ECON 2301 - Test 4 (Study)

Expansionary fiscal policy, other things being equal, will tend to:

decrease unemployment rates.

*Contractionary fiscal policy consists of:

decreased government purchases, increased taxes, decreased transfer payments.

*Budget surpluses exist when:

government tax revenues exceed its spending.

To offset the effect of a steep fall in net exports on the economy, the government might:

increase government purchases.

Ceteris paribus, when nominal GDP falls:

interest rates will tend to fall.

The federal government funds deficit spending by:

issuing bonds.

*Typically, the budget deficit is financed by:

issuing debt.

*Which of the following measures is associated with an expansionary fiscal policy?

lowering taxes

All decisions of the Federal Reserve are subject to approval by:

only the Board of Governors of the Federal Reserve.

The largest single source of revenue for the federal government is the:

personal income tax.

Which of the following is not a function of the Federal Reserve System? A. limiting the national debt B. setting the required reserve ratio for the deposit holdings of depository institutions C. buying and selling government bonds to control the size and growth rate of the money supply D. controlling inflation

A. limiting the national debt

When the money supply decreases, other things being equal,

real interest rates rise and investment spending falls.

*When the economy goes into a ____, the amount of taxes collected by the government ____ automatically.

recession; falls

When the economy goes into a ____, the amount of unemployment compensation and welfare payments ____ automatically.

recession; increase

If there is initially a federal budget deficit, and taxes rise, while transfer payments fall:

Aggregate Demand decreases and the budget deficit decreases.

*If there is initially a federal budget deficit, and taxes fall while transfer payments rise:

Aggregate demand (AD) increases and the budget deficit increases.

*A major advantage of automatic stabilizers is that they:

require no legislative action by Congress to take effect.

During a recession, total public assistance payments and unemployment compensation payments automatically increase while income taxes automatically decrease. Which of the following best describes the effect of these changes on aggregate demand? A. Aggregate demand will be less than it would be without these automatic stabilizers. B. Aggregate demand will be the same as it was before the recession. C. Aggregate demand will be more than it would be without these automatic stabilizers. D. Aggregate demand will be greater than it was before the recession.

Aggregate demand will be more than it would be without these automatic stabilizers.

How does a change in income taxes primarily affect aggregate demand?

An income tax change alters disposable income and consumption spending.

*If government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change? A. Decrease consumption taxes. B. Decrease government purchases of goods and services. C. Increase transfer payments. D. Increase the budget deficit. E. None of the above.

B. Decrease government purchases of goods and services.

*If government policy makers were worried about the inflationary potential of the economy, which of the following would not be a correct fiscal policy change? A. Increase consumption taxes. B. Increase government purchases of goods and services. C. Reduce transfer payments. D. Increase the budget deficit.

B. Increase government purchases of goods and services.

Which of the following is most frequently used when the Fed is attempting to adjust the money supply? A. Changing reserve requirements B. Open market operations C. Changing the discount rate D. Moral suasion E. all of the above

B. Open market operations

*You are a member of Congress when the economy is in a recession. If your goal is to achieve a fully employed labor force, which of the following fiscal policy scenarios should you follow? A. Eliminate a federal budget deficit or add to a federal budget surplus. B. Raise government purchases, reduce taxes, and/or increase transfer payments. C. Decrease government purchases, increase taxes, and/or cut transfer payments. D. Raise government purchases, raise taxes by more than the increase in government purchases, and decrease transfer payments.

B. Raise government purchases, reduce taxes, and/or increase transfer payments.

The government's fiscal policy is its plan to regulate aggregate demand by manipulating:

taxation and spending.

*Which of the following would be an example or result of expansionary fiscal policy in action? A. an increase in taxation B. a decrease in government purchases C. a budget deficit D. a decrease in transfer payments E. a budget surplus

C. a budget deficit

*A decrease in net taxes (taxes minus transfer payments) would do which of the following in the short run? A. decrease any budget deficit or increase any budget surplus B. reduce the price level C. reduce unemployment D. reduce consumption purchases E. All of the above.

C. reduce unemployment

If the Fed buys a U.S. government bond from a member of the public,

the banking system has more reserves and the money supply tends to grow.

*AD will shift to the right, other things being equal, when:

the government budget deficit increases because government purchases rose.

Federal funds market rate is:

the rate charged on loans provided to meet reserve requirement.

The most important automatic stabilizer (The one with the biggest impact on the economy) is:

the tax system.

Which of the following combinations of changes would have a contractionary effect on aggregate demand? A. An increase in government purchases and an increase in transfer payments. B. An increase in taxes and an increase in transfer payments. C. A decrease in taxes and an increase in transfer payments. D. An increase in taxes and a decrease in government purchases.

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

Assume that the government is considering plans to increase aggregate demand in order to reduce unemployment. Which of the following would be effective? A. Increase government purchases of goods and services. B. Decrease taxes. C. <p> Increase transfer payments.</p> D. Any of the above.

D. Any of the above.

If the government sought to end a recession, which of the following would be an appropriate policy? A. Increase taxes. B. Decrease government purchases. C. Decrease transfer payments. D. Decrease taxes and increase transfer payments. E. Increase taxes and decrease transfer payments.

D. Decrease taxes and increase transfer payments.

The primary benefit of the automatic stabilizers is:

they require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle.

The primary reason that money is demanded is for:

transaction purposes.

An expansionary monetary policy is likely to increase real output more than just temporarily:

when the economy is operating at less than full capacity.

During an expansionary economy, public assistance payments and unemployment compensation payments automatically decrease while income taxes automatically increase. Which of the following best describes the effect of these changes on aggregate demand? A. Aggregate demand will be less than it would be without these automatic stabilizers. B. Aggregate demand will be the same as it was before the expansion. C. Aggregate demand will be less than it was before the expansion. D. Aggregate demand will be greater than it was before the expansion. E. Both a. and d. accurately describe their effect.

E. Both a. and d. accurately describe their effect.

If unemployment is the most significant problem in the economy, which of the following actions would be an appropriate fiscal policy response? A. decrease taxes B. decrease transfer payments C. increase government purchases D. all of the above E. both A and C above

E. both A and C above

*Contractionary fiscal policy, other things being equal, will tend to: A. increase interest rates. B. increase investment. C. increase net exports. D. do both a. and c. E. do both b. and c.

E. do both b. and c.

*Someone earning $150,000 per year will pay the same amount of ____________ as someone earning $150,000,000 per year:

Social Security tax.

Which of the following statements is not true with regard to automatic stabilizers? A. The most important automatic stabilizer is the tax system. B. They act as shock absorbers to the economy. C. They require legislative action. D. Automatic stabilizers like government transfer payments change as business cycles conditions change.

They require legislative action.

If the Fed sells bonds, the short-run impact of this policy will tend to include:

an increase in real interest rates.

Automatic stabilizers in the United States are:

changes in government transfer payments and tax revenues that vary automatically and inversely to business cycle changes.

The main components of spending, which can cause changes in aggregate demand, are:

consumption, investment, government purchases, and net exports.

*A contractionary fiscal policy may be implemented in order to:

create or expand a budget surplus.