Macro Chapter 13 Fiscal Policy Review Questions

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by A) increasing government spending by $80 billion. B) decreasing taxes by $100 billion. C) increasing government spending by $25 billion. D) decreasing taxes by $25 billion.

D

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by A) reducing government expenditures by $125 billion. B) increasing taxes by $50 billion. C) increasing taxes by $250 billion. D) reducing government expenditures by $20 billion.

D

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 A) encourage private investment by reducing corporate income taxes. B) increase tax rates and/or reduce government spending. C) increase government expenditures. D) discourage personal saving by reducing the interest rate on government bonds.

B

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? A) Reductions in federal tax rates on personal and corporate income. B) Reductions in agricultural subsidies and veterans' benefits. C) Postponement of a highway construction program. D) A congressional proposal to incur a federal surplus to be used for the retirement of public debt.

A

The crowding-out effect suggests that A) government borrowing to finance the public debt increases the real interest rate and reduces private investment. B) consumer and investment spending always vary inversely. C) tax increases are paid primarily out of saving and therefore are not an effective fiscal device. D) it is very difficult to have excessive aggregate spending in a capitalist economy.

A

The cyclically adjusted budget refers to A) the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment. B) the inflationary impact that the automatic stabilizers have in a full-employment economy. C) that portion of a full-employment GDP that is not consumed in the year it is produced. D) the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.

A

The cyclically adjusted budget tells us A) what the size of the federal budget deficit or surplus would be if the economy was at full employment. B) that in a full-employment economy, the federal budget should be in balance. C) that tax revenues should vary inversely with GDP. D) the actual budget deficit or surplus realized in any given year.

A

The group of three economists appointed by the president to provide fiscal policy recommendations is the A) Council of Economic Advisers. B) Federal Reserve Board of Governors. C) Joint Economic Committee. D) Bureau of Economic Analysis.

A

A contractionary fiscal policy is shown as a A) movement along an existing aggregate demand curve. B) leftward shift in the economy's aggregate demand curve. C) rightward shift in the economy's aggregate demand curve. D) rightward shift in the economy's aggregate supply curve.

B

A major advantage of the built-in or automatic stabilizers is that they A) simultaneously stabilize the economy and reduce the absolute size of the public debt. B) require no legislative action by Congress to be made effective. C) guarantee that the federal budget will be balanced over the course of the business cycle. D) automatically produce surpluses during recessions and deficits during inflations.

B

An economist who favored expanded government would recommend A) tax cuts during recession and tax increases during inflation. B) increases in government spending during recession and tax increases during inflation. C) tax increases during recession and tax cuts during inflation. D) tax cuts during recession and reductions in government spending during inflation.

B

Discretionary fiscal policy refers to A) any change in government spending or taxes that destabilizes the economy. B) intentional changes in taxes and government expenditures made by Congress to stabilize the economy. C) the changes in taxes and transfers that occur as GDP changes. D) the authority that the president has to change personal income tax rates.

B

Economists refer to a budget deficit that exists when the economy is achieving full employment as a A) natural deficit. B) cyclically adjusted deficit. C) cyclical deficit. D) nonrecurring deficit.

B

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) A) contractionary fiscal policy. 31) B) expansionary fiscal policy. C) neutral fiscal policy.D) low-interest-rate policy.

B

The amount by which government expenditures exceed revenues during a particular 37) year is the A) GDP gap. B) budget deficit. C) full employment.D) public debt.

B

Which of the following best describes the built-in stabilizers as they function in the United States? A) Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. B) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises. C) The size of the multiplier varies inversely with the level of GDP. D) Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.

B

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 A) an equality of tax receipts and government expenditures. B) a reduction of subsidies and transfer payments and an increase in tax rates. C) an excess of government expenditures over tax receipts. D) an excess of tax receipts over government expenditures.

C

Countercyclical discretionary fiscal policy calls for A) surpluses during recessions and deficits during periods of demand-pull inflation. B) deficits during both recessions and periods of demand-pull inflation. C) deficits during recessions and surpluses during periods of demand-pull inflation. D) surpluses during both recessions and periods of demand-pull inflation.

C

The U.S. public debt A) consists of the total debt of U.S. households, businesses, and government. B) refers to the collective amount that U.S. citizens and businesses owe to foreigners. C) consists of the historical accumulation of all past federal deficits and surpluses. D) refers to the debts of all units of governmentfederal, state, and local

C

The crowding-out effect of expansionary fiscal policy suggests that A) consumer and investment spending always vary inversely. B) tax increases are paid primarily out of saving and therefore are not an effective fiscal device. C) increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. D) it is very difficult to have excessive aggregate spending in the U.S. economy.

C

Which of the following statements is correct? A) Built-in stability has eliminated the need for discretionary fiscal policy. B) Built-in stability works in halting inflation, but it cannot alleviate unemployment. C) Built-in stability only partially offsets fluctuations in economic activity. D) Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.

C

Which one of the following might offset a crowding-out effect of financing a large public debt? A) a decline in public investment B) a decrease in the money supply C) an increase in public investment D) a decline in net exports

C

An expansionary fiscal policy is shown as a 16) A) leftward shift in the economy's aggregate supply curve. B) movement along an existing aggregate demand curve. C) leftward shift in the economy's aggregate demand curve. D) rightward shift in the economy's aggregate demand curve.

D

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should A) reduce government expenditures by $40 billion. B) reduce taxes by $40 billion. C) increase government expenditures by $80 billion. D) reduce taxes by $80 billion.

D

The public debt is held as A) U.S. gold certificates. B) U.S. securities, corporate bonds, and common stock. C) Federal Reserve Notes. D) Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

D

Which of the following best describes the idea of a political business cycle? A) Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle. B) Fiscal policy will result in alternating budget deficits and surpluses. C) Politicians are more willing to cut taxes and increase government spending than they are to do the reverse. D) Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

D

Contractionary fiscal policy is so named because it A) is aimed at reducing aggregate demand and thus achieving price stability. B) is expressly designed to expand real GDP. C) involves a contraction of the nation's money supply. D) necessarily reduces the size of government.`

A

Expansionary fiscal policy is so named because it A) is designed to expand real GDP. B) is aimed at achieving greater price stability. C) necessarily expands the size of government. D) involves an expansion of the nation's money supply.

A

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by A) increasing government spending by $4 billion. B) decreasing taxes by $4 billion. C) increasing government spending by $40 billion. D) increasing taxes by $4 billion.

A

In an aggregate demand-aggregate supply diagram, equal decreases in government 14) spending and taxes will A) shift the AD curve to the left. B) not affect the AD curve. C) increase the equilibrium GDP. D) shift the AD curve to the right.

A

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by A) reducing government expenditures by $60 billion. B) increasing taxes by $20 billion. C) increasing taxes by $15 billion. D) reducing government expenditures by $12 billion.

B

If the economy has a cyclically adjusted budget surplus, this means that A) the public sector is exerting an expansionary impact on the economy. B) tax revenues would exceed government expenditures if full employment were achieved. C) the economy is actually operating at full employment. D) the actual budget is necessarily also in surplus.

B

Built-in stability means that A) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year. B) Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity. C) an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy. D) 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.

D