Econ Test 11 and 12 Part 2

An MPC of 0.80 means a $100 million transfer payment decrease: A) Reduces consumption in the first round by $80 million. B) Reduces consumption in the first round by $20 million. C) Increases consumption in the first round by $20 million. D) Increases consumption in the first round by $80 million.

A

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

A

Assume the economy is at full employment and prices are reasonably stable. If the government wants to increase spending for public schools, which of the following policies will have the least inflationary impact? A) An increase in taxes by an amount greater than the increase in spending. B) An increase in taxes by an amount smaller than the increase in spending. C) An increase in taxes equal to the increase in spending. D) No change in taxes when expenditures increase.

A

Ceteris paribus, if income was transferred from individuals with a low MPC to those with a high MPC, aggregate demand would: A) Increase. B) Decrease. C) Stay the same. D) Increase or decrease, but not because of the MPC.

A

Fiscal policy is carried out primarily by: A) the Federal government. B) state and local governments working together. C) state governments alone. D) local governments alone.

A

Fiscal policy options to stimulate the economy include: A) An increase in transfer payments. B) An increase in taxes. C) A decrease in government spending on goods and services. D) All of the above.

A

For a given amount of desired stimulus, dollar for dollar: A) Government spending is more effective than tax cuts. B) Tax cuts are more effective than income transfers. C) Income transfers are more effective than tax cuts. D) Income transfers are more effective than government spending.

A

Graphically, demand-pull inflation is shown as a: A) rightward shift of the AD curve along an upsloping AS curve. B) leftward shift of the AS curve along a downsloping AD curve. C) leftward shift of AS curve along an upsloping AD curve. D) rightward shift of the AD curve along a downsloping AS curve.

A

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: A) increasing government spending by $4 billion. B) increasing government spending by $40 billion. C) decreasing taxes by $4 billion. D) increasing taxes by $4 billion.

A

If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantitysupplied, we would expect: A) inflation to occur. B) the aggregate supply curve to shift leftward. C) the aggregate demand curve to shift leftward. D) the aggregate demand curve to shift rightward

A

If the desired fiscal restraint is $80 billion and the AD excess is $160 billion, we can conclude that: A) The MPS is 0.50. C) The multiplier is 0.50. B) There is a recessionary gap. D) The MPC is 2.0.

A

If the multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand, we can conclude that: A) Government spending decreased by $125 million. B) Taxes increased by $500 million. C) Taxes decreased by $100 million. D) Government spending decreased by $100 million.

A

In a diagram of aggregate demand and supply curves, the GDP gap is measured as the: A) Horizontal distance between the equilibrium output and the full-employment output. B) Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment. C) Horizontal distance between the aggregate demand necessary to achieve full employment and the aggregate demand curve at equilibrium output. D) Vertical distance between the equilibrium output and the full-employment output.

A

International flows of financial capital in response to interest rate changes in the United States: A) weaken domestic fiscal policy through an offsetting net export effect. B) strengthen domestic fiscal policy through a supporting net export effect. C) strengthen domestic fiscal policy through an offsetting net export effect. D) do none of the above.

A

Suppose an economy that has a MPC of .75 is experiencing a $20 billion recessionary gap (aggregateexpenditures model) and is operating in the horizontal range of its aggregate supply curve (AD-AS model).If this economy wishes to achieve its full-employment output, it must shift: A) its aggregate demand curve rightward by $80 billion. B) both its aggregate demand curve and supply curve rightward by $20 billion. C) its aggregate demand curve rightward by $20 billion. D) its aggregate supply curve rightward by $20 billion

A

Suppose economic conditions call for a tax increase but Congress does not implement this measure because an election is approaching. This is an example of which of the real world problems associated with fiscal policy? A) Pork-barrel politics. B) Time lags. C) Crowding out. D) All of the above.

A

Suppose that higher taxes on businesses reduce spending on plant and equipment. How will this affect the aggregate expenditure (AE) and the aggregate demand (AD) schedules?A) AE shifts down; AD shifts to the left B) AE shifts down; AD shifts to the rightC) AE shifts up; AD shifts to the left D) AE shifts up; AD shifts to the right

A

Suppose the consumption function is C = 200 + 0.60Y. If the government stimulates the economy with $100 billion in increased government purchases, aggregate expenditure would rise by: A) $250 billion. B) $600 billion. C) $800 billion. D) $450 billion.

A

Suppose the government decides to increase taxes by $20 billion in order to increase social security benefits by the same amount. If prices remain at current levels, this combined tax-transfer policy will: A) Leave aggregate demand unchanged. B) Increase aggregate demand by $20 billion. C) Increase aggregate demand by more than $20 billion after all multiplying effects. D) Decrease aggregate demand by $20 billion.

A

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion. What effect would there be on aggregate demand? A) Zero. B) $50 billion increase. C) More than $50 billion increase after the multiplier effect. D) $50 billion decrease.

A

Suppose the government purposely changes the economy's standardized 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. expansionary fiscal policy. B. neutral fiscal policy. C. contractionary fiscal policy. D. low-interest rate policy.

A

The "naïve" Keynesian model is unrealistic because it: A) Does not take into account probable changes in the price level as the economy approaches full employment. B) Assumes that the price level decreases as AD increases. C) Assumes that AS is upward sloping when it is more probably horizontal. D) Does not account for changes in output due to the multiplier.

A

The GDP gap differs from the AD shortfall when: A) The aggregate supply curve slopes upward. B) The multiplier effect raises spending. C) The AS curve is horizontal. D) There is a time lag in the implementation of fiscal policy.

A

The crowding out effect refers to: A) A decrease in consumption or investment as a result of an increase in government borrowing. B) A decrease in investment resulting from an increase in consumption and a decrease in savings. C) A decrease in government spending resulting from a decrease in taxes. D) A decrease in consumption resulting from an increase in investment.

A

The crowding-out effect of expansionary fiscal policy suggests that: A. government spending is increasing at the expense of private investment. B. imports are replacing domestic production. C. private investment is increasing at the expense of government spending. D. saving is increasing at the expense of investment.

A

The economy's long-run AS curve assumes that wages and other resource prices: A) eventually rise and fall to match upward or downward changes in the price level. B) are flexible upward but inflexible downward. C) rise and fall more rapidly than the price level. D) are relatively inflexible both upward and downward.

A

The fiscal stimulus associated with a tax cut is: A) The same as the stimulus associated with an increase in transfer payments. B) The same as the stimulus associated with a decrease in transfer payments. C) Less than the stimulus associated with an increase in transfer payments. D) Greater than the stimulus associated with an increase in government spending.

A

The most likely way the public debt burdens future generations, if at all, is by: A. reducing the current level of investment. B. causing deflation. C. causing future unemployment. D. reducing real interest rates.

A

The real-balances, interest-rate, and foreign purchases effects all help explain:A) why the aggregate demand curve is downsloping. B) why the aggregate supply curve is upsloping. C) shifts in the aggregate supply curve. D) shifts in the aggregate demand curve.

A

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.80, the government should increase transfer payments by: A) $25 billion. B) $100 billion. C) $80 billion. D) $20 billion.

A

What percentage of the U.S. public debt is held by Federal agencies and the Federal Reserve? A. 51 percent B. 58 percent C. 49 percent D. 26 percent

A

When Joan Robinson is quoted in the text saying "Keynes did not want anyone to dig holes and fill them," she is pointing out that: A) The content of fiscal policy is as important as its aggregate impact on the economy. B) The government should not be interfering in the economy because the jobs created are usually unproductive. C) As far as stabilization objectives are concerned, the level of spending is the only thing that counts. D) Keynesian economic policies do not work.

A

When aggregate demand declines, some firms may reduce employment rather than wages because wage reductions may: A) not be possible due to the minimum wage law. B) increase the cost of raising money capital. C) reduce the demands for their products. D) may set off a price war.

A

When aggregate demand declines, the price level may remain constant, at lease for a time, because: A) firms individually fear that their price cut may set off a price war. B) menu costs rise. C) price cuts tend to increase efficiency wages. D) product markets are highly competitive.

A

Which of the following equals the initial, or first-round, increase in consumption because of a tax cut? A) MPC × tax cut. B) MPC × multiplier x tax cut. C) Tax cut ÷ MPS. D) Multiplier × tax cut.

A

Which of the following gave the U.S. federal government the power to tax income? A) The Sixteenth Amendment to the Constitution. B) The Full Employment and Balanced Growth Act of 1978. C) The Social Security Act. D) The capital gains tax of the Bush administration.

A

Which of the following is equal to the AD excess divided by the multiplier? A) The desired fiscal restraint. B) The MPC. C) The first-round consumption increase. D) The cumulative change in income because of a spending change.

A

Which of the following is generally considered a desirable outcome of fiscal policy? A) More jobs. B) A higher price level. C) Higher unemployment rates. D) Greater deficits.

A

Which one of the following would increase per unit production cost and therefore shift the aggregate supply curve to the left? A) an increase in the price of imported resources B) production bottlenecks occurring when producers near full plant capacity C) deregulation of industry D) a reduction in business taxes

A

Which one of the following would not shift the aggregate demand curve? A) a change in the price level B) depreciation of the international value of the dollar C) a decline in the interest rate at each possible price level D) an increase in personal income tax rates

A

13. Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate: A) demand curve will shift leftward. B) supply curve will shift rightward. C) supply curve will shift leftward. D) expenditures curve will shift downward

B

A tax cut has less impact on aggregate demand than an increase in government purchases of the same size because: A) A portion of the tax cut is invested. C) Tax cuts do not increase disposable income. B) A portion of the tax cut is saved. D) The tax-cut multiplier is equal to 1.

B

According to Keynes, the level of economic activity is predominantly determined by the level of: A) Aggregate supply. B) Aggregate demand. C) Unemployment. D) Interest rates.

B

An appropriate fiscal policy for a severe recession is: A) a decrease in government spending. B) a decrease in tax rates. C) appreciation of the dollar. D) an increase in interest rates.

B

An appropriate fiscal policy for a severe recession is: A. a decrease in government spending. B. appreciation of the dollar. C. a decrease in tax rates. D. an increase in interest rates.

B

An expansionary U.S. fiscal policy might unintentionally cause demand-pull inflation if: A) the dollar unexpectedly appreciates while the expansionary policy is in place. B) the dollar unexpectedly depreciates while the expansionary policy is in place. C) the policy produces severe crowding out. D) our trading partners experience recession during the time of the fiscal policy action.

B

An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to: A. a leftward shift of the aggregate demand curve in the AD-AS model. B. a rightward shift of the aggregate demand curve in the AD-AS model. C. a movement downward along a fixed aggregate demand curve in the AD-As model. D. a decrease in aggregate supply in the AD-As model.

B

An increase in investment spending caused by higher expected rates of return will:A) shift the aggregate supply curve to the left. B) shift the aggregate demand curve to the right. C) shift the aggregate demand curve to the left. D) move the economy up along an existing aggregate demand curve

B

Assume the economy is operating below full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process? A) Increase government spending and leave tax rates unchanged. B) Decrease tax rates and leave government spending unchanged. C) Increase government spending and taxes by the same amount. D) Decrease government spending by more than an increase in taxes.

B

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

B

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

B

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

B

Crowding out occurs when the government: A) Increases taxes, thus causing a decrease in consumption. B) Issues debt, thus making it more difficult for the private sector to issue debt. C) Prints money, which displaces currency. D) Does all of the above.

B

Fiscal policy works primarily through: A) Shifts of the AS curve. B) Shifts of the AD curve. C) The improvement of worker skills through subsidized training programs. D) Shifts of both AD and AS as a result of changes in the interest rate.

B

Graphically, demand-pull inflation is shown as a: A) rightward shift of the AD curve in the horizontal range of aggregate supply. B) rightward shift of the AD curve in the intermediate or vertical ranges of aggregate supply.C) rightward shift of the AS curve in the intermediate range of aggregate demand. D) leftward shift of AS curve in the intermediate range of aggregate demand

B

If the MPC equals 0.75, a $100 billion transfer payment decrease will decrease consumption in the first round by: A) $25 billion. B) $75 billion. C) $100 billion. D) $400 billion.

B

If the MPC equals 0.80, $200 billion tax decrease will increase consumption in the first round by: A) $40 billion. B) $160 billion. C) $200 billion. D) $1000 billion.

B

If the MPC for an economy is 0.90, a $4 billion increase in taxes will ultimately cause consumption to decrease by: A) $40 million. B) $36 million. C) $4.4 million. D) $3.6 million.

B

If the MPC is 0.75, a $200 million transfer payment decrease ultimately: A) Reduces spending by $150 million. C) Increases spending by $600 million. B) Reduces spending by $600 million. D) Increases spending by $150 million.

B

If the economy has a full-employment 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 actual budget is necessarily also in surplus. D) the economy is actually operating at full employment.

B

If the economy is operating within the intermediate or vertical range of the aggregate supply curve, an increase in aggregate demand will produce:A) a larger multiplier than if the economy were in the horizontal range. ' B) a smaller multiplier than if the economy were in the horizontal range. C) the same sized multiplier as if the economy were in the horizontal range.D) a decline in real GDP.

B

If the government increases its spending during recession to assist the economy, the funds for such expenditures must come from some source. Which of the following sources would be the most expansionary? A) additional taxes on personal incomes B) creating new money C) borrowing from the public D) additional taxes on corporate profits

B

If the government increases spending and maintains a balanced budget at the same time: A) There will be no effect on the economy, since taxes balance government spending. B) Income will increase by the amount of the increase in government spending. C) Income will increases through the multiplier effect by more than the increase in government spending. D) Income will actually decrease by the amount that taxes have to be increased to offset the effects of the government spending.

B

Other things equal, an improvement in productivity will: A) shift the aggregate demand curve to the left. B) shift the aggregate supply curve to the right. C) shift the aggregate supply curve to the left. D) tend to increase the equilibrium price level.

B

Suppose the government purposely changes the economy's full-employment budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n): A) expansionary fiscal policy. B) contractionary fiscal policy. C) neutral fiscal policy. D) high-interest rate policy.

B

Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: A. increase government expenditures by $100 billion. B. increase government expenditures by $50 billion. C. reduce taxes by $50 billion. D. reduce taxes by $200 billion.

B

The AD shortfall divided by the multiplier is equal to: A) The MPC. B) Desired fiscal stimulus. C) Total gain in income generated from lower spending. D) First-round consumption that is lost from higher taxes.

B

The GDP gap will differ from the AD shortfall when the: A) Multiplier effect raises spending. C) Budget is balanced. B) Aggregate supply curve slopes upward. D) All of the above.

B

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

B

The effect of a government surplus on the equilibrium level of GDP is substantially the same as: A) a decrease in saving. B) an increase in saving. C) an increase in consumption. D) an increase in investment.

B

The effect of a government surplus on the equilibrium level of GDP is substantially the same as: A. a decrease in saving. B. an increase in consumption. C. an increase in saving. D. an increase in investment.

B

The use of government taxes and spending to alter economic outcomes is known as: A) Monetary policy. B) Fiscal policy. C) Income policy. D) Foreign-trade policy.

B

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may: A) reduce per unit production costs. B) reduce worker morale and work effort, and thus lower productivity. C) increase the firms' cost of raising financial capital. D) reduce the demands for their products.

B

When there is excess aggregate demand in the economy: A) Unemployment is higher than at full employment. B) The GDP gap is negative. C) Aggregate supply must be shifted leftward. D) All of the above.

B

Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment? A) Price level changes will make up for the difference between the fiscal stimulus and the AD shortfall . B) The multiplier process will contribute to an additional increase in aggregate demand. C) The government can increase taxes to create an additional increase in aggregate demand. D) All of the above.

B

Which of the following is an income transfer? A) Free medical care made available to the poor by a private physician. B) Unemployment benefits paid to a factory worker who was laid off. C) A new highway built by the federal government. D) All of the above.

B

Which of the following would cause both an increase in the price level and an increase in real output? A) A tax hike. C) A decrease in production costs. B) An increase in transfer payments. D) All of the above.

B

(Last Word) The composite index of leading indicators is useful for: A. predicting potential GDP. B. developing discretionary fiscal policy. C. determining the natural rate of unemployment. D. forecasting aggregate supply shocks.

C

According to Keynesian theory, which of the following should be used to increase aggregate demand? A) Market self-adjustment. C) An increase in government expenditure. B) A tax increase. D) An increase in interest rates.

C

An effective expansionary fiscal policy will: A. reduce a cyclical deficit, but necessarily increase the actual deficit. B. reduce the standardized deficit. C. increase the standardized deficit but reduce the cyclical deficit. D. always result in a balanced actual budget once full-employment is achieved.

C

An exchange rate: A. is the ratio of the dollar volume of a nation's exports to the dollar value of its imports. B. measures the interest rate ratios of any two nations. C. is the price at which the currencies of any two nations exchange for one another. D. is the amount which one nation must export to obtain $1 worth of imports.

C

An increase in aggregate expenditures resulting from some factor other than a change in the price level isequivalent to: A) a decrease in aggregate supply in the AD-AS model. B) a movement downward along a fixed aggregate demand curve in the AD-AS model. C) a rightward shift of the aggregate demand curve in the AD-AS model. D) a leftward shift of the aggregate demand curve in the AD-AS model

C

An increase in input productivity will: A) shift the aggregate supply curve leftward.B) reduce aggregate demand.C) reduce the equilibrium price level, assuming downward flexible prices.D) reduce the equilibrium real output

C

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will: A) Increase by $400 billion. C) Increase by $100 billion. B) Decrease by $400 billion. D) Not change.

C

Assume the MPC is 0.75. The change in total spending for the economy because of a $150 billion government spending increase is: A) $75 billion. B) $150 billion. C) $600 billion. D) $750 billion.

C

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

C

Assume the government purposely incurs a budget deficit that is financed by borrowing. As a result, interest rates rise and the amount of private investment spending declines. This illustrates: A. the equation-of-exchange effect. B. the crowding-out effect. C. the paradox of thrift. D. the wealth effect.

C

Ceteris paribus, which of the following is true about the concept of crowding out? A) It increases the private sector's ability to raise the level of output. B) It does not affect the private sector's ability to raise the level of output. C) It reduces the private sector's ability to raise the level of output. D) It occurs when spending increases are matched with tax increases.

C

Efficiency wages are: A) relevant to macro economics because they explain rightward shifts in aggregate demand.B) usually less than market wages. C) above-market-wages that elicit so much added work effort that per-unit production costs are lower than at market wages. D) wage payments necessary to compensate workers for unpleasant or risky work conditions

C

Fiscal policy affects: A) The level of output only. B) The mix of output only. C) Both the level and the mix of output. D) Interest rates only and therefore does not affect the level or mix of output.

C

Fiscal policy is: A) An internal market force. B) A macroeconomic outcome. C) The use of budget levers to influence the macroeconomy. D) All of the above.

C

Given a $600 billion AD shortfall and an MPC of 0.50, the desired fiscal stimulus would be: A) A $1200 billion increase in government expenditures. B) A $600 billion increase in government expenditures. C) A $300 billion increase in government expenditures. D) A $200 billion increase in government expenditures.

C

Graphically, cost-push inflation is shown as a: A) leftward shift of the AD curve. B) rightward shift of the AS curve. C) leftward shift of AS curve. D) rightward shift of the AD curve.

C

Graphically, cost-push inflation is shown as a:A) rightward shift of the AD curve. B) rightward shift of the AS curve. C) leftward shift of AS curve. D) leftward shift of the AD curve

C

Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a:A) leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve.B) rightward shift of the aggregate demand curve along a fixed aggregate supply curve.C) rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve.D) rightward shift of the aggregate supply curve along a fixed aggregate demand curve.

C

If government increases the size of its standardized surplus, we can: A. assume that government is causing interest rates to rise. B. not determine government's impact on the economy without also knowing the status of the actual budget. C. assume that government is having a contractionary effect on the economy. D. assume that government is having an expansionary effect on the economy.

C

If the MPC for an economy is 0.80, a $2 billion increase in taxes will ultimately cause consumption to decrease by: A) $4 million. B) $10 million. C) $8 million. D) $2 million.

C

If the government cuts taxes by $200 million and simultaneously decreases government purchases by $200 million, then: A) Income will rise because the government decrease in purchases occurs so slowly. B) Income in the economy will remain unchanged. C) People will spend only a part of their tax cut, so income will eventually fall by $200 million. D) Income will decrease by $200 million times the multiplier.

C

In a diagram of aggregate demand and supply curves, the AD shortfall is measured as the: A) Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment. B) Horizontal distance between the equilibrium output and the full-employment output. C) Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve at the equilibrium price. D) All of the above.

C

Monopoly or market power is the ability of a firm to: A) shift its demand curve to the right. B) shift its demand curve to the left. C) set its price. D) achieve economies of scale.

C

Suppose the consumption function is C = 100 + 0.80 Y. If the government stimulates the economy with $200 billion in increased income transfers, aggregate expenditure would rise by: A) $200 billion. B) $400 billion. C) $800 billion. D) $1,000 billion.

C

Suppose the consumption function is C = 100 + 0.90Y. If the government stimulates the economy with $100 billion in increased government purchases, aggregate expenditure would rise by: A) $10 billion. B) $900 billion. C) $1,000 billion. D) $800 billion.

C

The aggregate demand curve is: A) vertical if full employment exists. B) horizontal when there is considerable unemployment in the economy. C) downsloping because of the interest-rate, real-balances, and foreign purchases effects. D) downsloping because production costs decrease as real output rises.

C

The desired fiscal restraint is equal to: A) Excess AD times the multiplier. C) Excess AD divided by the multiplier. B) Desired AD reduction. D) GDP gap divided by the multiplier.

C

The desired tax cut to close a GDP gap is given by: A) AD shortfall × MPS. C) Desired fiscal stimulus ÷ MPC. B) AD shortfall ÷ MPC. D) Desired fiscal stimulus × MPC.

C

The effectiveness of the built-in or automatic stabilizers is limited because: A) the stabilizers produce budget surpluses during recessions. B) transfer payments and subsidies increase during inflation and decrease during recessions. C) the offset the stabilizers provide to a change in private spending is less than the change in private spending. D) the stabilizers raise the general price level regardless of the phase of the business cycle.

C

The effectiveness of the built-in or automatic stabilizers is limited because: A. the stabilizers produce budget surpluses during recessions. B. transfer payments and subsidies increase during inflation and decrease during recessions. C. the offset the stabilizers provide to a change in private spending is less than the change in private spending. D. the stabilizers raise the general price level regardless of the phase of the business cycle.

C

The fear of unwanted price wars may explain why many firms are reluctant to: A)B)C)D) provide wage increases when labor productivity rises. expand production capacity when an increase in aggregate demand occurs. reduce prices when a decline in aggregate demand occurs. reduce wages when a decline in aggregate demand occurs

C

The fraction or percentage of total income which is consumed is called the: A. break-even income. B. consumption schedule. C. average propensity to consume. D. marginal propensity to consume.

C

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

C

The interest-rate effect suggests that: A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

C

The real-balances effect indicates that: A) a lower price level will decrease the real value of many financial assets and therefore reduce spending. B) a higher price level will increase the real value of many financial assets and therefore increase spending. C) a higher price level will decrease the real value of many financial assets and therefore reduce spending. D) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending

C

The second crisis of economic theory refers to: A) The typical fiscal policy tradeoff between unemployment and inflation. B) The dominance of Keynesian views in fiscal policy to the exclusion of newer, more enlightened viewpoints. C) An emphasis on the level of output without concern for the content of output in terms of fiscal policy. D) Our inability to maintain full employment output over any significant period of time.

C

The true size of Federal budget deficits may be understated because: A. a portion of government spending is public investment. B. inflation reduces the real value of the public debt. C. Social Security surpluses are included as government tax revenues in measuring the budget deficit. D. foreign holdings of the debt have recently increased.

C

The wealth, interest rate, and foreign purchases effects all help explain: A. shifts in the aggregate demand curve. B. shifts in the aggregate supply curve. C. why the aggregate demand curve is downward sloping. D. why the aggregate supply curve is upward sloping.

C

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by: A) $200 billion. B) $100 billion. C) $50 billion. D) $500 billion.

C

What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount? A) Aggregate demand falls by the amount of the government spending. B) There is no effect. C) Aggregate demand rises by the amount of the government spending. D) Aggregate demand rises by the amount of the government spending times the multiplier.

C

When the macro equilibrium is above full employment, fiscal policy should be used to shift aggregate demand by the amount of: A) The difference between saving and investment. B) The difference between desired saving and desired investment. C) The AD excess. D) None of the above because aggregate supply is the curve that must be shifted.

C

Which factor explains the variability of investment? A. the regularity of innovation. B. the constancy of expectations. C. the durability of capital goods. D. the consistency of profits.

C

Which of the following is most powerful in shifting the aggregate spending curve to the right? A) A $1 reduction in taxes. C) A $1 increase in government purchases. B) A $1 increase in transfer payments. D) All are equally powerful.

C

Which of the following is the best choice if the desired fiscal stimulus is $10 billion and the desired AD increase is $100 billion? A) Tax hike is $11.11 billion. C) Tax cut is $11.11 billion. B) Tax hike is $10 billion. D) Tax cut is $10 billion.

C

Which of the following is true when the government attempts to move the economy to full employment by increasing spending? A) The desired stimulus should be set by the AD short fall multiplied by the multiplier. B) It must initially spend more than the GDP gap if the aggregate supply curve is upward-sloping. C) The total change in spending includes both the new government spending and the subsequent increases in consumer spending. D) All of the above.

C

Which of the following would cause the level of income to change by the greatest amount, ceteris paribus? A) An increase in social security payments of $10 billion. B) A reduction in personal income taxes of $10 billion. C) An increase in defense spending of $10 billion. D) The changes suggested above have equal impacts on the level of income.

C

Which of the following would not shift the aggregate supply curve? A) a decline in the price of imported oilB) an increase in labor productivityC) an increase in the price level D) a decline in business taxes

C

A tax cut: A) Directly increases the disposable income of consumers. B) Contains less fiscal stimulus than an increase in government spending of the same size. C) Shifts the AD curve to the right. D) All of the above.

D

Aggregate demand shifts to the left when: A) Government taxes are increased. C) Government purchases are decreased. B) Government transfers are decreased. D) All of the above.

D

An MPS of 0.25 means a $50 million tax cut ultimately: A) Reduces spending by $50 million. C) Increases spending by $400 million. B) Increases spending by $200 million. D) Increases spending by $150 million.

D

An appropriate fiscal policy for severe demand-pull inflation is: A. an increase in government spending. B. a reduction in interest rates. C. depreciation of the dollar. D. a tax rate increase.

D

Assume the MPC is 0.80. The change in total spending for the economy because of a $200 billion government spending increase is: A) $160 billion. B) $200 billion. C) $800 billion. D) $1,000 billion.

D

Fiscal policy levers include: A) Taxes. B) Government spending. C) Income transfers. D) All of the above.

D

Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be: A) A $2 trillion increase in government expenditures. B) A $375 billion increase in government expenditures. C) A $500 billion increase in government expenditures. D) A $125 billion increase in government expenditures.

D

If AD intersects the AS curve in the AS curve's intermediate range, an increase in AD will cause: A. lower prices and higher unemployment. B. a higher price level and higher unemployment. C. higher prices and no change in employment. D. a higher price level and lower unemployment.

D

If the MPC equals 0.75, $100 billion tax increase will decrease consumption in the first round by: A) $100 billion. B) $300 billion. C) $400 billion. D) $75 billion.

D

If the desired fiscal stimulus is $20 billion and the desired AD increase is $50 billion, we can conclude that: A) The MPS is 0.60. C) The multiplier is 2.0. B) There is an inflationary gap. D) The MPC is 0.60.

D

If the multiplier is 5 and a change in fiscal policy leads to a $500 million decrease in total spending, we can conclude that: A) Government spending decreased by $500 million. B) Taxes increased by $500 million. C) Taxes decreased by $100 million. D) Government spending decreased by $100 million.

D

In Keynesian theory, at macro equilibrium: A) The economy may or may not be at full employment. B) Aggregate demand intersects aggregate supply. C) The economy will stay at that output level, ceteris paribus. D) All of the above.

D

Keynesians would recommend: A) Higher taxes when there is excess aggregate demand. B) Higher government expenditures when there is a shortfall in aggregate demand. C) Reliance on government rather than the market for adjustment when an undesirable level of aggregate demand occurs. D) All of the above.

D

Monopoly or market power is the ability of a firm to: A) shift its demand curve to the right. B) shift its demand curve to the left.C) achieve economies of scale.D) set its price.

D

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the US: ' A) aggregate demand curve would shift to the left. B) aggregate supply curve would shift to the left. C) aggregate supply curve would shift to the right. D) aggregate demand curve would shift to the right

D

Prices and wages tend to be: A) flexible both upward and downward. B) inflexible both upward and downward. C) flexible downward, but inflexible upward. D) flexible upward, but inflexible downward.

D

Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP. It could: A) reduce taxes by $160 billion. B) increase government spending by $80 billion. C) reduce taxes by $40 billion. D) increase government spending by $40 billion.

D

Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should: A) increase government expenditures by $80 billion. B) reduce government expenditures by $40 billion. C) reduce taxes by $40 billion. D) reduce taxes by $80 billion.

D

The Federal budget surplus is found by: A. subtracting government revenue plus government borrowing from government spending in a particular year. B. cumulating the difference between government spending and tax revenues over all years since the nation's founding. C. subtracting government revenues from government spending on noninvestment goods in a particular year. D. subtracting government spending from government tax revenue in a particular year.

D

The amount of additional income generated by increased government spending depends on the: A) Marginal propensity to consume. B) Number of spending cycles that occur in a given period of time. C) Size of the multiplier. D) All of the above.

D

The foreign purchases effect: A) shifts the aggregate demand curve rightward. B) shifts the aggregate demand curve leftward. C) shifts the aggregate supply curve rightward. D) moves the economy along a fixed aggregate demand curve.

D

The graphical relationship between the price level and the amount of real GDP that businesses will offer for sale is known as the: A) aggregate demand curve. B) investment supply curve. C) investment demand curve. D) aggregate supply curve.

D

The higher domestic interest rate resulting from an expansionary U.S. fiscal policy will tend to: A) increase domestic investment spending. B) increase U.S. exports. C) increase domestic consumption spending. D) decrease U.S. exports.

D

The horizontal range of the aggregate supply curve: A. assumes constant resource prices. B. implies that output could be increased without increasing the price level. C. assumes there are unemployed resources in the economy. D. entails all of the above.

D

The multiplier effect: A. dissipates large changes in spending into smaller changes in output and income. B. lessens upswings and downswings in business activity. C. reduces the MPC. D. magnifies small changes in spending into larger changes in output and income

D

The power of the multiplier associated with an initial increase in spending will be: A. zero if any increase in price level occurs. B. enhanced if inflation occurss C. the same whether or not inflation occurs. D. diminished if inflation occurs.

D

The real-balances effect indicates that: A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B) a lower price level will decrease the real value of many financial assets and therefore reduce spending. C) a higher price level will increase the real value of many financial assets and therefore increase spending. D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

D

Time lags limit the effectiveness of fiscal policy because in the real world it takes time: A) To recognize and measure macroeconomic problems. B) To develop an appropriate corrective fiscal policy. C) For the multiplier process to occur. D) All of the above.

D

To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75, the government should decrease taxes by: A) $400 billion. B) $120 billion. C) $30 billion. D) $40 billion.

D

When the marginal propensity to consume is less than 1, the: A. average propensity to consume is greater than 1. B. average propensity to save is less than 1. C. marginal propensity to save is negative. D. marginal propensity to save is positive.

D

When there is excess aggregate demand in the economy: A) Desired fiscal restraint equals the AD excess divided by the multiplier. B) The GDP gap is negative. C) Full-employment output is lower than equilibrium output. D) All of the above.

D

Which of the following are likely to limit the effectiveness of fiscal policy in the real world? A) The crowding out effect. B) Time lags between the recognition of a macro problem and the implementation of corrective measures. C) Political considerations which could alter the content and timing of fiscal policy. D) All of the above.

D

Which of the following fiscal policies would cause a decrease in aggregate expenditures? A) An increase in transfer payments and an increase in government spending. B) An increase in transfer payments and a decrease in taxes. C) A decrease in taxes and an increase in government spending. D) An increase in taxes and a decrease in government spending

D

Which of the following government actions is an example of fiscal policy? A) Decreasing corporate income tax rates. B) Purchasing fighter planes from a U.S. manufacturer. C) Increasing social security tax rates. D) All of the above.

D

Which of the following is a fiscal policy tool used to stimulate the economy? A) Higher interest rates. C) Reducing inefficient employment of resources. B) Increased imports. D) Increased government purchases.

D

Which of the following will cause an increase in aggregate demand? A) Increasing purchases of goods and services. C) Raising income transfers. B) Reducing taxes. D) All of the above.

D

Which of the following will provide fiscal stimulus to the economy? A) Decreasing taxes. B) Increasing government spending on goods and services. C) Increasing transfer payments. D) All of the above.

D

Which of the following would shift the consumption schedule downward? A. a falling level of consumer debt B. expectations of rising prices C. an increase in real and financial assets D. an increase in taxes

D

With an upward-sloping aggregate supply curve, real output can be increased to the full-employment output level if: A) Government expenditures are increased by the amount of the GDP gap. B) Government expenditures are increased by the amount of the AD shortfall. C) Aggregate demand is increased by the amount of the GDP gap. D) Government expenditures are increased by the amount of the AD shortfall divided by the multiplier.

D