Question 1

An automatic stabilizer

Accepted Answer

A)   keeps taxes and government spending in a constant ratio to each other throughout the business cycle
B)   increases taxes relative to government spending during contractions and decreases it in expansions
C)   decreases taxes relative to government spending during contractions and increases it in expansions
D)   increases taxes relative to government spending throughout the business cycle
E)   decreases taxes relative to government spending throughout the business cycleF) A) and D)
G) A) and C)

Question 2

If fiscal policy is used to close an expansionary gap,the

Accepted Answer

A)   SRAS curve shifts leftward and the price level falls
B)   SRAS curve shifts rightward and the price level increases
C)   SRAS curve shifts rightward and the price level falls
D)   AD curve shifts leftward and the price level decreases
E)   AD curve shifts rightward and the price level decreasesF) A) and B)
G) D) and E)

Question 3

Discretionary fiscal policy is policy that

Accepted Answer

A)   is developed in secret
B)   applies to some states but not others
C)   applies to some industries but not others
D)   works automatically without public announcement or plan
E)   is an intentional change in taxation or government spendingF) A) and E)
G) A) and D)

Question 4

If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes,it could __________ autonomous net taxes by __________.

Accepted Answer

A)   increase; $100 billion
B)   decrease; $100 billion
C)   decrease; $100 billion * MPC/(1 - MP
C)  
D)   increase; $100 billion *MPC/(1 - MP
C)  
E)   decrease; $100 billion * (1 - MP
C)  /MPCF) C) and E)
G) A) and E)

Question 5

Suppose the government reduces its budget deficit at the same time that energy prices rise sharply.Which of the following will happen?

Accepted Answer

A)   The price level will rise,since higher energy prices increase the cost of production.
B)   real GDP will fall,since both events will tend to cause an economic contraction.
C)   The price level will fall,because the aggregate demand curve has shifted leftward.
D)   real GDP will rise; with less government spending,there are more opportunities for the private sector.
E)   Both the price level and real GDP will fall.F) B) and D)
G) A) and E)

Question 6

The Golden Age of fiscal policy was during

Accepted Answer

A)   the 1920s
B)   World War II
C)   the Eisenhower years
D)   the 1960s
E)   the Reagan administrationF) B) and D)
G) A) and B)

Question 7

Assume autonomous net taxes fall by $300; the MPC = 2/3.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.The value of the spending multiplier equals

Accepted Answer

A)   1
B)   10
C)   3
D)   0
E)   an indeterminate valueF) A) and B)
G) C) and D)

Question 8

The only way in which government can affect aggregate demand is through changes in its own purchases.

Accepted Answer

A) True 
 B)False

Question 9

A federal budget surplus occurs when

Accepted Answer

A)   there is deflation
B)   federal government net taxes exceed purchases
C)   there is inflation
D)   aggregate demand is greater than aggregate supply
E)   aggregate supply is greater than aggregate demandF) A) and E)
G) C) and D)

Question 10

If the short-run aggregate supply curve has a positive slope,effective fiscal policy to correct for an expansionary gap will

Accepted Answer

A)   only reduce the price level
B)   only reduce real GDP
C)   only increase the price level
D)   only increase real GDP
E)   reduce both the price level and real GDPF) D) and E)
G) A) and E)

Question 11

A progressive income tax ensures that during expansionary periods,

Accepted Answer

A)   consumption will increase by more than the increase in disposable income
B)   consumption will increase by more than the decrease in disposable income
C)   disposable income will increase by more than the increase in GDP
D)   disposable income will increase by less than the increase in GDP
E)   disposable income will increase by more than the decrease in GDPF) C) and E)
G) A) and D)

Question 12

Which of the following is a difference between John Maynard Keynes and the classical economists?

Accepted Answer

A)   Keynes did not believe that unemployment was a serious long-term problem; the classical economists did.
B)   Keynes did not believe that the economy was always in equilibrium; the classical economists did.
C)   Keynes did not believe that the economy necessarily settled at full employment; the classical economists did.
D)   Keynes believed that the economy was always in equilibrium; the classical economists did not.
E)   Keynes believed that a general glut of output was a good thing for the economy; the classical economists believed a glut created an unemployment problem for the economy.F) A) and C)
G) A) and B)

Question 13

Which of the following is not a tool of fiscal policy?

Accepted Answer

A)   money supply
B)   government purchases
C)   taxes
D)   Social Security program
E)   unemployment benefitsF) All of the above
G) A) and E)

Question 14

Exhibit 12-2 
-What happens in the economy illustrated in Exhibit 12-2 if government purchases increase by the amount necessary to achieve full employment?

Accepted Answer

A)   The AD curve shifts to the right,the SRAS curve shifts to the left,and long-run equilibrium is achieved.
B)   The AD curve shifts to the right,the price level increases,and long-run equilibrium is achieved.
C)   The AD curve shifts to the right,the price level increases,and the expansionary gap worsens.
D)   The AD curve shifts to the left,the price level increases,and the contractionary gap worsens.
E)   The SRAS curve shifts to the left,the price level decreases,and long-run equilibrium is achieved.F) None of the above
G) A) and B)

Question 15

If net taxes increase and government purchases decrease,

Accepted Answer

A)   the price level will rise
B)   the money supply must increase
C)   the aggregate demand will shift rightward
D)   output and employment will fall
E)   there will be a federal budget deficitF) B) and E)
G) B) and C)

Question 16

The unemployment problem becomes more severe if prices are sticky downward.

Accepted Answer

A) True 
 B)False

Question 17

People will be likely to spend a higher percentage of any additional income when

Accepted Answer

A)   they believe that the increase is permanent
B)   they believe that the increase is temporary
C)   the increase is large
D)   the increase is small
E)   interest rates on savings accounts are risingF) B) and E)
G) B) and D)

Question 18

If the multiplier for autonomous government purchases equals 4,then it is true that the simple tax multiplier

Accepted Answer

A)   equals -4
B)   equals -3
C)   always equals 1
D)   is the same as the original multiplier
E)   is invariably equal to 5F) B) and C)
G) B) and E)

Question 19

Which of the following is a component of aggregate demand?

Accepted Answer

A)   transfer payments from government
B)   taxation by government
C)   purchases by government
D)   borrowing by government
E)   saving by consumersF) B) and D)
G) All of the above

Question 20

Assume autonomous net taxes fall by $300; the MPC = 2/3.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.As a result,consumption will initially

Accepted Answer

A)   remain unchanged
B)   rise by $300
C)   fall by $300
D)   rise by $200
E)   fall by $200F) A) and E)
G) B) and D)

Exam 12: Fiscal Policy

The only way in which government can affect aggregate demand is through changes in its own purchases.

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Which of the following is a difference between John Maynard Keynes and the classical economists?

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Assume autonomous net taxes fall by $300; the MPC = 2/3.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.As a result,consumption will initially

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Which of the following is not a tool of fiscal policy?

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If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes,it could __________ autonomous net taxes by __________.

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People will be likely to spend a higher percentage of any additional income when

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If fiscal policy is used to close an expansionary gap,the

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An automatic stabilizer

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If net taxes increase and government purchases decrease,

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A progressive income tax ensures that during expansionary periods,

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Exhibit 12-2 -What happens in the economy illustrated in Exhibit 12-2 if government purchases increase by the amount necessary to achieve full employment?

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The Golden Age of fiscal policy was during

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A federal budget surplus occurs when

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Assume autonomous net taxes fall by $300; the MPC = 2/3.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.The value of the spending multiplier equals

Correct AnswerverifiedShow Answer

If the short-run aggregate supply curve has a positive slope,effective fiscal policy to correct for an expansionary gap will

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Discretionary fiscal policy is policy that

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Which of the following is a component of aggregate demand?

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Suppose the government reduces its budget deficit at the same time that energy prices rise sharply.Which of the following will happen?

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If the multiplier for autonomous government purchases equals 4,then it is true that the simple tax multiplier

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The unemployment problem becomes more severe if prices are sticky downward.

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If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes,it could autonomous net taxes by .

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