chapter 10 questions -- macro

Assuming a full multiplier effect, if government decreases taxes by $60 billion and the MPC = 0.75, then according to the Keynesian model, equilibrium income increases by a maximum of: a. $60 billion, ceteris paribus. b. $79.8 billion, ceteris paribus. c. $180 billion, ceteris paribus. d. $240 billion, ceteris paribus.

$180 billion, ceteris paribus.

Assuming a full multiplier effect, if government spending increases by $60 billion and the MPC = 0.75, then according to the Keynesian model, equilibrium income increases by a maximum of: a. $60 billion, ceteris paribus. b. $79.8 billion, ceteris paribus. c. $180 billion, ceteris paribus. d. $240 billion, ceteris paribus.

$240 billion, ceteris paribus.

If, in a given fiscal year, government expenditures are $4,500 billion and tax receipts are $5,000 billion, the result is a: a. $500 billion budget deficit. b. $500 billion budget surplus. c. balanced budget. d. $9,500 billion national debt.

$500 billion budget surplus.

Suppose the consumption function for an economy is C = $100 + 0.90(YD). If lump sum personal income taxes of $100 are introduced, consumption spending at income of $1,000 is: a. $900. b. $910. c. $1,000. d. $1,100.

$910.

When government is added to the Keynesian model: a. AE = C + I + G. b. AE = C + MPC(YD) - T + I + G. c. MPC = 1 - MPS - T. d. MPS = 1 +MPC - T.

AE = C + I + G.

Expansionary fiscal policy: a. involves increases in government spending and decreases in taxes. b. tends to expand economic activity. c. is likely to be implemented when the economy is in a slump. d. All of the above are true with respect to expansionary fiscal policy.

All of the above are true with respect to expansionary fiscal policy.

Which of the following is an example of nondiscretionary contractionary fiscal policy, or an automatic (built-in) stabilizer? a. Congress approving an increase in business taxes in order to reduce investment spending and slow the pace of economic growth to avoid inflation b. The Federal Reserve raising interest rates in order to make it more expensive for consumers and businesses to borrow c. An increase in the national debt due to an increase in government borrowing d. An increase in the dollar amount of tax revenue that occurs when the economy is expanding and the income tax is progressive

An increase in the dollar amount of tax revenue that occurs when the economy is expanding and the income tax is progressive

Which of the following is an example of discretionary expansionary fiscal policy? a. Congress approving an increase in government spending in order to stimulate the demand side of the economy b. The Federal Reserve lowering interest rates in order to make it cheaper for consumers and businesses to borrow c. An increase in the national debt due to an increase in government borrowing d. A decrease in the dollar amount of tax revenue that occurs when the economy is contracting and the income tax is progressive

Congress approving an increase in government spending in order to stimulate the demand side of the economy

Suppose the short-run equilibrium level of real GDP is $3,000 billion and the MPC = 0.75. If full employment (natural) real GDP is $4,000 billion, what fiscal policy action could the government undertake to put the economy at full-employment equilibrium? a. Increase government spending by $1,000 billion b. Decrease taxes by $250 billion c. Decrease government spending by $250 billion d. Increase both government spending and taxes by $1,000 billion

Increase both government spending and taxes by $1,000 billion

The increase in unemployment compensation that occurs when the economy slows down is an example of: a. discretionary, expansionary fiscal policy. b. discretionary, contractionary fiscal policy. c. automatic, expansionary fiscal policy. d. automatic, contractionary fiscal policy.

automatic, expansionary fiscal policy.

Keynes believed that an economy may achieve equilibrium at a level of real GDP below the full-employment level: a. because of insufficient aggregate demand. b. when prices and wages are perfectly flexible. c. only if supply creates its own demand. d. if the long-run aggregate supply curve is vertical.

because of insufficient aggregate demand.

When government spending exceeds net taxes in a fiscal year, the government has a: a. budget deficit. b. budget surplus. c. trade deficit. d. trade surplus.

budget deficit.

If increases in government spending and borrowing lead to higher interest rates and lower investment spending, then: a. crowding out occurs and expansionary fiscal policy may not be an effective tool for increasing aggregate demand. b. crowding out occurs and expansionary fiscal policy is a more effective tool for increasing aggregate demand. c. contractionary fiscal policy may not be an effective tool for increasing aggregate demand. d. contractionary fiscal policy is a more effective tool for increasing aggregate demand.

crowding out occurs and expansionary fiscal policy may not be an effective tool for increasing aggregate demand.

Suppose Congress decreases taxes and increases government spending. This is an example of _________ fiscal policy, which may result in shifting __________ to the ___________. a. expansionary; short-run aggregate supply; left b. expansionary; aggregate demand; right c. contractionary; short-run aggregate supply; right d. contractionary; aggregate demand; left

expansionary; aggregate demand; right

When government is added to the simplified Keynesian model, if government must balance its budget: a. government spending will have no impact on the economy. b. government spending is equal to tax revenues. c. the multiplier effect disappears. d. equilibrium will be at a higher level of real GDP than if it can deficit-spend.

government spending is equal to tax revenues.

Supply-side economists argue that reductions in marginal tax rates can: a. reduce private sector borrowing and spending. b. reduce the impact of the multiplier and therefore destabilize the economy. c. shift aggregate demand to the left to reduce inflationary pressures. d. increase incentives for people to work and save and for businesses to invest.

increase incentives for people to work and save and for businesses to invest.

Fiscal policy that leads to increases in aggregate supply: a. increases output without increasing employment. b. increases output without increasing inflation. c. affect the supply side of the economy without affecting the demand side of the economy. d. involves trading a higher price level for a lower unemployment rate.

increases output without increasing inflation.

The Laffer curve suggests that: a. increasing marginal tax rates may actually reduce tax revenues. b. there is an inverse relationship between unemployment and inflation. c. increases in tax rates lead to increases in consumption expenditures. d. increases in income, output, and employment are directly related to increases in the tax rate.

increasing marginal tax rates may actually reduce tax revenues.

Contractionary fiscal policy: a. involves decreases in government spending and increases in taxes. b. tends to expand economic activity. c. is likely to be implemented when the economy is in a slump. d. All of the above are true with respect to contractionary fiscal policy.

involves decreases in government spending and increases in taxes.

Suppose the consumption function for an economy is C = $100 + 0.90(YD). If lump sum personal income taxes of $100 are introduced, the consumption function can be rewritten as: a. C = $100 + 0.90(YD - T). b. AE = C + I = Y. c. C = $100 + 0.90(Y - $100). d. C = $100 + (0.90 - 0.10)(Y - T).

C = $100 + 0.90(Y - $100).

If Congress approves a budget for which spending is greater than projected tax revenue, there is a: a. decrease in the national debt. b. budget surplus. c. structural deficit. d. cyclical deficit.

structural deficit.

If a tax bill increases by $2,500 when taxable income increases by $10,000, then: a. the marginal tax rate is greater than the average tax rate. b. the marginal tax rate is 25%. c. the tax is a progressive tax. d. the tax is a proportional tax.

the marginal tax rate is 25%.

The total stock of outstanding government securities is: a. the national debt. b. the budget deficit. c. the structural deficit. d. the cyclical deficit.

the national debt.

All of the following statements are true EXCEPT: a. the national debt in the U.S. is more than $26 trillion. b. the national debt is the accumulated budget deficits of the government. c. the majority of U.S. government debt is held internally. d. the size of the national debt decreases when the size of the budget deficit decreases.

the size of the national debt decreases when the size of the budget deficit decreases.

Fiscal policy is: a. conducted by the central bank with the primary goals of achieving full employment and price stability. b. the use of the government's budget to influence macroeconomic outcomes. c. also called active policy when government takes a laissez-faire approach to macroeconomic policy. d. primarily comprised of trade treaties and restrictions that affect a country's balance of trade.

the use of the government's budget to influence macroeconomic outcomes.

A possible trade-off between unemployment and inflation may occur if government: a. uses expansionary fiscal policy to stimulate the demand side of the economy when SRAS is upward-sloping. b. takes a laissez-faire approach to macroeconomic policy, assuming SRAS will increase to automatically close a recessionary gap. c. has a budget surplus in successive fiscal years. d. removes all barriers to international trade.

uses expansionary fiscal policy to stimulate the demand side of the economy when SRAS is upward-sloping.