Chapter 27

109. Which of the following contributes to implementation lag for discretionary fiscal policy? A) the time it takes to secure legislative approval for policy actions B) the time it takes for economic agents to respond to policy actions C) the difficulty of collecting economic data in a timely manner D) the time it takes to borrow funds to finance the fiscal policy

: A Difficulty: Medium

113. An expansionary fiscal policy is likely to A) increase borrowing by the Treasury through the sale of bonds. B) decrease borrowing by the Treasury through the purchase of bonds. C) increase borrowing by the Treasury through the purchase of bonds. D) decrease borrowing by the Treasury through the sale of bonds.

: A Difficulty: Medium

100. Refer to Figure 12-3. Suppose the aggregate demand curve is AD1. All of the following events would more likely bring the economy back to the natural rate of unemployment except A) The government orders a one-time surcharge of 10% to be added to individual income tax liabilities. B) Businesses increase investment in response to tax breaks for businesses. C) The Federal Reserve buys bonds on the open market. D) The government orders a cut in withholding rates designed to increase disposable income and boost consumption.

: A Difficulty: Medium

74. Refer to Figure 12-1. At output level Y1, A) potential output is greater than actual output. B) the economy is operating at a point outside its production possibilities curve. C) the actual unemployment rate is less than the natural rate of unemployment. D) aggregate demand will fall to restore equilibrium.

: A Difficulty: Medium

78. Refer to Figure 12-2. If real GDP is equal to Yr, there is A) an inflationary gap. B) a recessionary gap. C) equilibrium at full employment. D) a short-run and a long-run equilibrium.

: A Difficulty: Medium

81. Refer to Figure 12-2. If discretionary fiscal policy is used to eliminate the gap, policy actions will A) shift the aggregate demand curve to the left until long-run equilibrium is restored at a price level, Pj and output level, Yp. B) shift the aggregate demand curve and the short-run aggregate supply curve to the left until long-run equilibrium is restored at a price level Pk and output level, Yp. C) shift the aggregate demand curve to the left until long-run equilibrium is restored at a price level, Pr and output level, Yp. D) shift the short-run aggregate supply curve to the left until long-run equilibrium is restored at a price level, Pr and output level, Yp.

: A Difficulty: Medium

87. The impact of instituting investment tax credits is A) to stimulate private sector investments and increase aggregate demand. B) to stimulate private production and increase aggregate supply. C) to encourage individuals to save in an effort to increase funds available for investment. D) to curtail in excessive lending by financial institutions.

: A Difficulty: Medium

91. Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action A) will shift the aggregate demand curve to the left by $120 billion. B) will shift the aggregate demand curve to the left by $6,000 billion. C) will shift the aggregate supply curve to the left by $120 billion. D) will shift the aggregate supply curve to the left by $6,000 billion.

: A Difficulty: Medium

95. An increase in government transfer payments will shift the aggregate demand curve to the right A) by the initial change in consumption arising from the change in transfer payment × the spending multiplier. B) by the initial change in income arising from the change in transfer payment × the spending multiplier. C) by the change in transfer payments × times the spending multiplier. D) by the change in transfer payments × times the marginal propensity to consume.

: A Difficulty: Medium

106. Which of the following statements is true? A) Unlike monetary policy, fiscal policy is not subject to lags. B) Like monetary policy, fiscal policy is also subject to the same types of lags. C) In general, fiscal policy lags are much shorter than monetary policy lags. D) Although both monetary and fiscal policies are subject to lags, fiscal policy lags are easier to eliminate.

: B Difficulty: Medium

96. Consider two fiscal policy actions. I. a $400 billion reduction in income taxes II. a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand? A) Both policies will have the exact same impact. B) Policy II because it affects aggregate demand directly. C) Policy I because it affects disposable income directly. D) Policy I because it works through consumption which is the largest component of aggregate demand.

: B Difficulty: Medium

94. Suppose that income taxes are increased by $600 billion. If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level? A) $2,400 billion B) $1,800 billion C) $600 billion D) $450 billion

: B Difficulty: Difficult

101. Refer to Figure 12-3. If the aggregate demand curve is AD2, which of the following is the most appropriate discretionary fiscal policy to pursue? A) a contractionary fiscal policy involving reductions in government spending and decreases in income tax rates B) a contractionary fiscal policy involving reductions in government spending and increases in income tax rates C) an expansionary fiscal policy involving increases in government spending and increases in income tax rates D) an expansionary fiscal policy involving increases in government spending and decreases in income tax rates

: B Difficulty: Medium

75. Refer to Figure 12-1. In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do? A) establish a consumption tax to encourage savings B) increase government spending C) loosen environmental regulations to lower businesses cost of production D) raise interest rates

: B Difficulty: Medium

77. Refer to Figure 12-1. Assume that the economy is initially at Y1. A nonintervention policy would result in the restoration of potential output by allowing the A) the aggregate demand curve to shift to the right. B) the short-run aggregate supply curve to shift to the right. C) the aggregate demand curve to shift to the left. D) the short-run aggregate supply curve to shift to the left.

: B Difficulty: Medium

82. Refer to Figure 12-2. Assume that the economy is initially at Yr. A nonintervention policy would return the economy to its potential output by A) allowing the short-run aggregate supply to shift to the right. B) allowing the short-run aggregate supply to shift to the left. C) allowing the aggregate demand to shift to the left. D) allowing the aggregate demand to shift to the right.

: B Difficulty: Medium

85. Suppose a country decreases government purchases by $400 billion. Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion. This contractionary policy action shifts the aggregate demand curve to the left by A) $12,000 billion. B) $600 billion. C) $533.3 billion. D) $266.6 billion.

: B Difficulty: Medium

88. Suppose the government increases the corporate income tax rate. This is A) an expansionary fiscal policy that will shift the aggregate demand curve to the right by an amount equal to the initial change in corporate income tax revenue times the spending multiplier. B) a contractionary fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier. C) a contractionary fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in the corporate income tax rate times the spending multiplier. D) an automatic fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier.

: B Difficulty: Medium

90. Suppose a country institutes an investment tax credit and that leads to an initial increase in investment spending of $100 billion. Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion. This action is A) expansionary and will shift the aggregate demand curve to the right by $750 billion. B) expansionary and will shift the aggregate demand curve to the right by $150 billion. C) expansionary and will shift the aggregate demand curve to the left by $7500 billion. D) expansionary and will shift the aggregate demand curve to the left by $150 billion.

: B Difficulty: Medium

104. As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by John Taylor on the effect of fiscal policy since the year 2000 suggests that A) the multiplier effect of fiscal policy is much less than that for monetary policy. B) temporary fiscal policy financed through government borrowing implies a multiplier value between 0.8 and 1.5. C) fiscal policy has little effect on the economy and that the multiplier value is effectively zero. D) statistical models are inadequate to determine the multiplier and the multiplier value likely varies based on the state of the economy.

: C Difficulty: Medium

107. Recognition lags in fiscal policy stem largely from A) the fact that it takes time before a fiscal policy, such as a change in government purchases or a change in taxes, is agreed to and put into effect. B) the fact that it takes time for a policy action to have its full effect on aggregate demand. C) the difficulty of collecting economic data in a timely and accurate fashion. D) households and businesses may not respond to fiscal policy to the extent that policy makers had hoped, for example, they may not be as responsive to a tax cut .

: C Difficulty: Medium

110. Which of the following statements is true about fiscal policy lags? A) Automatic stabilizers have a much shorter impact lag than discretionary fiscal policy. B) Although the recognition lag is equally long for discretionary fiscal policy and for automatic stabilizers, the latter avoid implementation lag because automatic stabilizers are triggered automatically. C) Unlike discretionary fiscal policy, automatic stabilizers respond automatically to changes in the economy, thus avoiding the recognition and implementation lags. D) Although automatic stabilizers have a much shorter lag, discretionary fiscal policy instruments have a more potent impact on the economy because they are more precise.

: C Difficulty: Medium

97. Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases? A) An increase in government purchases can be paid for with a bond issue while transfer payments must be funded by taxes. B) An increase in transfer payments can be paid for by borrowing, but an increase in government purchases must ultimately be funded by tax increases. C) Households save part of an increase in income while the entire increase in government purchases represents additional spending. D) An increase in transfer payments does not create a multiplier effect, but an increase in government purchases does.

: C Difficulty: Medium Figure 12-3

93. Suppose that when income taxes are reduced by $400 billion, households increase consumption by 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. At a given price level, the aggregate demand curve shifts to the right by A) $320 billion. B) $400 billion. C) $640 billion. D) $800 billion.

: C Difficulty: Difficult

76. Refer to Figure 12-1. If discretionary fiscal policy is used to eliminate the gap, policy actions will A) shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P1 and output level, Yp. B) shift the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level, P1 and output level, Yp. C) shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P2 and output level, Yp. D) shift the aggregate demand curve and the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level corresponding to point d and output level, Yp.

: C Difficulty: Medium

79. Refer to Figure 12-2. At output level Yr, A) potential output is greater than actual output. B) the expected price level equals actual price level. C) the actual unemployment rate is less than the natural rate of unemployment. D) aggregate demand will fall over time to restore equilibrium.

: C Difficulty: Medium

80. Refer to Figure 12-2. Suppose real GDP is equal to Yr. If policymakers want to close the output gap with demand management policies, what should they do? A) lower corporate profit tax rates to encourage investments B) increase investment tax credits to businesses C) decrease government spending on transfer payments and on final goods and services D) lower interest rates

: C Difficulty: Medium

83. A change in government purchases shifts the aggregate demand curve by an amount equal to the A) change in consumption ´ marginal propensity to consume. B) change in government purchases ´ money multiplier. C) change in government purchases ´ spending multiplier. D) change in the spending multiplier ´ change in government purchases.

: C Difficulty: Medium

86. Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by A) $12,000 billion. B) $3,000 billion. C) $1,400 billion. D) $350 billion.

: C Difficulty: Medium

92. Suppose that income taxes are reduced by $400 billion and households increase consumption by 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. What is the marginal propensity to consume? A) 0.2 B) 0.4 C) 0.8 D) 1.6

: C Difficulty: Medium

99. Refer to Figure 12-3. If the aggregate demand curve is AD1, which of the following is the most appropriate discretionary fiscal policy to pursue? A) a contractionary fiscal policy involving reductions in government spending and increases in income tax rates B) a contractionary fiscal policy involving reductions in government spending and decreases in income tax rates C) an expansionary fiscal policy involving increases in government spending and increases in investment tax credits D) an expansionary fiscal policy involving increases in government spending and decreases in investment tax credits

: C Difficulty: Medium

103. As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by Jonathan Parker on the effect of fiscal policy during recessions suggests that A) the multiplier effect of fiscal policy is much less than that for monetary policy. B) temporary fiscal policy financed through government borrowing implies a multiplier value between 0.8 and 1.5. C) fiscal policy has little effect on the economy and that the multiplier value is effectively zero. D) statistical models are inadequate to determine the multiplier and the multiplier value likely varies based on the state of the economy.

: D Difficulty: Medium

105. The various studies of the size of the fiscal multiplier by different economists suggest A) general agreement that the fiscal multiplier value is relatively high. B) general agreement that the fiscal multiplier value has a range between 0.8 and 1.2. C) general agreement that the fiscal multiplier value is zero. D) there is a wide range of opinion on the size of the fiscal multiplier.

: D Difficulty: Medium

108. Some economists argue that A) discretionary monetary policy is ineffective because of its long identification lag. B) discretionary fiscal policy is ineffective because of its long recognition lag. C) discretionary monetary policy is ineffective because of its long implementation lag. D) discretionary fiscal policy is ineffective because of its long implementation lag.

: D Difficulty: Medium

112. An expansionary fiscal policy is likely to result in the Treasury A) selling more bonds, the prices of bonds falling, and interest rates falling. B) buying more bonds, the prices of bonds rising, and interest rates falling. C) selling more bonds, the prices of bonds rising, and interest rates rising. D) selling more bonds, the prices of bonds falling, and interest rates rising.

: D Difficulty: Medium

102. Refer to Figure 12-3. Suppose the aggregate demand curve is AD2. All of the following events would more likely bring the economy back to the natural rate of unemployment except A) the government orders a one-time surcharge of 10% to be added to individual income tax liabilities. B) the government raises business taxes. C) the Federal Reserve sells bonds on the open market. D) the government orders a cut in withholding rates designed to increase disposable income and boost consumption.

: D Difficulty: Medium

84. Suppose the economy is in long-run equilibrium. If the federal government cuts government spending, which of the following is likely to result? A) an increase in real GDP and an increase in the price level B) an increase in unemployment and an increase in the price level C) a decrease in unemployment and a decrease in the price level D) a decrease in the price level and an increase in unemployment

: D Difficulty: Medium

89. Suppose the government institutes a new investment tax credit. This is likely to A) shift the short-run aggregate supply curve to the right by an amount equal to the amount of tax credit times the spending multiplier. B) shift the aggregate demand curve to the right by an amount equal to the amount of tax credit times the spending multiplier. C) shift the short-run aggregate supply curve to the right by an amount equal to the initial change in investment times the spending multiplier. D) shift the aggregate demand curve to the right by an amount equal to the initial change in investment times the spending multiplier.

: D Difficulty: Medium

98. Refer to Figure 12-3. If the aggregate demand curve is AD0, which of the following is the most appropriate discretionary fiscal policy to pursue? A) increase government spending, increase individual income tax rates, and increase corporate income tax rates B) increase government spending, increase individual income tax rates, and decrease corporate income tax rates C) increase government spending, decrease individual income tax rates, and decrease corporate income tax rates D) maintain existing government spending, individual income tax rates, and corporate income tax rates

: D Difficulty: Medium