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9) A decrease in taxes should be applied in a situation with
A) a recessionary gap.
B) a inlationary gap.
C) low unemployment.
D) high demand for goods and services.
E) no tax multiplier.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
10) If the economy has been producing at a point where real GDP is less than potential
GDP, what iscal policy can the federal government use to restore real GDP to potential
GDP?
A) cut government expenditure on goods and services
B) increase taxes
C) cut taxes
D) raise the interest rate
E) decrease the quantity of money
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
11) In order to reduce inlationary pressure on the economy, what iscal policy can the
government use?
A) raise taxes
B) cut taxes
C) increase government expenditure on goods and services
D) cut interest rates
E) increase the quantity of money
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
61
12) To eliminate an inlationary gap using iscal policy, the government could
A) increase government expenditure on goods and services and simultaneously increase
taxes by an equal amount.
B) only decrease taxes.
C) increase government expenditure on goods and services and simultaneously decrease
taxes by an equal amount.
D) increase taxes.
E) decrease the quantity of money.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
13) Ignoring any supply-side efects, when taxes are hiked, real GDP ________ and the price
level ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
E) decreases; does not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
14) Ignoring any supply-side efects, to close an inlationary gap of $100 billion with a
government expenditure multiplier of 5, the government could
A) decrease government expenditure on goods and services by $100 billion.
B) decrease government expenditure on goods and services by $20 billion.
C) lower taxes by $100 billion.
D) lower taxes by more than $20 billion.
E) increase government expenditure on goods and services by $20 billion.
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
62
15) If an economy is at the short-run equilibrium illustrated by the igure above, a
discretionary iscal policy to adjust the economy to full employment is to
A) decrease taxes.
B) decrease the quantity of money.
C) increase government spending.
D) increase taxes and decrease government spending simultaneously.
E) increase the quantity of money.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
16) Aggregate demand changes when government expenditure on national defense
increases by $100 billion. Aggregate demand ________ by ________ than $100 billion because
government expenditure ________ induced expenditure.
A) increases; more; increases
B) increases; more; decreases
C) decreases; more; decreases
D) increases; less; increases
E) decreases; less; increases
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
63
17) When the government cuts the income tax rate, the supply of labor ________, the
demand for labor ________, and the equilibrium level of employment ________.
A) increases; increases; increases
B) increases; decreases; increases
C) decreases; increases; increases
D) increases; does not change; increases
E) increases; does not change; decreases
Skill: Level 5: Critical thinking
Section: Integrative
Status: New
AACSB: Relective thinking
18) When the government cuts the income tax rate, the real wage rate paid by employers
________ and the real wage rate received by workers ________ and potential GDP ________.
A) decreases; decreases; increases
B) decreases; increases; decreases
C) increases; increases; increases
D) increases; decreases; increases
E) decreases; increases; increases
Skill: Level 5: Critical thinking
Section: Integrative
Status: New
AACSB: Relective thinking
19) When there is a cut in payroll taxes, there is a(n) ________ in the tax wedge that lowers
the cost of labor. This tax cut will ________ the quantity of labor demanded and ________ the
quantity of labor employed.
A) increase; increase; increase
B) decrease; increase; increase
C) decrease; decrease; increase
D) decrease; increase; decrease
E) increase; decrease; decrease
Skill: Level 5: Critical thinking
Section: Integrative
Status: New
AACSB: Relective thinking
64
20) Income taxes create a wedge between the wage rate paid by ________ and received by
workers and thereby ________ employment and ________ potential GDP.
A) irms; lower; increase
B) irms; raise; increase
C) households; lower; decrease
D) irms; lower; decrease
E) irms; raise; decrease
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
21) A government budget deicit ________ the ________ interest rate and crowds out private
investment, which ________ real GDP growth.
A) raises; nominal; slows
B) raises; real; accelerates
C) lowers; real; slows
D) lowers; nominal; slows
E) raises; real; slows
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Application of knowledge
16.6 Essay: The Federal Budget
1) "The federal budget is required by law to balance." Is the previous statement correct or
incorrect?
Skill: Level 1: Deinition
Section: Checkpoint 16.1
Status: Old
AACSB: Relective thinking
65
2) Depending on the relative size of the federal government's expenditures and tax
revenues, the federal government's budget can be in three possible conditions. What are
the three possible conditions and what is the relationship of federal government
expenditures and tax revenues for each?
Skill: Level 1: Deinition
Section: Checkpoint 16.1
Status: Old
AACSB: Written and oral communication
3) When government outlays exceed tax revenues, does the government have a budget
deicit or surplus?
Skill: Level 1: Deinition
Section: Checkpoint 16.1
Status: Old
AACSB: Relective thinking
4) Discuss the federal budget history of the United States since 1970. Make sure to note
speciically the budget position of the United States during the last of the 1990s and
compare it to the situation in 2014.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.1
Status: Old
AACSB: Written and oral communication
5) A country reports that its government outlays total $0.8 trillion and its tax revenues total
$0.6 trillion. Does the country have a budget surplus or deicit and what is the surplus or
deicit?
Skill: Level 2: Using deinitions
Section: Checkpoint 16.1
Status: Old
AACSB: Analytical thinking
66
6) The above table gives a country's government outlays and tax revenue for 2008 through
2012. During which years did the country have a balanced budget, budget surplus, and
budget deicit?
Skill: Level 2: Using deinitions
Section: Checkpoint 16.1
Status: Old
AACSB: Analytical thinking
16.7 Essay: Fiscal Stimulus
1) Compare the views of Keynesian and mainstream economists on the efects iscal
stimulus has on real GDP and employment.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
2) Describe the diference between discretionary and automatic iscal policy.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
67
3) Explain the diference between discretionary and automatic iscal policy. Provide
examples of each.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Relective thinking
4) What are automatic stabilizers? How do they afect the budget deicit and/or budget
surplus during a recession and during an expansion?
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
5) What are automatic stabilizers? How do they help stabilize real GDP?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
68
