Question 1

Growing capital spending and privatization were two of the factors due to which the U.S.economy experienced a strong recovery in 1994.

Accepted Answer

A) True 
 B)False

Question 2

Suppose the government reduces its budget deficit at the same time that energy prices rise sharply.Which of the following is most likely to 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 as less government spending leads to more opportunities for the private sector.
E)  Both the price level and real GDP will fall.

Question 3

Government transfer payments are a good example of an automatic stabilizer.

Accepted Answer

A) True 
 B)False

Question 4

It has been estimated that the marginal propensity to consume out of tax rebate money is around 1/3.

Accepted Answer

A) True 
 B)False

Question 5

Because of automatic stabilizers,disposable income varies proportionately less than real GDP during periods of economic fluctuations.

Accepted Answer

A) True 
 B)False

Question 6

The U.S.federal income tax is progressive,which means that _____.

Accepted Answer

A)  tax receipts grow at the same rate that income does
B)  tax receipts grow at the same rate that government spending does
C)  middle-income individuals pay more in taxes than either high-income or low-income individuals
D)  the tax rate decreases with increases in income.
E)  high-income individuals are taxed at a higher rate than low-income individuals

Question 7

A decrease in net taxes:

Accepted Answer

A)  raises aggregate expenditure by raising disposable income,thereby increasing consumption.
B)  raises aggregate expenditure by raising disposable income,thereby decreasing consumption.
C)  lowers aggregate expenditure by lowering disposable income,thereby decreasing consumption.
D)  lowers aggregate expenditure by lowering disposable income,consumption remaining constant.
E)  has no effect on aggregate expenditure.

Question 8

Classical economists believed that the economy automatically moves toward equilibrium at full employment.

Accepted Answer

A) True 
 B)False

Question 9

If policy makers estimate the natural rate of unemployment incorrectly,_____.

Accepted Answer

A)  their policies will cause deflation in the long run
B)  their policies will cause even more unemployment in the long run
C)  the economy will stay below its potential GDP in the long run
D)  the economy will tend toward the level of unemployment the policy makers believe is correct
E)  policies that appear to be successful in the short run will lead to further economic problems

Question 10

The tax cut of 1964 (proposed by President Kennedy) :

Accepted Answer

A)  was the last time fiscal policy was used.
B)  was the greatest failure as a demand-management tool.
C)  actually increased investment,consumption,and employment.
D)  shifted the aggregate demand curve leftward.
E)  was the first time the focus moved away from managing aggregate demand to focusing exclusively on aggregate supply.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

A decrease in net taxes:

Accepted Answer

A)  increases GDP as much as an equal decrease in government purchases.
B)  increases GDP less than an equal increase in government purchases.
C)  decreases GDP more than an equal decrease in government purchases.
D)  changes GDP in an unpredictable manner.
E)  has no effect on GDP.

Question 13

Expansionary and contractionary gaps are automatically eliminated by shifts in aggregate demand.

Accepted Answer

A) True 
 B)False

Question 14

A temporary tax cut is not likely to be effective in stimulating aggregate demand if:

Accepted Answer

A)  the tax cut is large.
B)  the MPC is relatively high.
C)  the economy experiences a contractionary gap.
D)  the short-run aggregate supply curve is relatively flat.
E)  people based consumption decisions on their level of permanent income.

Question 15

Figure 11.1 shows the relationship between the price level and the real GDP.Which of the following sets of policies would unambiguously move the economy to full employment?

Accepted Answer

A)  Increase in government purchases,increase in taxes,and decrease in transfer payments
B)  Decrease in government purchases,increase in taxes,and decrease in transfer payments
C)  Increase in government purchases,decrease in taxes,and increase in transfer payments
D)  Increase in government purchases,increase in taxes,and increase in transfer payments
E)  Decrease in government purchases,decrease in taxes,and decrease in transfer payments

Question 16

The simple spending multiplier understates the amount by which output changes.

Accepted Answer

A) True 
 B)False

Question 17

If the economy is already at its potential output,then the spending multiplier is:

Accepted Answer

A)  zero in the long run.
B)  infinite in the long run.
C)  equal to 1 in the long run.
D)  zero in the short run.
E)  equal to 1 in the short run.

Question 18

Suppose the government expenditure increases by $200 and the simple spending multiplier equals 5.The final increase in output will be:

Accepted Answer

A)  $6000.
B)  $500.
C)  $200.
D)  more than $200.
E)  less than $200.

Question 19

The effect of automatic stabilizers on the business cycle is to:

Accepted Answer

A)  make upswings larger and downswings smaller.
B)  make upswings smaller and downswings larger.
C)  make both upswings and downswings smaller.
D)  eliminate fiscal drag.
E)  make both upswings and downswings larger.

Question 20

During the 1970s,demand-management policy:

Accepted Answer

A)  continued to be highly successful in curing the economy's economic problems.
B)  was found to be highly unsuitable in periods of stagflation such as the decade of the 1970s.
C)  was so unsuccessful that economists advised a return to the pre-World War II philosophy of fiscal policy.
D)  was unsuccessful because automatic stabilizers no longer influenced the economy.
E)  was unsuitable because it affected aggregate supply more than aggregate demand.

Exam 11: Fiscal Policy

A temporary tax cut is not likely to be effective in stimulating aggregate demand if:

Correct AnswerverifiedShow Answer

Growing capital spending and privatization were two of the factors due to which the U.S.economy experienced a strong recovery in 1994.

Correct AnswerverifiedShow Answer

If the economy is already at its potential output,then the spending multiplier is:

Correct AnswerverifiedShow Answer

Suppose the government expenditure increases by $200 and the simple spending multiplier equals 5.The final increase in output will be:

Correct AnswerverifiedShow Answer

Expansionary and contractionary gaps are automatically eliminated by shifts in aggregate demand.

Correct AnswerverifiedShow Answer

Figure 11.1 shows the relationship between the price level and the real GDP.Which of the following sets of policies would unambiguously move the economy to full employment?

Correct AnswerverifiedShow Answer

Because of automatic stabilizers,disposable income varies proportionately less than real GDP during periods of economic fluctuations.

Correct AnswerverifiedShow Answer

Government transfer payments are a good example of an automatic stabilizer.

Correct AnswerverifiedShow Answer

If policy makers estimate the natural rate of unemployment incorrectly,_____.

Correct AnswerverifiedShow Answer

Classical economists believed that the economy automatically moves toward equilibrium at full employment.

Correct AnswerverifiedShow Answer

The effect of automatic stabilizers on the business cycle is to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

It has been estimated that the marginal propensity to consume out of tax rebate money is around 1/3.

Correct AnswerverifiedShow Answer

The simple spending multiplier understates the amount by which output changes.

Correct AnswerverifiedShow Answer

During the 1970s,demand-management policy:

Correct AnswerverifiedShow Answer

The tax cut of 1964 (proposed by President Kennedy) :

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A decrease in net taxes:

Correct AnswerverifiedShow Answer

The U.S.federal income tax is progressive,which means that _____.

Correct AnswerverifiedShow Answer

A decrease in net taxes:

Correct AnswerverifiedShow Answer

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