Economics Final Exam

When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of a. World War II. b. the Vietnam War. c. the Reagan defense buildup and tax cuts. d. the Bush economic recovery program.

a.

Which of the following is not an automatic stabilizer? a. Defense spending. b. Unemployment compensation benefits. c. Personal income taxes. d. Welfare payments.

a.

"Crowding in" refers to federal government deficits a. used for public infrastructure, which will offset any decline in business investment. b. which reduce private business and consumption spending. c. which reduce future rates of economic growth. d. all of the above.

a.

Assuming a fixed aggregate demand curve, a leftward shift in the aggregate supply curve causes a (an) a. increase in the price level and a decrease in real GDP. b. increase in the price level and an increase in real GDP. c. decrease in the price level and a decrease in real GDP. d. decrease in the price level and an increase in real GDP

a.

During the late 1998-2001, federal government budget deficits a. were completely removed. b. dropped significantly from a high of $300 billion. c. remained fairly stable at about $150 billion per year. d. exceeded $200 billion in each year.

a.

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC) is 0.80, federal policy-makers could follow Keynesian economics and restrain inflation by a. decreasing government spending by $200 billion. b. decreasing taxes by $100 billion. c. decreasing taxes by $1,000 billion. d. decreasing government spending by $1,000 billion

a.

Margaret pays a local income tax of 2 percent, regardless of the size of her income. This tax is a. proportional. b. regressive. c. progressive. d. a mix of (a) and (b).

a.

Since 1975, total government expenditures as a percentage of GDP in the United States have a. grown from one-third to about 40 percent. b. remained at about one-third. c. grown from one-fourth to one-half. d. grown from one-quarter to one-third.

a.

Some cities finance their airports with a departure tax. Every person leaving the city by plane is charged a small fixed dollar amount that is used to help pay for building and running the airport. The departure tax follows the a. benefits-received principle. b. ability-to-pay principle. c. flat-rate principle. d. public-choice principle.

a.

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then a. both real GDP and the price level will fall. b. real GDP will fall and the price level will rise. c. real GDP will rise and the price level will fall. d. both real GDP and the price level will rise.

a.

The national debt is unlikely to cause national bankruptcy because the a. national debt can be refinanced by issuing new bonds. b. interest on the public debt equals GDP. c. national debt cannot be shifted to future generations for repayment. d. federal government cannot repudiate the outstanding national debt.

a.

The portion of the U.S. national debt held by foreigners a. represents a burden because it transfers purchasing power from U.S. taxpayers to other countries. b. is an accounting entry that represents no real burden. c. decreased as a proportion of the total debt during the 2000's. d. has been constant for many decades.

a.

The real balances effect occurs because a higher price level will reduce the real value of people's a. financial assets. b. wages. c. unpaid debt. d. physical investments.

a.

The spending multiplier is defined as a. 1 / (1 - marginal propensity to consume). b. 1 / (marginal propensity to consume) c. 1 / (1 - marginal propensity to save). d. 1 / (marginal propensity to consume + marginal propensity to save).

a.

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always equal a. 1 b. 0 c. the interest rate d. the marginal propensity to invest (MPI)

a.

Which of the following statements is true? a. A reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues. b. According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. c. The presence of the automatic stabilizers tends to destabilize the economy. d. To combat inflation, Keynesians recommend lower taxes and greater government

a.

Which of the following statements relating to public choice is true? a. A low voter turnout may result when voters perceive that the marginal cost of voting exceeds its marginal benefit. b. If the marginal cost of voting exceeds its marginal benefit, the vote is unimportant. c. Special-interest groups always cause the will of a majority to be imposed on a minority. d. All of the above are true.

a.

Which of the following will not shift the aggregate demand curve to the left? a. Consumers become more optimistic about the future. b. Government spending decreases. c. Business optimism decreases. d. Consumers become pessimistic about the future.

a.

According to the shortsightedness effect, politicians tend to favor projects with a. short-run benefits and short-run costs. b. short-run benefits and long-run costs. c. long-run benefits and short-run costs. d. long-run benefits and long-run costs.

b.

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.80, and the government increases spending by $500 billion. As a result, aggregate demand will rise by a. zero. b. $2,500 billion. c. more than $2,500 billion. d. less than $2,500 billion

b.

In 2009, approximately what percentage of the U.S. national debt was owed to foreigners? a. About 2.5 percent. b. About 30 percent. c. About 20 percent. d. About 60 percent.

b.

The federal government finances a budget deficit by a. taxing businesses and households. b. selling Treasury securities. c. printing more money. d. reducing its purchases of goods and services.

b.

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which, in turn, reduces consumption and investment spending. This effect is called the a. real balances effect b. interest - rate effect c. net exports effect d. substitution effect

b.

Which of the following accounted for the second largest percentage of total federal government expenditures in recent years? a. Income security. b. National defense. c. Interest on the national debt. d. Education and health.

b.

Along the classical or vertical range of the aggregate supply curve, a decrease in the aggregate demand curve will decrease a. both the price level and real GDP. b. only real GDP. c. only the price level. d. real GDP and the price level.

c.

Assume the marginal propensity to consume (MPC) is 0.75 and the government increases taxes by $250 billion. The aggregate demand curve will shift to the a. left by $1,000 billion. b. right by $1,000 billion. c. left by $750 billion. d. right by $750 billion.

c.

Classical economists believed that the a. price system was stable. b. goal of full employment was impossible. c. price system automatically adjusts the economy to full employment in the long run. d. government should attempt to restore full employment.

c.

In 2009, the national debt was approximately a. $60 billion. b. $600 billion. c. $12 trillion. d. $20 trillion.

c.

Macroeconomic equilibrium occurs when a. aggregate supply exceeds aggregate demand. b. the economy is at full employment. c. aggregate demand equals aggregate supply. d. aggregate demand equals the average price level.

c.

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume (MPC) is 0.75, federal policy-makers could follow Keynesian economics and restrain inflation by a. decreasing taxes by $600 billion. b. decreasing transfer payments by $200 billion. c. increasing taxes by $200 billion. d. increasing government spending by $150 billion.

c.

The aggregate demand curve is defined as the a. net national product b. sum of wages, rent, interest, and profits c. real GDP purchased at different possible price levels d. total dollar value of household expectations

c.

The federal personal income tax is an example of a (an) a. excise tax. b. proportional tax. c. progressive tax. d. regressive tax.

c.

The net exports effect is the inverse relationship between net exports and the _______ of an economy. a. real GDP b. GDP deflator c. price level d. consumption spending

c.

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is a. supply-side economics. b. Keynesian economics. c. classical economics. d. mercantilism.

c.

Which of the following countries has the smallest national debt as a percentage of GDP in 2009? a. Italy b. Canada c. Australia d. Japan e. France

c.

Which of the following statements is true? a. The most important source of tax revenue for the federal government is individual income taxes. b. The taxation burden, measured by taxes as a percentage of GDP, is lighter in the United States than in most other advanced industrial countries. c. Both (a) and (b). d. Neither (a) nor (b) are true.

c.

Generally, most economists feel that a ______type of income tax is a fairer way to raise government revenue than a sales tax. a. regressive b. proportional c. flat-rate d. progressive

d.

"The poor should not pay income taxes." This statement reflects which of the following principles of taxation? a. Fairness of contribution b. Benefits received c. Inexpensive to collect d. Ability to pay

d.

A 5 percent sales tax on food is an example of a a. flat tax. b. progressive tax. c. proportional tax. d. regressive tax.

d.

A tax that is structured so that people with higher incomes pay a larger percentage of their income for the tax than do people with smaller incomes is called a (an) a. income tax. b. regressive tax. c. property tax. d. progressive tax.

d.

An increase in the price level caused by a rightward shift of the aggregate demand curve is called a. cost-push inflation. b. supply shock inflation. c. demand shock inflation. d. demand-pull inflation.

d.

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through a. expanding and contracting the money supply. b. encouraging business to expand or contract investment. c. regulation of net exports. d. decreasing government spending or increasing taxes.

d.

If no fiscal policy changes are implemented, suppose the aggregate demand curve will shift and exceed the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is (MPC) 0.90, this increase in aggregate demand could be prevented by a. increasing government spending by $500 billion. b. increasing government spending by $140 billion. c. decreasing taxes by $40 billion. d. increasing taxes by $100 billion

d.

If no fiscal policy changes are implemented, suppose the future aggregate demand curve will exceed the current aggregate demand curve by $500 billion at any level of prices. Assuming the marginal propensity to consume (MPC) is 0.80, this increase in aggregate demand could be prevented by a. increasing government spending by $500 billion. b. increasing government spending by $140 billion. c. decreasing taxes by $40 billion. d. increasing taxes by $125 billion.

d.

If the marginal propensity to consume (MPC) is 0.60, the value of the spending multiplier is a. 0.4 b. 0.6 c. 1.5 d. 2.5.

d.

Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC) is given by the formula a. MPC 1. b. (MPC 1) MPC c. 1 / MPC d. 1 [1 / (1 MPC)].

d.

Other factors held constant, a decrease in resource prices will shift the aggregate a. demand curve leftward. b. demand curve rightward. c. supply curve leftward. d. supply curve rightward.

d.

Supply-side economics is most closely associated with a. Karl Marx. b. John Maynard Keynes. c. Milton Friedman. d. Ronald Reagan.

d.

The national debt to GDP ratio in 2009 a. was about seven times its size in 1982. b. was twice as large in 2000. c. was approximately the same size in 1945. d. was approximately the same size in 1951.

d.

Which of the following contributed the second largest percentage of total federal government expenditures in recent years? a. Interest on the national debt. b. Education and health. c. National defense. d. Income security.

d.

Which of the following countries devotes about the same percentage of its GDP to taxes as the United States? a. Sweden. b. Italy. c. United Kingdom. d. Japan.

d.

Which of the following is false? a. The national debt's size decreased steadily after World War II until 1990 and then increased sharply each year. b. The national debt increases in size whenever the federal government has a budget surplus. c. The national debt is currently about the same size as it was during World War II. d. All of the above are false.

d.

Which of the following is not a range on the eclectic or general view of the aggregate supply curve? a. Classical range b. Keynesian range c. Intermediate range d. Monetary range

d.

Which of the following statements about crowding out is true? a. It can completely offset the multiplier. b. It is caused by a budget deficit. c. It is not caused by a budget surplus. d. All of the above are true.

d.

Which of the following statements about crowding out is true? a. It is caused by a budget surplus. b. It is not caused by a budget deficit. c. It cannot completely offset the multiplier effect of deficit government spending. d. It affects interest rates and, in turn, consumption and investment spending.

d.

Which of the following statements is true? a. A sales tax on food is a regressive tax. b. The largest source of federal government tax revenue is individual income taxes. c. The largest source of state and local government tax revenue is sales taxes. d. All the above are true statements.

d.

Which of the following will shift the aggregate demand curve to the left? a. An increase in exports b. An increase in investment c. An increase in government spending d. A decrease in government spending

d.

Supply-side economists argue that less government spending a. will contract the productive side of the economy. b. will result in more crowing out. c. causes higher rates of unemployment and inflation. d. would cause interest rates to increase dramatically. e. would make more investment capital available at lower rates of interest to the private sector.

e.

The marginal propensity to save is a. the change in saving induced by a change in consumption b. (change in S) / (change in Y) c. 1- MPC / MPC d. (change in Y - bY) / (change in Y) e. 1- MPC

e.

Which of the following own a portion of the national debt? a. Federal, state, and local governments b. Private U.S. citizens c. Banks d. Foreigners e. All of the above

e.