32) If iscal stimulus creates a large budget ________, then in the long run economic growth
________.
A) surplus; increases
B) surplus; decreases
C) deicit; increases
D) deicit; decreases
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
51
16.4 Chapter Figures
The igure above shows a nation’s aggregate demand curve, aggregate supply curve, and
potential GDP.
1) In the igure above, the ________ gap is one trillion dollars. To close the gap, the
government can change expenditure by ________ one trillion dollars.
A) recessionary; less than
B) inlationary; exactly
C) inlationary; more than
D) recessionary; more than
E) recessionary; exactly
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
52
2) In the igure above, the ________ gap is equal to ________.
A) recessionary; $1 trillion
B) inlationary; $1 trillion
C) recessionary; $12 trillion
D) inlationary; $12 trillion
E) recessionary; $13 trillion
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
3) In the igure above, the ________ gap is one trillion dollars. To close the gap, the
government can ________ government expenditure and/or ________ taxes.
A) recessionary; increase; decrease
B) inlationary; decrease; increase
C) inlationary; increase; increase
D) recessionary; decrease; decrease
E) recessionary; decrease; increase
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
4) In the igure above, the ________ gap is one trillion dollars. To close the gap, the
government can ________ government expenditure and/or ________ taxes.
A) recessionary; increase; decrease
B) inlationary; decrease; increase
C) inlationary; increase; increase
D) recessionary; decrease; decrease
E) recessionary; decrease; increase
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
53
5) In the igure above, to use iscal policy to move the economy back to potential GDP, the
government must increase government expenditure by ________ $1 trillion and/or decrease
taxes by ________ $1 trillion.
A) exactly; exactly
B) more than; less than
C) less than; more than
D) less than; less than
E) more than; more than
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
54
The igure above shows an economy aggregate demand curve and aggregate supply curves.
6) Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of iscal policy.
Which of the policies below could lead to these shifts?
i. An increase in government expenditure
ii. A tax cut
iii. A decrease in government expenditure
iv. A tax hike
A) i only
B) iv only
C) i and ii
D) iii and iv
E) i and iv
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
55
7) Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of iscal policy. If
the efect on aggregate supply was larger than the igure above shows, as a result the price
level would be ________ 110 and real GDP would be ________ $17 trillion.
A) equal to; equal to
B) higher than; larger than
C) smaller than; larger than
D) equal to; larger than
E) smaller than; less than
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
8) Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of iscal policy. If
the efect on aggregate demand was larger than the igure above shows, as a result the
price level would be ________ 110 and real GDP would be ________ $17 trillion.
A) equal to; equal to
B) higher than; larger than
C) smaller than; larger than
D) equal to; larger than
E) smaller than; less than
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
The igure above shows a labor market with an income tax.
9) According to the igure above, if there is no income tax, the equilibrium real wage rate is
________ and the equilibrium hours of labor are ________.
56
A) $20; 200 billion
B) $30; 250 billion
C) $35; 200 billion
D) $30; 200 billion
E) The equilibrium is not shown.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
10) The tax wedge in the igure above is equal to ________ per hour, which creates an after-
tax real wage rate of ________ per hour and employment of ________ billion hours per year.
A) $10; $35; 250
B) $15; $20; 200
C) $10; $35; 200
D) $5; $35; 200
E) $15; $30; 250
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
11) In the igure above, the tax wedge is equal ________ per hour, the after-tax real wage
rate is equal to ________, and the before-tax real wage rate is equal to ________.
A) $10; $30; $30
B) $15; $20; $35
C) $20; $30; $35
D) $20; $30; $20
E) $30; $20; $35
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
16.5 Integrative Questions
1) Do automatic iscal stabilizers eliminate business cycles?
A) Yes
B) No, because they have no efect if the business cycle is the result of some unanticipated
change.
C) No, but they do moderate business cycles.
D) No, they increase the likelihood that a business cycle occurs.
E) No, they make business cycle luctuations more severe.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Relective thinking
57
2) President Reagan often stated he preferred supply side policies. Which of the following
federal government policies would be considered supply side?
i. Decrease the quantity of money.
ii. Lower taxes.
iii. Lower the interest rate.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
58
3) When the economy is in a recession, ________ taxes decrease while ________ spending
increases and, as a result of this automatic iscal policy, aggregate demand ________.
A) needs-tested; induced; decreases
B) induced; needs-tested; increases
C) induced; discretionary; is not changed
D) discretionary; needs-tested; increases
E) discretionary; induced; is not changed
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
4) Government tax revenues ________ during an expansion and ________ during a recession,
which leads to larger budget deicits during the ________ phase of the business cycle.
A) increase; decrease; recession
B) increase; increase; recession
C) decrease; increase; expansion
D) decrease; decrease; expansion
E) increase; decrease; expansion
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
5) Need-based spending ________ during an expansion and ________ during a recession,
which leads to larger budget deicits during the ________ phase of the business cycle.
A) increases; decreases; recession
B) decreases; increases; expansion
C) decreases; increases; recession
D) decreases; decreases; expansion
E) increases; decreases; expansion
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
59
6) Assume the federal government raises taxes (a contractionary iscal policy). If the tax
increase afects AS and AD equally, then real GDP will ________ and the price level will
________.
A) decrease; decrease
B) increase; be unchanged
C) increase; increase
D) decrease; be unchanged
E) increase; decrease
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
7) When an economy faces an inlationary gap, an appropriate iscal policy is to
A) decrease government expenditure.
B) decrease taxes.
C) increase aggregate demand.
D) increase the quantity of money.
E) decrease the quantity of money.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
8) If an economy is in an equilibrium with an inlationary gap, policymakers can use
A) discretionary iscal policy and increase government expenditure.
B) automatic iscal policy and increase government expenditure.
C) automatic iscal policy and cut taxes.
D) discretionary iscal policy and decrease government expenditure.
E) discretionary iscal policy and cut taxes.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
60