Practice Quiz B Units 5 and 6

In the Keynesian model, if the marginal propensity to save is .25, then:

the spending multiplier is 4 and the tax multiplier is -3

In the Keynesian model, if the government increases taxes by $30 million this year, and the marginal propensity to save is .20, then:

total spending (GDP) throughout the economy will decrease by $120 million.

In the Keynesian model, if the government spends an additional $60 million this year, and the marginal propensity to consume is .75, then how much will this increase total spending throughout the economy?

$240 million

According the National Taxpayers Union (NTU), the top 10% (highest income earners), pays approximately:

70% of all federal individual income taxes.

In the Keynesian model, which of the following has to happen in case there is a considerable recessionary gap and the government is trying to eliminate the gap?

Aggregate demand must increase.

According to classical economists, which of the following has to happen in case there is a recession, and the country wants to eliminate the recession?

Aggregate supply must increase.

Which one of the following statements would classical economists say is not a valid relationship (which one do they believe is false)?

An increase in government spending or the money supply stimulates the economy in the long run and leads to an increase in GDP in the long run.

Which one of the following is an example of fiscal policy?

Congress increases spending and lowers tax rates

In a progressive tax system, which one of the following happens if the government cuts everyone's income taxes by an equal percentage?

In absolute dollar amounts, the higher income groups receive a larger cut in their taxes as compared to the lower income groups.

Which one of the following is correct about the consumption tax system?

In the consumption tax system even people that hold illegal jobs pay taxes.

In the Keynesian model, if the economy is experiencing a recessionary gap of $825 billion and the marginal propensity to save is .20, which one of the following combinations of spending and taxing changes should the government implement in order to eliminate the gap?

Increase government spending by $125 billion and decrease taxes by $50 billion

Which of the following is a correct sequence of occurrences in Keynes's explanation of how the free market economy works?

Overall spending decreases ==> business production decreases ==> employment decreases ==> people's incomes decrease ==> overall spending decreases more ==> etc.

According to classical economists, which one of the following is the correct (recommended) sequence of occurrences?

The economy is in a recession, production falls and unemployment rises ==> prices, wages, and interest rates decrease ==> business costs fall, profits rise, borrowing and consumer spending rise ==> employment and production rise ==> GDP rises

Which one of the following is correct about the flat tax system?

The flat tax is simple, and saves people and the government time and money in preparing and looking over tax returns.

Which of the following did Keynes recommend in the event of an overheating economy (strong expansion)?

The government should decrease spending and/or increase taxes and/or decrease the money supply.

Which one of the following statements about the marginal propensity to consume and marginal propensity to save is true?

The marginal propensity to consume is the ratio of how much people consume of additional income earned; the marginal propensity to save is the ratio of the amount people save of additional earnings. The MPC and the MPS always add up to 1.

John Maynard Keynes compared an economy to an elevator because (select the best answer):

When an elevator goes down it will continue to fall, unless someone takes specific action to stop it. The economy continues to spiral down unless our government takes action.

Which one of the following is correct, according to Arthur Laffer and the Laffer Curve?

When income tax rates are high, the government should lower tax rates in order to raise more revenue.

Public choice theory concludes that most government departments as well as other non-profits tend to waste money because:

government budget managers do what they can to spend everything in their budget, so that their budget for the following year is not cut.

To prevent politicians from making decisions that are good for the short run but bad for the long run, some public choice economists propose (according to our text):

strict term limits (for example, one term) for all politicians.