Chapter 13

Assuming the economy is represented by the graph shown, if the government were to enact a partially successful expansionary fiscal policy, it would be most likely to move from equilibrium: A) B to A. B) A to B. C) D to C. D) D to B.

A to B.

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the AD-AS model in the figure above, this would be depicted as a movement from A) B to A. B) A to E. C) A to B. D) B to C. E) C to B.

A to B.

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) B to A. D) A to E. E) C to B.

A to E.

Keynesian policy: A) refers to policies that actively shift aggregate demand in an effort to reach full employment. B) promotes spending more and taxing less to boost economic activity to potential GDP. C) refers to fiscal policy. D) All of these are true.

All of these are true.

Refer to Figure 16-1. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) C to B. B) E to A. C) A to E. D) B to A. E) D to C.

C to B.

Refer to the diagrams which represent short-run equilibrium changes. The AS curve is our SRAS curve. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z? A) Crowding-out effect. B) Decrease in savings. C) Increase in consumer confidence. D) Depreciation of the dollar.

Crowding-out effect.

What is a benefit of giving the government freedom to spend more than they receive in taxes and run a deficit? A) The federal government cannot run a deficit. B) It allows the government to be flexible if something unexpected happens. C) It can make it more difficult for businesses and consumers to borrow. D) There is never a good enough reason to allow public debt.

It allows the government to be flexible if something unexpected happens

The idea that if governments cut taxes but not spending, people will not change their behavior, and expansionary policy will have little expansionary effect is known as: A) the invisible hand. B) Keynesian policy. C) Ricardian equivalence. D) Stimulus policy.

Ricardian equivalence.

The process of deciding on and passing fiscal policy legislation creates: A) an information lag. B) a direction lag. C) an implementation lag. D) a formulation lag.

a formulation lag.

A decrease in taxes should be applied in a situation with A) high demand for goods and services. B) low unemployment. C) a inflationary gap. D) a recessionary gap.

a recessionary gap.

Fiscal policy most directly affects the economy by increasing or decreasing: A) long-run aggregate supply. B) aggregate demand. C) interest rate. D) the money supply.

aggregate demand

Refer to Figure 16-4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president? A) an open market purchase of Treasury bills B) an increase in interest rates C) an increase in transfer payments D) an increase in income taxes

an increase in income taxes

A lack of understanding regarding the current state of the economy creates: A) an implementation lag. B) a formulation lag. C) a direction lag. D) an information lag

an information lag

The amount by which government expenditures exceed revenues during a particular year is the: A) GDP gap. B) public debt. C) full employment. D) budget deficit.

budget deficit

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 tax revenues. C) budget deficit or surplus as a percentage of GDP. D) absolute size of the budget deficit or surplus

budget deficit or surplus as a percentage of GDP.

In 2010, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2010, the city of Canfield had a A) budget surplus of $50,000. B) budget surplus of $5,000. C) budget surplus of $450,000. D) budget deficit of $50,000

budget surplus of $50,000.

One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is the automatic adjustment: A) means a lower level of potential GDP. B) is generally not supported by government officials. C) can take a very long time. D) will cause permanent unemployment.

can take a very long time

If the government reduces expenditures by $30 billion, aggregate demand will A) decrease and potential GDP will decrease. B) increase and potential GDP will increase. C) decrease and real GDP will decrease. D) increase and real GDP will increase

decrease and real GDP will decrease.

When an economy faces an inflationary gap, an appropriate policy would be to A) decrease government purchases. B) increase the quantity of money. C) decrease taxes. D) increase aggregate demand.

decrease government purchases.

Refer to Figure 12-1. Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.) A) decrease interest rates B) increase the money supply C) decrease government spending D) decrease taxes E) More than one of the above

decrease government spending

The nation of Hyperbole is in a recession, and the government decides to increase taxes and reduce government spending to reduce the growing deficit. This will ________ aggregate demand and will likely ________ real GDP and employment. A) decrease; decrease B) increase; increase C) increase; decrease D) decrease; increase

decrease; decrease

An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) decrease; rise; falls B) increase; fall; rises C) decrease; fall; rises D) increase; rise; falls

decrease; rise; falls

An increase in individual income taxes ________ disposable income, which ________ consumption spending A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases

decreases; decreases

Decreasing government spending ________ the price level and ________ equilibrium real GDP in the short run. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases

decreases; decreases

Increased government spending is an example of: A) expansionary fiscal policy. B) contractionary fiscal policy. C) contractionary monetary policy. D) expansionary monetary policy.

expansionary fiscal policy

An example of automatic fiscal policy is A) the federal government expanding spending at the Department of Education. B) the Federal Reserve reducing interest rates as economic growth slows. C) expenditures for unemployment compensation increasing as economic growth slows. D) Congress passing a tax rate reduction package.

expenditures for unemployment compensation increasing as economic growth slows.

The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence: A) fails to hold, and people save more. B) holds, and people save more. C) fails to hold, and people increase their spending. D) holds, and people increase their spending.

fails to hold, and people increase their spending.

If the federal government has a budget deficit, then A) tax receipts and government expenditures are equal. B) tax receipts are falling and government expenditures are rising. C) tax receipts exceed government expenditures. D) government expenditures exceed tax receipts

government expenditures exceed tax receipts.

An economy is at a short-run equilibrium as illustrated in the above figure (AS is our SRAS curve). An appropriate fiscal policy option to move the economy to full employment is to increase A) government spending and move the economy to a full-employment equilibrium at point b. B) government spending and move the economy to a full-employment equilibrium at point c. C) tax rates and move the economy to a full-employment equilibrium at point b. D) tax rates and move the economy to a full-employment equilibrium at point c.

government spending and move the economy to a full-employment equilibrium at point b.

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) lower; lower B) lower; higher C) higher; higher D) higher; lower

higher; higher

An increase in government spending causes interest rates to _________, which causes investment spending to __________. This is known as ʺcrowding outʺ. A) increase ; decrease B) increase ; increase C) decrease ; increase D) decrease ; decrease E) None of the above are correct

increase ; decrease

Refer to Figure 12-1. Suppose the economy is at point B. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.) A) decrease interest rates B) increase taxes C) increase government spending D) increase the money supply E) More than one of the above

increase government spending

Refer to Figure 12-1. Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.) A) increase taxes B) increase government spending C) increase the money supply D) increase interest rates E) More than one of the above

increase taxes

Refer to Figure 15-1. Keynes argued that the economy could get stuck at a point like point A in the above graph. What did Keynes advocate in order to get the economy ʺunstuckʺ? A) encouraging consumers to spend more money B) policies to shift the LRAS curve to the left C) allowing the automatic mechanism to shift the SRAS curve to the right D) increases in government spending

increases in government spending

A decrease in individual income taxes ________ disposable income, which ________ consumption spending. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases

increases; increases

In the short run, expansionary fiscal policy ________ the price level and ________ equilibrium real GDP. A) increases; increases B) decreases; decreases C) decreases; increases D) increases; decreases

increases; increases

Contractionary fiscal policy is so named because it: A) is expressly designed to expand real GDP. B) necessarily reduces the size of government. C) is aimed at reducing aggregate demand. D) involves a contraction of the nationʹs money supply.

is aimed at reducing aggregate demand.

When a government runs a deficit A) its debt decreases. B) it must cut spending. C) it must raise taxes D) its debt increases.

its debt increases.

The presence of automatic stabilizers means that the federal budget deficit is ________ than it otherwise would be in a recession and ________ than it otherwise would be in an expansion. A) larger; smaller B) larger; larger C) smaller; smaller D) smaller; larger

larger; smaller

When an economy is in a recession, discretionary fiscal policy would call for ________, and the automatic stabilizers would ________. A) increasing tax revenues; increase tax rates B) increasing tax rates, lower tax revenues. C) lowering tax rates; lower tax revenues D) increasing tax rates; increase tax revenues

lowering tax rates; lower tax revenues

If there are multiplier effects, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) $200 billion. B) more than $200 billion. C) less than $200 billion. D) None of the above are correct. This policy shifts the long run aggregate supply curve.

more than $200 billion

The national debt is the amount A) by which government tax receipts exceed expenditure in a given year. B) of debt outstanding that arises from past budget deficits. C) of government expenditures summed over time. D) by which government expenditure exceeds tax receipts in a given year.

of debt outstanding that arises from past budget deficits.

Automatic stabilizers are defined as A) policy that stabilizes without the need for action by the government. B) discretionary policy taken to stabilize the economy. C) actions taken by the President without Congressional consent to stabilize the economy. D) actions taken by an act of Congress to stabilize the economy.

policy that stabilizes without the need for action by the government.

Government budget deficits are most likely to increase during economic ____________. A) expansions B) recessions

recessions

During recessions, government expenditure automatically A) falls, because of the progressive income tax system. B) rises, because of programs such as unemployment insurance and Medicaid. C) rises, because of the progressive income tax system. D) falls, because of programs such as unemployment insurance and Medicaid.

rises, because of programs such as unemployment insurance and Medicaid.

The U.S. government generally finances its debt by: A) borrowing directly from very large banks. B) printing money. C) selling U.S. securities. D) borrowing directly from the FED

selling U.S. securities.

Expansionary fiscal policy will A) shift the aggregate demand curve to the left. B) not shift the aggregate demand curve. C) shift the short-run aggregate supply curve to the left. D) shift the aggregate demand curve to the right.

shift the aggregate demand curve to the right.

If the government uses fiscal policy to close a recessionary gap, government A) spending must be increased by more than the gap because of the government expenditure multiplier. B) spending can be increased by less than the gap because of the government expenditure multiplier. C) taxes can be raised by less than the gap because of the tax multiplier. D) taxes must be cut by more than the gap because of the tax multiplier.

spending can be increased by less than the gap because of the government expenditure multiplier.

During a recession, what automatically (due to ʺautomatic stabilizersʺ) happens to the governmentʹs budget situation? A) tax revenues do not change; government spending falls, and the budget deficit gets smaller. B) tax revenues fall, government spending falls, and the effect on budget deficits is ambiguous C) tax revenues fall, government spending increases, and the budget deficit gets larger. D) tax revenues rise; government spending increases, and the effect on budget deficits is ambiguous

tax revenues fall, government spending increases, and the budget deficit gets larger.

It is estimated that the tornadoes in Alabama earlier this year caused $645 million of damage in Jefferson County, Alabama alone. Suppose that Ben Gleck, a news analyst on the Coyote News Network, argues that the tornado, while tragic, will have a positive impact on the U.S. economy as it will create jobs for those involved in the cleanup and reconstruction, and thus increase the amount of employment in the U.S.. Mr. Gleckʹs argument is an example of A) the crowding out fallacy. B) the broken window fallacy. C) the missing variables effect. D) sound economic reasoning.

the broken window fallacy

Which of the following is INCORRECT regarding tax revenues? A) they increase during recessions B) they are a revenue source in the governmentʹs budget C) they change with changes in the tax rate D) they increase during economic expansions

they increase during recessions