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51) The balanced budget multiplier is based on the point that the ________ multiplier is
larger than the ________ multiplier so that an equal increase in government expenditure and
taxes ________ aggregate demand.
A) tax; expenditure; does not change
B) expenditure; tax; does not change
C) expenditure; tax; decreases
D) expenditure; tax; increases
E) tax; expenditure; decreases
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
52) The balanced budget multiplier applies when a $50 billion increase in government
expenditure is inanced by a $50 billion ________ in tax revenue and the balanced budget
multiplier shows that in this case there is ________ efect on aggregate demand.
A) decrease; no
B) decrease; a positive
C) increase; no
D) increase; a positive
E) increase; a negative
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
53) If government expenditure increases by $200 billion and taxes simultaneously increase
by $200 billion, then aggregate demand
A) remains the same.
B) decreases no matter what happens to aggregate supply.
C) increases no matter what happens to aggregate supply.
D) increases only if aggregate supply increases.
E) increases only if aggregate supply decreases.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
31
54) Ignoring any supply-side efects, if government expenditure on goods and services
increase by $10 billion and taxes increase by $10 billion, then real GDP ________ and the
price level ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
E) does not change; does not change
Skill: Level 4: Applying models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
55) Ignoring any supply-side efects, if government expenditure on goods and services
decrease by $10 billion and taxes decrease by $10 billion, then real GDP ________ and the
price level ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
E) does not change; does not change
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
56) If the economy is in equilibrium with real GDP less than potential GDP, there is ________
gap, and a iscal policy that ________ is appropriate.
A) an inlationary; increases aggregate demand
B) an inlationary; decreases aggregate demand
C) a recessionary; increases aggregate demand
D) a recessionary; decreases aggregate demand
E) a recessionary; increases potential GDP
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
32
57) In order to help the economy recover from a recession using iscal policy, the
government can ________ so that aggregate demand increases.
A) cut taxes
B) raise taxes
C) cut government expenditure on goods and services
D) raise interest rates
E) decrease the quantity of money
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
58) Which of the following is an example of a iscal stimulus?
A) decrease in government expenditure on goods and services
B) decrease in transfer payments
C) increase in taxes
D) decrease in taxes
E) none of the above
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
59) Suppose the economy is in an equilibrium in which real GDP is less than potential GDP.
To increase real GDP, the government can use a iscal stimulus of
A) increasing taxes only.
B) decreasing government expenditure only.
C) decreasing taxes and/or increasing government expenditure.
D) decreasing government expenditure and simultaneously increasing taxes.
E) increasing the quantity of money.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
33
60) If the economy is in an equilibrium with real GDP less than potential GDP, a iscal
stimulus could move the economy toward potential GDP by simultaneously ________ taxes
and ________ government expenditures on goods and services.
A) raising; increasing
B) raising; decreasing
C) cutting; increasing
D) cutting; decreasing
E) raising; not changing
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
61) To eliminate a recessionary gap, the government can ________ government expenditures
on goods and services or ________ taxes.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increase; not change
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
62) If the government uses iscal policy to close a recessionary gap,
A) government expenditure must be increased by more than the gap because of the
government expenditure multiplier.
B) taxes must be cut by more than the gap because of the tax multiplier.
C) government expenditure can be increased by less than the gap because of the
government expenditure multiplier.
D) taxes can be raised by less than the gap because of the tax multiplier.
E) taxes must be raised by more than the gap because of the tax multiplier.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
34
63) Ignoring any supply-side efects, to close a recessionary gap of $100 billion with a
government expenditure multiplier of 5, the government could
A) increase government expenditure on goods and services by $100 billion.
B) increase government expenditure on goods and services by $20 billion.
C) raise taxes by $100 billion.
D) raise taxes by more than $20 billion.
E) decrease government expenditure on goods and services by $20 billion.
Skill: Level 5: Critical thinking
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
64) An economy is at a short-run equilibrium as illustrated in the above igure. An
appropriate iscal policy option to move the economy to full employment is to
A) increase government expenditure and move the economy to a full-employment
equilibrium at point c.
B) increase tax rates and move the economy to a full-employment equilibrium at point c.
C) increase government expenditure and move the economy to a full-employment
equilibrium at point b.
D) increase tax rates and move the economy to a full-employment equilibrium at point b.
E) lower the interest rate by increasing the quantity of money and move the economy to a
full-employment equilibrium at point b.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
35
65) Which of the following is a limitation of discretionary iscal policy?
i. law-making lags
ii. estimating potential GDP
iii. income gap
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
66) The use of discretionary iscal policy is hampered by
i. diiculty of estimating the level of potential GDP.
ii. lack of accuracy of economic forecasts.
iii. the small impact tax cuts and increases in government expenditure have on aggregate
demand.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
67) There are four limitations to the efectiveness of discretionary iscal policy. Which item
below is NOT one of these limitations?
A) shrinking area of law-maker discretion
B) law-making time lag
C) estimating potential GDP
D) iscal multiplier
E) economic forecasting
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
36
68) The law-making time lag is best described as the time that it takes
A) Congress to realize that new laws must be passed to change taxes or spending.
B) a newly passed law to become the norm in daily lives.
C) the President to sign a bill sent from Congress.
D) a jury to render a verdict.
E) Congress to pass laws needed to change taxes or spending.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
69) A reason why discretionary iscal policy might move the economy away from potential
GDP instead of toward potential GDP is that
A) economic forecasts consistently underestimate the impact of iscal policy.
B) it is diicult to know whether real GDP is above or below potential GDP.
C) during a recession, politicians prefer increases in government spending over decreasing
taxes.
D) government programs automatically move real GDP away from potential GDP.
E) government programs are always expansionary.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
70) In order for the United States to use discretionary iscal policy to deal with a
recessionary gap,
A) the public must elect members of Congress that understand economics.
B) the President and Congress must agree on which taxes to hike.
C) time must pass in order for Congress to decide what taxes and government programs to
change.
D) the President's and Congress's economic advisors must agree on the proper government
programs to slash.
E) since 2002, the President has been given the authority to make up to a 10 percentage
point change in government expenditure programs.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
37
71) The ________ view says that iscal stimulus has a multiplier efect that makes it a
________ tool to ight a deep recession.
A) mainstream; powerful
B) "free lunch"; powerful
C) Keynesian; powerful
D) Keynesian; weak
E) None of the above answers is correct.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
72) An example of automatic iscal policy is
A) an interest rate cut, initiated by an act of Congress.
B) an increase in the quantity of money.
C) a tax cut, initiated by an act of Congress.
D) a decrease in tax revenues, triggered by the state of the economy.
E) any change in the interest rate, regardless of its cause.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
73) If the structural deicit is $800 billion and the cyclical deicit is $600 billion, the actual
budget deicit is
A) $200 billion.
B) $600 billion.
C) $800 billion.
D) $1,400 billion.
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
38
74) The government expenditure multiplier relects the magniication on ________ from a
change in government expenditure on goods and services.
A) aggregate demand
B) the budget deicit
C) tax receipts
D) aggregate supply
E) potential GDP
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
75) The magnitude of the tax multiplier is ________ the magnitude of the government
expenditure multiplier.
A) equal to
B) greater than
C) smaller than
D) the inverse of
E) exactly one half
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
76) An example of a discretionary iscal stimulus policy is
A) the automatic increase in needs-tested spending during a recession.
B) induced taxes.
C) decreasing government expenditure.
D) decreasing needs-tested spending.
E) cutting taxes.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
39
77) A iscal stimulus works to close a recessionary gap by shifting the
A) AD curve leftward.
B) AS curve leftward.
C) AD curve leftward and AS curve leftward.
D) AD curve rightward.
E) potential GDP line leftward.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
78) Discretionary iscal policy is handicapped by
A) induced taxes and automatic stabilizers.
B) law-making time lags, estimation of potential GDP, and economic forecasting.
C) economic forecasting, law-making time lags, and induced taxes.
D) automatic stabilizers, law-making time lags, and potential GDP estimation.
E) automatic stabilizers and induced taxes.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
16.3 The Supply Side: Potential GDP and Growth
1) Government expenditure ________ change potential GDP and taxes ________ change
potential GDP.
A) can; can
B) cannot; can
C) can; cannot
D) cannot; cannot
E) None of the above answers is correct.
Skill: Level 1: Deinition
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
40
