States has had:

large Federal budget deficits.

A tax reduction of a specific amount will be more expansionary, the:

larger is the economy's MPC.

Which of the following represents the most contractionary fiscal policy?

leftward shift in the economy's aggregate demand curve.

Fiscal policy refers to the:

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

Answer the question on the basis of the following before-tax consumption schedule for a closed economy: GDP: $0 100 200 300 400 Consumption: $40 120 200 280 360 Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, we can conclude that the tax:

neither increases nor decreases built-in stability.

Suppose the government cuts taxes to keep the economy's cyclically-adjusted budget in balance when the economy is expanding. The government is engaging in a(n):

neutral fiscal policy.

Other things equal, an increase of corporate bonds from $140 billion to $150 billion in the above economy would:

not change the size of the public debt.

A major advantage of the built-in or automatic stabilizers is that they:

require no legislative action by Congress to be made effective.

An expansionary fiscal policy is shown as a:

rightward shift in the economy's aggregate demand curve.

The cyclically-adjusted budget deficit for the United States:

rose to -7.3 percent of potential GDP in 2009.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:

shift the AD curve to the left.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the:

smaller is the economy's MPS.

The American Recovery and Reinvestment Act of 2009 was implemented primarily to:

stimulate aggregate demand and employment.

The crowding-out effect is:

strongest when the economy is at full employment.

The Federal budget deficit is found by:

subtracting government tax revenues from government spending in a particular year.

An economist who favors smaller government would recommend:

tax cuts during recession and reductions in government spending during inflation.

If the economy has a cyclically-adjusted budget surplus, this means that:

tax revenues would exceed government expenditures if full employment were achieved.

The public debt is the amount of money that:

the Federal government owes to holders of U.S. securities.

When the economy is at full employment:

the actual and the cyclically-adjusted budgets will be equal.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:

the crowding-out effect.

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

the cyclically-adjusted budget has a deficit.

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

the cyclically-adjusted budget has a surplus.

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

the cyclically-adjusted budget has neither a deficit nor a surplus.