Multiple Choice Part 4

increase; increase

A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. increase; not change

All of the above are correct

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may A. reduce investment in new capital. B. make domestic businesses less competitive in international markets as the dollar appreciates in value. C. raise interest rates and reduce consumer expenditures on automobiles and new houses. D. All of the above are correct.

more of that economic activity to occur

As the tax wedge associated with a given economic activity gets smaller, we would expect A. more of that economic activity to occur. B. the distortions caused by taxes on that activity to be greater. C. people to engage in less of that particular activity. D. no change in the practice of that activity until the tax wedge ultimately disappears.

less; more

Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________. A. less; less B. less; more C. more; less D. more; more

private expenditures; government purchases

Crowding out refers to a decline in ________ as a result of an increase in ________. A. tax revenues; unemployment B. government purchases; tax rates C. government purchases; private expenditures D. private expenditures; government purchases

will raise disposable income and raise spending

Cutting taxes A. will lower disposable income and lower spending. B. will raise disposable income and lower spending. C. will lower disposable income and raise spending. D. will raise disposable income and raise spending.

rises because of programs such as unemployment insurance and Medicaid

During recessions, government expenditure automatically A. falls because of programs such as unemployment insurance and Medicaid. B. rises because of programs such as unemployment insurance and Medicaid. C. falls because of the progressive income tax system. D. rises because of the progressive income tax system.

tax cuts mainly affect aggregate demand

Economists who believe the supply-side effects of tax cuts are small essentially believe that A. tax cuts mainly affect aggregate demand. B. tax cuts mainly affect aggregate supply. C. tax cuts will increase the quantity of labor supplied. D. tax cuts will result in relatively small changes in the price level.

aggregate supply; taxes

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________. A. aggregate demand; government spending B. aggregate supply; taxes C. aggregate demand; taxes D. aggregate supply; government spending

decrease; increase

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

be below potential GDP

If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to A. be at potential GDP. B. be above potential GDP. C. be below potential GDP. D. There is insufficient information given here to draw a conclusion.

increase taxes

Refer to Figure 6. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP? A. increase taxes B. increase government spending C. decrease the money supply D. increase interest rates

Real equilibrium GDP will rise

Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP? A. Real equilibrium GDP will fall. B. Real equilibrium GDP will rise. C. There will be no change in real equilibrium GDP. D. Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.

lower government purchases by an amount less than $200 billion

Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should A. lower government purchases by an amount less than $200 billion. B. lower government purchases by $200 billion. C. raise taxes by $200 billion. D. lower taxes by $200 billion. E. raise taxes by an amount more than $200 billion.

increase; decrease

Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ taxes, which would cause aggregate demand to ________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

people have higher incomes due to overall economic growth

Tax revenues tend to grow more quickly when A. people have higher incomes due to overall economic growth B. the economy is in a recession C. the Federal Reserve increases tax rates D. it is an election year

the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because A. the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. B. the Federal Reserve can immediately recognize when real GDP is below or above potential GDP. C. changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. D. changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.

government tax revenues decrease during a recession

The federal budget deficit acts as an automatic stabilizer because A. government tax revenues decrease during a recession. B. unemployment insurance payments decrease during a recession. C. food stamp payments increase during expansionary periods. D. Medicaid payments increase during expansionary periods.

is negative

The tax multiplier A. is negative. B. is larger in absolute value as compared to the government spending multiplier. C. is a measure of how much taxes will fall when income is falling. D. is always less than one.

equilibrium real GDP; taxes

The tax multiplier equals the change in ________ divided by the change in ________. A. taxes; equilibrium real GDP B. equilibrium real GDP; taxes C. taxes; consumption spending D. consumption spending; taxes