Chapter 13

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the: A. equation-of-exchange effect. B. paradox of thrift. C. crowding-out effect. D. net export effect.

C

Which of the following represents the most expansionary fiscal policy? A. A $10 billion tax cut. B. A $10 billion increase in government spending. C. A $10 billion tax increase. D. A $10 billion decrease in government spending.

B

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

A tax reduction of a specific amount will be more expansionary the: A. smaller is the economy's MPC. B. larger is the economy's MPC. C. smaller is the economy's multiplier. D. less is the economy's built-in stability.

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

If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by: A. reducing government expenditures by $125 billion. B. reducing government expenditures by $20 billion. C. increasing taxes by $50 billion. D. increasing taxes by $250 billion.

B

Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues: A. Increase and transfer payments decrease B. Decrease and transfer payments increase C. And transfer payments both decrease D. And transfer payments both increase

B

Which of the following best describes the built-in stabilizers as they function in the United States? A. The size of the multiplier varies inversely with the level of GDP. B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises

D

Answer the question using the following budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. Picture Refer to the data. If year 1 is the first year of this nation's existence and year 6 is the present year, this nation's public debt is: A. $275 billion. B. $100 billion. C. $3,540 billion. D. $230 billion.

A

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing: A. a positive GDP gap. B. a negative GDP gap. C. a recession. D. cost-push inflation.

A

The crowding-out effect is: A. strongest when the economy is at full employment. B. strongest when the economy is in a deep recession. C. weakest when there is demand-pull inflation. D. equally strong, regardless of the state of the macroeconomy.

A

An expansionary fiscal policy is shown as a: A. rightward shift in the economy's aggregate demand curve. B. movement along an existing aggregate demand curve. C. leftward shift in the economy's aggregate supply curve. D. leftward shift in the economy's aggregate demand curve.

A

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be: A. Expansionary and worsen the effects of the recession B. Contractionary and worsen the effects of the recession C. Contractionary and counter the effects of the recession D. Expansionary and counter the effects of the recession

B

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of: A. progressive taxation. B. built-in stability. C. the multiplier. D. discretionary fiscal policy.

B

Answer the question using the following budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. Picture Refer to the data. The budget deficit in year 3 is: A. $175 billion. B. $3,050 billion. C. $100 billion. D. $295 billion.

C

To say that "the U.S. public debt is mostly held internally" is to say that: A. only interest payments on the public debt are an economic burden. B. official figures understate the size of the public debt. C. the bulk of the public debt is owned by U.S. citizens and institutions. D. the public debt is equal to the land and building assets owned by the federal government.

C

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is: A. Active Monetary Policy B. Automatic Fiscal Policy C. Discretionary Fiscal Policy D. Active Federal Policy

C

Which of the following is the best example of public investment? A. Salaries of senators and representatives. B. Government expenditures on food stamps. C. Construction of highways. D. Funding of regulatory agencies.

C

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

D

An economist who favored expanded 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.

D

Answer the question using the following budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. Picture Refer to the data. A budget surplus occurred in year: A. 2. B. 3. C. 4. D. 6.

D

Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions? A. 50 percent. B. 71 percent. C. 40 percent. D. 33 percent.

D

Expansionary fiscal policy is so named because it: A. involves an expansion of the nation's money supply. B. necessarily expands the size of government. C. is aimed at achieving greater price stability. D. is designed to expand real GDP.

D

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the: A. Economy's MPS is small B. Economy's MPS is large C. Economy's MPC is small D. Unemployment rate is low

A

Which combination of fiscal policy actions would most likely offset each other? A. Increase taxes and government spending B. Decrease taxes and increase government spending C. Increase taxes, but make no change in government spending D. Decrease government spending, but make no change in taxes

A

A contractionary fiscal policy is shown as a: A. rightward shift in the economy's aggregate demand curve. B. rightward shift in the economy's aggregate supply curve. C. movement along an existing aggregate demand curve. D. leftward shift in the economy's aggregate demand curve.

D

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

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should: A. increase tax rates and/or reduce government spending. B. discourage personal saving by reducing the interest rate on government bonds. C. increase government expenditures. D. encourage private investment by reducing corporate income taxes.

A

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be: A. Increased government spending or increased taxation, or a combination of the two actions B. Increased government spending or decreased taxation, or a combination of the two actions C. Increased government spending or increased taxation, but not a combination of the two actions D. Decreased government spending or decreased taxation, or a combination of the two actions

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 more progressive the tax system, the: A. Less is the built-in stability for the economy B. Greater is the built-in stability for the economy C. Less is the effect of crowding-out on the economy D. Greater is the severity of business fluctuations on the economy

B

When government spending is increased, the amount of the increase in aggregate demand primarily depends on: A. The average propensity to consume B. The size of the multiplier C. Income taxes D. Exchange rates

B

Contractionary fiscal policy is so named because it: A. involves a contraction of the nation's money supply. B. necessarily reduces the size of government. C. is aimed at reducing aggregate demand and thus achieving price stability. D. is expressly designed to expand real GDP.

C

Discretionary fiscal policy is so named because it: A. is undertaken at the option of the nation's central bank. B. occurs automatically as the nation's level of GDP changes. C. involves specific changes in T and G undertaken D. expressly for stabilization at the option of Congress. is invoked secretly by the Council of Economic Advisers.

C

Discretionary fiscal policy refers to: A. any change in government spending or taxes that destabilizes the economy. B. the authority that the president has to change personal income tax rates. C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy. D. the changes in taxes and transfers that occur as GDP changes.

C

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by: A. increasing government spending by $25 billion. B. increasing government spending by $80 billion. C. decreasing taxes by $25 billion. D. decreasing taxes by $100 billion.

C

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should: A. encourage personal saving by increasing the interest rate on government bonds. B. decrease government expenditures. C. reduce tax rates and/or increase government spending. D. discourage private investment by increasing corporate income taxes.

C

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400: A. there will be a budget deficit. B. there will be a budget surplus. C. the budget will be balanced. D. the macroeconomy will be in equilibrium.

C

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit: A. at all levels of GDP. B. at any level of GDP above $400. C. at any level of GDP below $400. D. only when GDP is stable.

C

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to: A. increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2. B. reduce taxes on businesses to shift the aggregate supply curve leftward. C. reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2. D. do nothing since the economy appears to be achieving full-employment real GDP.

C

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2: A. the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes. B. the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes. C. government should undertake neither an expansionary nor a contractionary fiscal policy. D. the economy is achieving its maximum possible output.

C

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with: A. an expansionary fiscal policy. B. a major recession. C. a contractionary fiscal policy. D. demand-pull inflation.

C

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the: A. Federal Reserve. B. budget deficit. C. budget surplus. D. public debt.

C

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a: A. Trade deficit B. Trade surplus C. Budget deficit D. Budget surplus

C

The following is budget information for a hypothetical economy. All data are in billions of dollars. Picture Refer to the above table. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5? A. $25 billion B. $75 billion C. $125 billion D. $925 billion

C

The public debt is the amount of money that: A. state and local governments owe to the federal government. B. Americans owe to foreigners. C. the federal government owes to holders of U.S. securities. D. the federal government owes to taxpayers.

C

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here? A. Increase government spending and taxes B. Decrease government spending and taxes C. Decrease government spending and increase taxes D. Increase government spending and decrease taxes

C

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth? A. A congressional proposal to incur a federal surplus to be used for the retirement of public debt. B. Reductions in agricultural subsidies and veterans' benefits. C. Postponement of a highway construction program. D. Reductions in federal tax rates on personal and corporate income.

D

Which of the following expansionary fiscal policy changes would be most favored by those economists who think that the government is too large and inefficient? A. A $40 billion increase in government spending B. A $20 billion tax cut and $20 billion increase in government spending C. A $10 billion tax cut and $30 billion increase in government spending D. A $40 billion tax cut

D