Chapter 16 Economics

34) If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP. A) $250 billion B) $400 billion C) $640 billion D) None of the above are correct. Taxes should be increased in this case.

A) $250 billion

7) Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate is 0.2, and the marginal propensity to import equals 0.3. A) 1.43 B) 1.6 C) 3.33 D) 4

A) 1.43

2) Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier? A) 10 B) 9 C) 5 D) 1

A) 10

14) Calculate the government purchases multiplier if the marginal propensity to consume equals 0.8, the tax rate is 0.1, and the marginal propensity to import equals 0.2. A) 2.1 B) 1.9 C) 1.7 D) 1.4

A) 2.1

5) What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed. A) 2.78 B) 5 C) 6.25 D) 100

A) 2.78

12) What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed. A) 5.3 B) 10 C) 11.1 D) 100

A) 5.3

20) The government purchases multiplier is defined as

A) Change in equilibrium real GDP/Change in government purchases

24) Which of the following is considered expansionary fiscal policy? A) Congress decreases the income tax rate. B) Congress increases defense spending. C) Legislation increases a college tuition deduction from federal income taxes. D) The Arizona legislature cuts highway spending to balance its budget.

A) Congress decreases the income tax rate.

16) Which of the following is considered contractionary fiscal policy? A) Congress increases the income tax rate. B) Congress increases defense spending. C) Legislation removes a college tuition deduction from federal income taxes. D) The New Jersey legislature cuts highway spending to balance its budget.

A) Congress increases the income tax rate.

12) If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $300 billion decrease in GDP B) a $300 billion increase in GDP C) a $30 billion increase in GDP D) a $133.33 billion decrease in GDP E) a $133.33 billion increase in GDP

A) a $300 billion decrease in GDP

14) If the federal government's expenditures are less than its tax revenues, then A) a budget surplus results. B) a budget deficit results. C) the budget is balanced. D) No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays.

A) a budget surplus results.

19) Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP? A) an increase in government purchases B) an increase in the supply of money C) an increase in individual income taxes D) a decrease in transfer payments

A) an increase in government purchases

28) An equal increase in government purchases and taxes will cause A) an increase in real GDP. B) no change in real GDP. C) an increase in the budget surplus. D) a reduction in cyclically adjusted budget surplus.

A) an increase in real GDP.

8) A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending. A) an induced; an autonomous B) an expansionary; a contractionary C) an autonomous; an induced D) a contractionary; an expansionary

A) an induced; an autonomous

3) Data indicates that recessions following financial crises ________ recessions which do not follow financial crises. A) are more severe than B) are less severe than C) are equally severe as D) Data does not show any link between the severity of recessions following financial crises.

A) are more severe than

7) The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy.

A) automatic stabilizers.

8) The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy.

A) automatic stabilizers.

13) Tax cuts on business income increase aggregate demand by increasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates.

A) business investment spending.

22) Tax increases on business income decrease aggregate demand by decreasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates.

A) business investment spending.

10) Expansionary fiscal policy A) can be effective in the short run. B) causes complete crowding out in the short run. C) is never effective because of crowding out. D) can be effective in the long run.

A) can be effective in the short run.

19) To combat inflation, Congress and the president should A) decrease government spending. B) decrease taxes. C) raise interest rates. D) increase transfer payments.

A) decrease government spending.

5) Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant A) decrease in investment spending. B) decrease in oil prices. C) increase in consumption spending. D) increase in net exports.

A) decrease in investment spending.

14) The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods. C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods. D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.

A) decrease in taxes will be saved by households and not spent, and some

23) During most of the years of the Great Depression, the actual federal budget was in ________, and the cyclically adjusted budget was in ________. A) deficit; surplus B) surplus; surplus C) deficit; deficit D) surplus; deficit

A) deficit; surplus

1) Part of the spending on the Doyle Drive project in northern California came from the American Reinvestment and Recovery Act, which is an example of ________ aimed at increasing real GDP and employment. A) discretionary fiscal policy B) an automatic stabilizer C) contractionary fiscal policy D) a transfer payment

A) discretionary fiscal policy

8) The impact of crowding out may be the least A) during a deep recession. B) when real GDP is above but close to potential GDP. C) during an expansion. D) when real GDP is below but close to potential GDP.

A) during a deep recession.

18) Social Security began as a "pay-as-you-go" system, meaning that payments to current retirees were paid A) from taxes collected from current workers. B) from taxes collected from retired workers. C) as long as the government had funds available. D) as the government collected revenues from tariffs and excise taxes in the years Social Security payments were made.

A) from taxes collected from current workers.

3) An increase in government purchases will increase aggregate demand because A) government expenditures are a component of aggregate demand. B) consumption expenditures are a component of aggregate demand. C) the decline in the price level will increase demand. D) the decline in the interest rate will increase demand.

A) government expenditures are a component of aggregate demand.

18) The federal budget deficit acts as an automatic stabilizer because A) government tax revenues decrease during a recession. B) unemployment insurance payments decrease during a recession. C) food stamp payments increase during expansionary periods. D) Medicaid payments increase during expansionary periods.

A) government tax revenues decrease during a recession.

37) A one-time tax rebate, which is notexpected to be extended in future years, will A) have a moderately positive effect on consumption and aggregate demand. B) have no effect on consumption and aggregate demand. C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate. D) increase aggregate supply and aggregate demand.

A) have a moderately positive effect on consumption and aggregate demand.

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

A) higher; higher

16) If policymakers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to A) increase taxes. B) increase government spending. C) use expansionary fiscal policy. D) increase interest rates.

A) increase taxes.

11) Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) increase; increase

15) A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) increase; not change

A) increase; increase

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

A) increases; increases

4) Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates.

A) increasing government purchases or decreasing taxes.

15) The three categories of federal government expenditures, in addition to government purchases, are A) interest on the national debt, grants to state and local governments, and transfer payments. B) interest on the national debt, defense spending, and transfer payments. C) defense spending, budgets of federal agencies, and transfer payments. D) defense spending, Social Security, and Medicare.

A) interest on the national debt, grants to state and local governments, and transfer payments.

24) The tax multiplier A) is negative. B) is larger in absolute value as compared to the government spending multiplier. C) is a measure of how much taxes will fall when income is falling. D) is always less than one.

A) is negative.

6) In an open economy, the government purchases multiplier will be A) larger as the marginal propensity to import decreases. B) smaller as the marginal propensity to import decreases. C) smaller as the marginal propensity to tax decreases. D) larger as the marginal propensity to consume decreases.

A) larger as the marginal propensity to import decreases.

9) Which of the following would not be considered an automatic stabilizer? A) legislation increasing funding for job retraining passed during a recession B) decreasing unemployment insurance payments due to decreased joblessness during an expansion C) rising income tax collections due to rising incomes during an expansion D) declining food stamp payments due to more persons finding jobs during an expansion

A) legislation increasing funding for job retraining passed during a recession

12) If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be A) less than it would be without the supply-side effects. B) increased as aggregate real income and output rise in the long run. C) unaffected by the shifting long-run aggregate supply curve. D) dependent upon the impact of this tax change on consumer disposable income.

A) less than it would be without the supply-side effects.

17) Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should A) lower government purchases by an amount less than $200 billion. B) lower government purchases by $200 billion. C) raise taxes by $200 billion. D) lower taxes by $200 billion. E) raise taxes by an amount more than $200 billion.

A) lower government purchases by an amount less than $200 billion.

18) Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back to potential GDP, Congress should A) lower taxes by an amount less than $500 billion. B) raise government purchases by $500 billion. C) raise government purchases by more than $500 billion. D) lower taxes by $500 billion. E) lower government purchases by $500 billion.

A) lower taxes by an amount less than $500 billion.

3) A decrease in which of the following would decrease the tax wedge? A) marginal tax rate B) money supply C) national debt D) federal budget deficit

A) marginal tax rate

7) As the tax wedge associated with a given economic activity gets smaller, we would expect A) more of that economic activity to occur. B) the distortions caused by taxes on that activity to be greater. C) people to engage in less of that particular activity. D) no change in the practice of that activity until the tax wedge ultimately disappears.

A) more of that economic activity to occur.

1) Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect. A) multiplier B) expenditure C) consumption D) aggregate demand

A) multiplier

8) Reducing the marginal tax rate on income will A) reduce the tax wedge faced by workers and increase labor supplied. B) raise the return to entrepreneurship and encourage the opening of new businesses. C) increase the after-tax return on saving, and encourage saving. D) All of the above are correct.

A) reduce the tax wedge faced by workers and increase labor supplied.

4) Economists who believe the supply-side effects of tax cuts are small essentially believe that A) tax cuts mainly affect aggregate demand. B) tax cuts mainly affect aggregate supply. C) tax cuts will increase the quantity of labor supplied. D) tax cuts will result in relatively small changes in the price level.

A) tax cuts mainly affect aggregate demand.

1) The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. B) the Federal Reserve can immediately recognize when real GDP is below or above potential GDP. C) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.

A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

22) if government spending and the price level increase, then A) the interest rate increases, consumption declines, and investment spending declines. B) the interest rate decreases, consumption declines, and investment spending declines. C) the interest rate increases, consumption increases, and investment spending increases. D) the interest rate decreases, consumption increases, and investment spending increases.

A) the interest rate increases, consumption declines, and investment spending declines.

7) An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier. A) will decrease B) will increase C) will not change D) may increase or may decrease

A) will decrease

25) A change in tax rates A) has a less complicated effect on GDP than does a tax cut of a fixed amount. B) has a larger multiplier effect the smaller the tax rate. C) will not affect disposable income. D) will not affect the size of the multiplier.

B) has a larger multiplier effect the smaller the tax rate.

9) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.8. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3

B) 5

34) Which of the following statements about the Social Security, Medicare, and Medicaid programs is true? A) Spending on these three programs will rise from 9.7% of GDP currently to 10.2% of GDP by 2050. B) Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially. C) Some economists have argued for decreasing taxes to help with these programs' funding problems. D) Some economists have argued for increasing benefits to help with these programs' funding problems.

B) Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially.

13) Which of the following is a reason why we should consider the federal national debt a problem? A) The federal government is in danger of defaulting on its debt. B) If the debt drives up interest rates, crowding out will occur. C) If the debt was incurred to finance improvements in infrastructure, crowding out will occur. D) If the debt was incurred to finance research and development, crowding out will occur.

B) If the debt drives up interest rates, crowding out will occur.

32) ________ and ________ are the largest sources of revenue collected by the federal government. A) Individual income taxes; corporate income taxes B) Individual income taxes; social insurance taxes C) Corporate income taxes; excise and other taxes D) Excise and other taxes; individual income taxes

B) Individual income taxes; social insurance taxes

20) Which of the following provides health-care coverage to people age 65 and over? A) Medicaid B) Medicare C) Social Security D) Health-Aid

B) Medicare

16) Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP? A) Real equilibrium GDP will fall. B) Real equilibrium GDP will rise. C) There will be no change in real equilibrium GDP. D) Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.

B) Real equilibrium GDP will rise.

31) Accumulating debt poses a problem for the U.S. federal government because A) it is currently in danger of defaulting on the debt. B) a large debt-to-GDP ratio causes crowding out. C) building roads and bridges do not yield enough benefits to justify their cost. D) the debt has to ultimately be paid off.

B) a large debt-to-GDP ratio causes crowding out.

6) Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________. A) aggregate demand; government spending B) aggregate supply; taxes C) aggregate demand; taxes D) aggregate supply; government spending

B) aggregate supply; taxes

1) To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the A) absolute size of the budget deficit or surplus. B) budget deficit or surplus as a percentage of GDP. C) budget deficit or surplus as a percentage of tax revenues. D) budget deficit or surplus as a percentage of government spending.

B) budget deficit or surplus as a percentage of GDP.

3) The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

B) by more than

4) The aggregate demand curve will shift to the left ________ the initial decrease in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

B) by more than

5) The aggregate demand curve will shift to the right ________ the initial decrease in taxes. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than

B) by more than

7) From an initial long-run equilibrium, if aggregate demand grows faster than long-run and short-run aggregate supply, then Congress and the president would most likely A) decrease the required reserve ratio. B) decrease government spending. C) decrease oil prices. D) decrease tax rates.

B) decrease government spending.

20) To combat a recession with discretionary fiscal policy, Congress and the president should A) decrease government spending to balance the budget. B) decrease taxes to increase consumer disposable income. C) lower interest rates and increase investment by increasing the money supply. D) raise taxes on interest and dividends, but not on personal income.

B) decrease taxes to increase consumer disposable income.

26) Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

B) decrease; increase

25) Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; discretionary fiscal policy B) discretionary fiscal policy; automatic stabilizers C) automatic stabilizers; monetary policy D) discretionary fiscal policy; conscious fiscal policy

B) discretionary fiscal policy; automatic stabilizers

9) The government purchases multiplier equals the change in ________ divided by the change in ________. A) government purchases; equilibrium real GDP B) equilibrium real GDP; government purchases C) government purchases; consumption spending D) consumption spending; government purchases

B) equilibrium real GDP; government purchases

10) The tax multiplier equals the change in ________ divided by the change in ________. A) taxes; equilibrium real GDP B) equilibrium real GDP; taxes C) taxes; consumption spending D) consumption spending; taxes

B) equilibrium real GDP; taxes

3) Fiscal policy refers to changes in A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund the war on terrorism. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

15) If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in A) the money supply and a decrease in interest rates. B) government purchases. C) oil prices. D) taxes.

B) government purchases.

6) Automatic stabilizers refer to A) the money supply and interest rates that automatically increase or decrease along with the business cycle. B) government spending and taxes that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

B) government spending and taxes that automatically increase or decrease along with the business cycle.

23) Crowding out, following an increase in government spending, results from (the exchange rate is the foreign exchange price of the domestic currency) A) higher interest rates and a lower exchange rate. B) higher interest rates and a higher exchange rate. C) lower interest rates and a lower exchange rate. D) lower interest rates and a higher exchange rate.

B) higher interest rates and a higher exchange rate.

35) A tax rebate by the government would A) increase your pretax income, but not your disposable income. B) increase your disposable income, but not your pretax income. C) decrease your pretax income, but not your disposable income. D) decrease your disposable income, but not your pretax income.

B) increase your disposable income, but not your pretax income.

36) A government tax rebate of $1,000 would ________ your disposable income by ________. A) increase; less than $1,000 B) increase; $1,000 C) decrease; less than $1,000 D) decrease; $1,000

B) increase; $1,000

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

B) increase; fall; rises

2) The multiplier effect refers to the series of A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. C) autonomous increases in investment spending that result from an initial increase in induced expenditures. D) induced increases in investment spending that result from an initial increase in autonomous expenditures.

B) induced increases in consumption spending that result from an initial increase in autonomous expenditures.

19) The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures. A) induced; investment; autonomous B) induced; consumption; autonomous C) autonomous; consumption; induced D) autonomous; investment; induced

B) induced; consumption; autonomous

26) Some economists argue that the federal government should normally run a deficit at potential GDP, with the borrowed funds applied to A) consumption goods. B) investment goods. C) social security benefits. D) health care costs.

B) investment goods.

33) Social Security A) has not been successful in reducing poverty among elderly Americans. B) is a system whereby current retirees are paid from taxes collected from current workers. C) has a greater number of workers per retiree today as compared to when it started. D) currently pays retirees benefits equal to what they paid into the system.

B) is a system whereby current retirees are paid from taxes collected from current workers.

1) In an open economy, the government purchases multiplier will be smaller the A) smaller the marginal propensity to import. B) larger the tax rate. C) larger the marginal propensity to consume. D) All of the above are correct.

B) larger the tax rate.

30) Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to increase government purchases by A) $500 billion. B) less than $500 billion. C) more than $500 billion. D) None of the above are correct. Congress must act to decrease government purchases in this case.

B) less than $500 billion.

31) Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by A) $500 billion. B) less than $500 billion. C) more than $500 billion. D) None of the above are correct. Congress should raise taxes in this case.

B) less than $500 billion.

5) Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________. A) less; less B) less; more C) more; less D) more; more

B) less; more

6) The crowding out of private spending by government spending will be greater the A) less sensitive consumption, investment, and net exports are to changes in interest rates. B) more sensitive consumption, investment, and net exports are to changes in interest rates. C) less sensitive consumption, investment, and net exports are to changes in the price level. D) more sensitive consumption, investment, and net exports are to changes in the price level.

B) more sensitive consumption, investment, and net exports are to changes in interest rates.

20) It is ________ difficult to effectively time fiscal policy than monetary policy because ________. A) more; fiscal policy can be quickly decided and changed B) more; fiscal policy takes longer to implement C) less; monetary policy takes longer to decide and change D) less; monetary policy takes longer to implement

B) more; fiscal policy takes longer to implement

21) If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy A) must be at potential real GDP. B) must be below potential real GDP. C) must be above potential real GDP. D) could be below or above potential real GDP.

B) must be below potential real GDP.

28) Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run. A) partial crowding out; partial crowding out B) partial crowding out; complete crowding out C) complete crowding out; complete crowding out D) complete crowding out; partial crowding out

B) partial crowding out; complete crowding out

16) Government deficits tend to increase during A) recessions and booms. B) periods of war and recession. C) periods of below- or above-average growth. D) periods of increased financial uncertainty.

B) periods of war and recession.

20) The cyclically adjusted budget deficit calculates the budget surplus or deficit at A) real GDP. B) potential GDP. C) nominal GDP. D) average GDP.

B) potential GDP.

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

B) rises because of programs such as unemployment insurance and Medicaid.

10) If tax reduction and simplification are effective, then A) real wages will rise as labor supply and demand increase. B) saving and investment in new capital will increase. C) interest rates will rise in financial markets and demand for financial assets falls. D) fewer new firms will be established, since existing firms will make more profit.

B) saving and investment in new capital will increase.

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

B) shift the aggregate demand curve to the right.

13) In an open economy, the government purchases multiplier will be A) larger as the marginal propensity to import increases. B) smaller as the marginal propensity to import increases. C) larger as the marginal propensity to tax increases. D) smaller as the marginal propensity to consume increases.

B) smaller as the marginal propensity to import increases.

8) The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle A) destabilize the economy. B) stabilize the economy. C) decrease potential GDP. D) increase potential GDP.

B) stabilize the economy.

27) Borrowing to pay for long-lived capital expenditures makes sense as A) the benefits are received in the current year so the burden of paying for them should be spread over many years. B) the benefits are received over many years so the burden of paying for them should be spread over many years. C) the benefits are received in the current year so the burden of paying for them should be paid in the current year. D) the benefits are received over many years so the burden of paying for them should be paid in the current year.

B) the benefits are received over many years so the burden of paying for them should be spread over many years.

10) For the federal deficit to be lowered, A) the federal government must decrease its spending and increase net exports. B) the federal government's expenditures must be lower than its tax revenue. C) the Federal Reserve must raise interest rates and lower the required reserve ratio. D) the Federal Reserve must reduce the money supply.

B) the federal government's expenditures must be lower than its tax revenue.

30) Which of the following is the largest category of federal government expenditures? A) defense spending B) transfer payments C) interest on the debt D) grants to state and local governments

B) transfer payments

14) Tax cuts on business income ________ aggregate demand. A) would decrease B) would increase C) would not change D) may increase or decrease

B) would increase

17) Government transfer payments include which of the following? A) interest on the national debt B) grants to state and local governments C) Social Security and Medicare programs D) national defense

C) Social Security and Medicare programs

28) Which of the following is a government expenditure, but is not a government purchase? A) The federal government buys a Humvee. B) The federal government pays the salary of an FBI agent. C) The federal government pays out an unemployment insurance claim. D) The Federal government pays to support research on AIDS.

C) The federal government pays out an unemployment insurance claim.

11) In the long run, most economists agree that a permanent increase in government spending leads to A) no decrease in private spending. B) a decrease in private spending by less than the amount that government spending increased. C) a decrease in private spending by the same amount that government spending increased. D) a decrease in private spending by more than the amount that government spending increased.

C) a decrease in private spending by the same amount that government spending increased.

13) If the economy is slipping into a recession, which of the following would be an appropriate fiscal policy? A) an increase in the money supply and a decrease in interest rates B) a decrease in government purchases C) a decrease in taxes D) a decrease in oil prices

C) a decrease in taxes

6) If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy? A) a decrease in the money supply and an increase in the interest rate B) an increase in government spending C) an increase in taxes D) an increase in oil prices

C) an increase in taxes

6) The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A) in a recession. B) in an expansion. C) at potential GDP. D) at potential tax revenue.

C) at potential GDP.

25) If policymakers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to A) be at potential GDP. B) be above potential GDP. C) be below potential GDP. D) There is insufficient information given here to draw a conclusion.

C) be below potential GDP.

32) Suppose real GDP is $14 trillion and potential real GDP is $14.4 trillion. An increase in government purchases of $400 billion would cause real GDP to ________ potential real GDP (assuming a constant price level). A) equal B) be less than C) be more than D) There is insufficient information given here to draw a conclusion.

C) be more than

9) In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending. A) no B) partial C) complete D) more than complete

C) complete

9) Double taxation refers to A) corporations paying taxes on profits and individuals paying taxes on wage income. B) individuals paying taxes on wage income and individuals paying taxes on dividends. C) corporations paying taxes on profits and individuals paying taxes on dividends. D) corporations paying taxes on capital gains and individuals paying taxes on wage income.

C) corporations paying taxes on profits and individuals paying taxes on dividends.

25) 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) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

C) decrease; decrease

21) A(n) ________ in private expenditures as a result of a(n) ________ in government purchases is called crowding out. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase

C) decrease; increase

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

C) decrease; rise; falls

38) A tax rebate, which is expected to be offered in this and all future years, will A) have a small positive effect on consumption and aggregate demand. B) have no effect on consumption and aggregate demand. C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate. D) increase aggregate supply and aggregate demand.

C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate.

27) If Congress wanted to counteract the effects of a recession it could A) increase tax rates. B) increase taxes by a fixed amount. C) increase government purchases. D) decrease defense spending.

C) increase government purchases.

12) Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant A) decrease in oil prices. B) decrease in real GDP. C) increase in inflation. D) increase in labor productivity.

C) increase in inflation.

13) Consider a tax cut which affects not only consumer disposable income, but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving. In the long run we would expect this tax cut to A) decrease both the price level and increase real GDP. B) increase both the price level and the level of real GDP. C) increase the level of real GDP. D) increase the price level.

C) increase the level of real GDP.

24) Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ taxes, which would cause aggregate demand to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

C) increase; decrease

29) The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases

C) increases; decreases

15) Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases

C) increases; increases

26) A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect. A) decreasing; increasing B) decreasing; decreasing C) increasing; increasing D) increasing; decreasing

C) increasing; increasing

19) Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally A) less difficult than with monetary policy. B) far less difficult than with monetary policy. C) more difficult than with monetary policy. D) about the same difficulty as with monetary policy.

C) more difficult than with monetary policy.

21) An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) $200 billion. B) less than $200 billion. C) more than $200 billion. D) None of the above are correct. This policy shifts the long-run aggregate supply curve.

C) more than $200 billion.

2) The tax wedge is the difference between the A) amount of taxes needed to balance the federal budget and the actual amount of taxes. B) amount of taxes needed to pay off the national debt and the actual amount of taxes. C) pretax and posttax returns to an economic activity. D) nominal and real interest rates.

C) pretax and posttax returns to an economic activity.

7) Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, the cyclically adjusted budget A) deficit was $210 billion. B) deficit was $110 billion. C) surplus was $10 billion. D) surplus was $110 billion.

C) surplus was $10 billion.

28) The total value of U.S. Treasury bonds outstanding equals A) the federal government deficit. B) the federal government surplus. C) the federal government debt. D) the cyclically adjusted budget deficit.

C) the federal government debt.

2) The use of fiscal policy to stabilize the economy is limited because A) changes in government spending and tax rates have a small effect on aggregate demand. B) changes in government spending and tax rates have a small effect on interest rates. C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. D) the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code.

C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. D) the Internal Revenue Service (IRS)

24) Crowding out will be greater A) the less sensitive consumption spending is to changes in the interest rate. B) the further equilibrium GDP is below potential GDP. C) the more sensitive investment spending is to changes in the interest rate. D) if the economy is in recession, rather than at full employment.

C) the more sensitive investment spending is to changes in the interest rate.

26) Which of the following is an example of discretionary fiscal policy? A) an increase in unemployment insurance payments during a recession B) an increase in income tax receipts with rising income during an expansion C) the tax cuts passed by Congress in 2001 to combat the recession D) a decrease in food stamps issued during an expansion or boom

C) the tax cuts passed by Congress in 2001 to combat the recession

31) The fastest growing category of government expenditure is A) grants to state and local governments. B) defense spending. C) transfer payments. D) government purchases.

C) transfer payments.

24) Which of the following would be considered a fiscal policy action? A) The Fed increases the money supply. B) Tax incentives are offered to encourage the purchase of fuel efficient cars. C) Spending on the war in Afghanistan is increased to promote homeland security. D) A tax cut is designed to stimulate spending during a recession.

D) A tax cut is designed to stimulate spending during a recession.

22) Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential, A) this will result in a current budget deficit. B) the cyclically adjusted budget will be balanced. C) government transfer payments will be rising and tax receipts will be falling. D) All of the above are correct.

D) All of the above are correct.

5) Crowding out refers to a decline in ________ as a result of an increase in ________. A) tax revenues; unemployment B) government purchases; tax rates C) government purchases; private expenditures D) private expenditures; government purchases

D) private expenditures; government purchases

33) If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP. A) $7.25 trillion B) $1 trillion C) $500 billion D) $250 billion

D) $250 billion

8) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

D) lower; lower

27) An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may A) reduce investment in new capital. B) make domestic businesses less competitive in international markets as the dollar appreciates in value. C) raise interest rates and reduce consumer expenditures on automobiles and new houses. D) All of the above are correct.

D) All of the above are correct.

8) In an open economy, the government purchases multiplier will be larger the A) smaller the marginal propensity to import. B) smaller the marginal income tax rate. C) larger the marginal propensity to consume. D) All of the above are correct.

D) All of the above are correct.

2) Fiscal policy is determined by A) the Federal Reserve. B) the president and the Federal Reserve. C) Congress and the Federal Reserve. D) Congress and the president.

D) Congress and the president.

10) Suppose that Congress allocates $1 billion to clean up after hurricanes in 2016. It also raises taxes by $1 billion to keep the deficit from growing. If the marginal propensity to consume is 0.9, what is the effect on equilibrium GDP? A) GDP does not change. B) GDP increases by $10 billion. C) GDP increases by $900,000. D) GDP increases by $1 billion.

D) GDP increases by $1 billion.

3) Suppose that Congress allocates $5 billion to an "energy-efficient appliance rebate" program. It also raises taxes by $5 billion to keep the deficit from growing. If the marginal propensity to consume is 0.8, what is the effect on equilibrium GDP? A) GDP does not change. B) GDP increases by $25 billion. C) GDP increases by $4 billion. D) GDP increases by $5 billion.

D) GDP increases by $5 billion.

1) Which of the following best describes supply-side economics? A) Labor productivity affects aggregate supply. B) Education affects labor productivity which affects aggregate supply. C) Education affects the incentive to work, save, and invest and, therefore, aggregate supply. D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.

D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.

4) Which of the following would be classified as fiscal policy? A) The federal government passes tax cuts to encourage firms to reduce air pollution. B) The Federal Reserve cuts interest rates to stimulate the economy. C) A state government cuts taxes to help the economy of the state. D) The federal government cuts taxes to stimulate the economy. E) States increase taxes to fund education.

D) The federal government cuts taxes to stimulate the economy.

11) Suppose the president is successful in passing a $5 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.75. What happens to equilibrium GDP? A) There is a $20 billion increase in equilibrium GDP. B) There is a $20 billion decrease in equilibrium GDP. C) There is a $15 billion increase in equilibrium GDP. D) There is a $15 billion decrease in equilibrium GDP.

D) There is a $15 billion decrease in equilibrium GDP.

4) Suppose the president is successful in passing a $10 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.8. What happens to equilibrium GDP? A) There is a $50 billion increase in equilibrium GDP. B) There is a $50 billion decrease in equilibrium GDP. C) There is a $40 billion increase in equilibrium GDP. D) There is a $40 billion decrease in equilibrium GDP.

D) There is a $40 billion decrease in equilibrium GDP.

11) Which of the following would increase the size of the government purchases multiplier? A) an increase in the tax rate B) an increase in the quantity of imports purchased by households from an increase in income C) a decrease in the amount of consumption spending by households from an increase in income D) a decrease in the amount saved by households from an increase in income

D) a decrease in the amount saved by households from an increase in income

13) Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant? A) an increase of less than $80 billion B) an increase equal to $80 billion C) an increase of greater than $80 billion D) a decrease of less than $80 billion E) a decrease of more than $80 billion

D) a decrease of less than $80 billion

4) From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then Congress and the president would most likely A) increase the required reserve ratio and decrease government spending. B) decrease government spending. C) decrease oil prices. D) decrease taxes. E) lower interest rates.

D) decrease taxes.

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

D) decreases; decreases

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

D) decreases; decreases

1) Congress and the president carry out fiscal policy through changes in A) interest rates and the money supply. B) taxes and the interest rate. C) government purchases and the money supply. D) government purchases and taxes.

D) government purchases and taxes.

5) Which of the following is an objective of fiscal policy? A) energy independence from Middle East oil B) health care coverage for all Americans C) discovering a cure for AIDs D) high rates of economic growth E) homeland security

D) high rates of economic growth

21) The tax increases necessary to fund future Social Security and Medicare benefit payments would be A) small, and have little effect on economic growth. B) small, but could discourage work effort, entrepreneurship, and investment, thereby slowing economic growth. C) large, but would have little effect on economic growth. D) large, and could discourage work effort, entrepreneurship, and investment, thereby slowing economic growth.

D) large, and could discourage work effort, entrepreneurship, and investment, thereby slowing economic growth.

25) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

D) lower; lower

23) If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in A) the money supply and a decrease in interest rates. B) government purchases. C) oil prices. D) taxes.

D) taxes.

23) Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) taxes; interest rates B) taxes; the money supply C) interest rates; money supply D) taxes; expenditures

D) taxes; expenditures

11) The federal government debt equals A) tax revenues minus government spending. B) government spending minus tax revenues. C) the accumulation of past budget deficits. D) the total value of U.S. Treasury bonds outstanding.

D) the total value of U.S. Treasury bonds outstanding.

13) The largest and fastest-growing category of federal government expenditures is A) grants to state and local governments. B) interest on the national debt. C) national park spending. D) transfer payments.

D) transfer payments.

23) Cutting taxes A) will lower disposable income and lower spending. B) will raise disposable income and lower spending. C) will lower disposable income and raise spending. D) will raise disposable income and raise spending.

D) will raise disposable income and raise spending.