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63. According to the Keynesian view, if an economy was operating at long-run equilibrium, an increase in
government expenditures (holding taxes constant) would
a.
be inflationary.
b.
lead to a recession.
c.
lower the real rate of interest.
d.
reduce the size of the national debt.
64. Keynesian analysis suggests that a planned budget surplus
a.
will affect aggregate demand only if the money supply decreases by the size of the
surplus.
b.
will stimulate both consumption and income.
c.
will stimulate output and employment.
d.
is proper during periods of inflation but may increase unemployment if timed improperly.
65. According to the Keynesian view, if policy makers thought the economy was about to enter an
inflationary boom, which of the following would be most appropriate?
a.
a tax increase
b.
a planned increase in the budget deficit
c.
an increase government expenditures
d.
a tax decrease
66. If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that
they should
a.
increase the budget deficit.
b.
increase government spending and hold taxes constant.
c.
decrease government spending and/or raise taxes.
d.
hold government spending constant and decrease taxes.
67. According to the Keynesian view, which of the following would most likely stimulate real output if an
economy were in a recession?
a.
a decrease in tax rates
b.
an increase in tax rates
c.
a reduction in government expenditures
d.
a budget surplus
68. If an economy is experiencing both full employment and price stability, within the Keynesian model, a
major tax reduction probably would cause
a.
an increase in unemployment in the near future.
b.
an increase in the general level of prices unless government expenditures are also reduced.
c.
an increase in the interest rate since individuals will reduce their savings in response to the
tax cut.
d.
a decrease in consumption unless the expected budget deficit is financed by selling bonds
to foreigners.
69. In the midst of the Great Depression in 1932, Congress and the Hoover administration increased tax
rates substantially. According to the Keynesian view, this tax increase was
a.
inappropriate because it would depress economic activity and lead to further increases in
unemployment.
b.
appropriate because it would lead to a significant increase in the money supply and,
thereby, increase employment.
c.
inappropriate because it would decrease the money supply and, thereby, prolong the
Depression.
d.
appropriate because it would stimulate economic activity and help end the Depression.
70. According to the Keynesian model, which of the following policies would be most appropriate during a
period of rapid inflation?
a.
a tax cut
b.
a budget deficit
c.
a budget surplus
d.
an increase in the money supply
71. Unemployment compensation payments
a.
rise during a recession and thereby help stimulate consumption.
b.
rise during a recession and thereby retard consumption.
c.
rise during economic expansion and thereby help stimulate consumption.
d.
rise during economic expansion and thereby retard consumption.
72. Which of the following is a major deficiency of fiscal policy as a stabilization tool?
a.
Congress is reluctant to make changes in either taxes or expenditures.
b.
The Constitution requires the president to submit and Congress to pass a balanced budget.
c.
Both political and economic factors make it unlikely that changes in fiscal policy will be
timed correctly.
d.
A change in fiscal policy exerts major effects on the economy quickly.
73. The main reason that the deficit grows in a recession is that
a.
the government reacts quickly and adjusts taxes to compensate.
b.
monetary policy that targets interest rates causes the costs of borrowing to fall.
c.
the deficit causes the recession, and reducing the deficit cures the recession.
d.
many forms of taxes act as automatic stabilizers.
74. Which of the following is an example of an automatic stabilizer?
a.
Congress legislates lower tax rates to increase consumption and investment.
b.
Tax rates are increased during a recession to maintain a balanced budget.
c.
A regressive income tax system reduces tax revenues (as a share of income) as income
expands.
d.
Revenues from the corporate income tax increase sharply during a business boom but
decline substantially during a recession, even though no new tax legislation has been
enacted.
75. When an economy dips into recession, automatic stabilizers will tend to
a.
enlarge the budget deficit (or reduce the surplus).
b.
reduce the budget deficit (or increase the surplus).
c.
ensure that the budget remains in balance.
d.
expand the supply of money and, thereby, stimulate aggregate demand.
76. When an economy expands into an economic boom, automatic stabilizers will tend to
a.
enlarge the budget deficit (or reduce the surplus).
b.
reduce the budget deficit (or increase the surplus).
c.
ensure that the budget will remain in balance.
d.
reduce the supply of money and, thereby, retard aggregate demand.
77. The optimal time for the implementation of restrictive fiscal policy would be
a.
before inflation accelerated.
b.
after inflation accelerated.
c.
during a recession.
d.
after the price level had risen significantly.
78. Which of the following best illustrates the use of discretionary countercyclical fiscal policy?
a.
Congress provides $90 billion in relief aid for hurricane victims.
b.
Congress appropriates $50 billion to help the needy, and the appropriation is financed by a
tax on wealth.
c.
Income tax receipts are smaller because of a decline in real GDP during a recession.
d.
Congress passes a bill authorizing $100 billion in additional spending when it receives
news of a deepening recession.
79. The distinction between discretionary fiscal policy and the use of automatic stabilizers is that
a.
only discretionary fiscal policy can stimulate the economy.
b.
only automatic stabilizers can stimulate the economy.
c.
discretionary fiscal policy, once adopted, is built into the structure of the economy.
d.
automatic stabilizers, once adopted, are built into the structure of the economy.
80. Discretionary fiscal policy involves
a.
expansion of government revenues during a period of rapid growth.
b.
contraction of government revenues during a recession.
c.
automatic adjustments that affect the size of the budget deficit or surplus.
d.
an intentional change in taxation or government spending.
e.
both a and b.
81. Automatic stabilizers will shift the government budget toward
a.
a surplus during both expansions and contractions.
b.
a deficit during both expansions and contractions.
c.
a surplus during an expansion and a deficit during a contraction.
d.
a surplus during a contraction and a deficit during an expansion.
82. Long lags make discretionary policy less effective because
a.
by the time the impact of a policy is felt, the problem may have been corrected by market
forces.
b.
it is easier to forecast an expansion than a recession.
c.
it is easier to forecast a recession than an expansion.
d.
automatic stabilizers are subject to longer lags than are discretionary policies.
83. Because of automatic stabilizers, government budget deficits are
a.
positive during both expansions and contractions.
b.
negative during both expansions and contractions.
c.
zero if averaged out over the entire business cycle.
d.
larger during expansions and smaller during contractions.
e.
smaller during expansions and larger during contractions.
84. The major advantage of automatic stabilizers is that they
a.
guarantee the federal budget will be balanced in a relatively short amount of time.
b.
institute countercyclical fiscal policy without the delays associated with legislative action.
c.
automatically produce surpluses during recessions and deficits during expansions.
d.
require discretionary actions on the part of Congress before they exert an impact on output
and employment.
Use the figure below to answer the following question(s).
Figure 11-1
85. Refer to Figure 11-1. Consider the short-run aggregate supply curve SRAS. What is the segment
between a and b called?
a.
the new classical range
b.
the Keynesian range
c.
the flexible wage and price range
d.
the balanced budget range
Use the figure below to answer the following question(s).
Figure 11-2
86. Refer to Figure 11-2. If an economy operates in the short run at point a, Keynesian analysis indicates
that restrictive fiscal policy will
a.
increase AD and move the economy toward point c.
b.
decrease AD and move the economy toward point b.
c.
increase SRAS and move the economy toward point b.
d.
decrease SRAS and move the economy toward point c.
87. Refer to Figure 11-2. When the economy is operating at point a, reliance on the self-correcting
mechanism will
a.
result in higher resource prices and a shift to the left in the SRAS curve.
b.
result in lower resource prices and a shift to the right in the SRAS curve.
c.
lead to lower interest rates and a shift to the right in the AD curve.
d.
lead to higher interest rates and a shift to the left in the AD curve.
e.
do both a and d.
88. Refer to Figure 11-2. Which of the following will a Keynesian most likely favor if the economy is
operating at point a?
a.
a tax cut
b.
an increase in government expenditures
c.
restrictive fiscal policy
d.
an increase in the budget deficit
Use the figure below to answer the following question(s).
Figure 11-3
89. Refer to Figure 11-3. When the economy is operating at point a, which of the following will be most
likely to happen?
a.
an increase in resource prices
b.
a decrease in resource prices
c.
the current output will be sustained in the future
d.
an increase in aggregate demand
90. Refer to Figure 11-3. If the economy is currently operating at point a, which of the following would a
Keynesian economist be most likely to favor?
a.
a tax cut
b.
an increase in government expenditures
c.
a shift to a more expansionary monetary policy
d.
a reduction in the budget deficit
Figure 11-4
91. According to Keynesian analysis, which of the following policy combinations would most likely to
move the economy illustrated in Figure 11-4 to full employment?
a.
increase both taxes and government transfer payments
b.
reduction in government purchases and increase in taxes
c.
increase in government purchases and reduction in taxes
d.
increase in taxes to reduce the government deficit
92. What happens in the economy illustrated in Figure 11-4 if government purchases increase by the
amount necessary to achieve full employment?
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 unemployment increases.
d.
The AD curve shifts to the left, the price level increases, and employment decreases.
e.
The SRAS curve shifts to the left, the price level decreases, and long-run equilibrium is
achieved.
93. The marginal propensity to consume (MPC) is
a.
consumption expenditures divided by saving.
b.
consumption expenditures divided by disposable income.
c.
consumption expenditures divided by personal income.
d.
additional consumption expenditures divided by additional disposable income.
94. Government programs that automatically shift the government budget toward a deficit during
recessions and a surplus during recoveries are called
a.
discretionary fiscal policy.
b.
automatic stabilizers.
c.
progressive taxation.
d.
price deflators.
95. If fiscal policy is going to exert a stabilizing impact on the economy, it must be
a.
instituted by the Federal Reserve system.
b.
expansionary during an economic boom but restrictive during a recession.
c.
timed correctly.
d.
passed by a three-fifths majority in Congress.
96. The consumption function shows the relationship between
a.
planned consumption expenditures and disposable income.
b.
permanent income and savings.
c.
business inventory and real GDP.
d.
aggregate demand and aggregate consumption.
97. In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
a.
actual saving equals actual investment.
b.
planned aggregate expenditures equal total output.
c.
consumption equals income times the marginal propensity to consume.
d.
the marginal propensity to consume equals planned output.
98. According to the Keynesian view, an unanticipated reduction in spending will
a.
increase the demand for goods and services.
b.
raise business inventories and lead to a decline in output.
c.
lead to lower interest rates, which will stimulate aggregate demand and keep the economy
at full employment.
d.
lead to a lower price level, which will quickly guide the economy to full-employment
equilibrium.
99. Keynesian analysis implies that potential output and price stability can be achieved if
a.
the federal budget is balanced annually.
b.
marginal tax rates are kept low so the incentive to produce will be strong.
c.
aggregate demand is equal to the economy's full-employment rate of output.
d.
current saving exceeds the level of investment.
100. Which of the following is the best example of an automatic stabilizer?
a.
a balanced federal budget
b.
the minimum wage
c.
unemployment compensation program
d.
discretionary fiscal policy
101. When the spending of consumers, businesses, government, and foreigners (net exports) is less than the
current level of output, Keynesian analysis indicates that
a.
the economy’s output will fall short of its potential.
b.
prices will rise.
c.
equilibrium real GDP will increase.
d.
inventories will decline.
102. Which of the following is the primary source of changes in output within the framework of Keynesian
analysis?
a.
changes in the price level
b.
changes in aggregate demand
c.
changes in interest rates
d.
changes in wage rates
103. Which of the following would most likely cause an increase in aggregate demand?
a.
an increase in the corporate income tax
b.
an increase in interest rates
c.
an increase in the budget deficit
d.
an increase in personal income tax rates
104. If the federal government is running a budget deficit,
a.
the national debt will decline.
b.
it will have to either raise taxes or reduce expenditures next year.
c.
the U.S. Treasury will finance the deficit by issuing additional bonds.
d.
the supply of money will increase and the general level of prices will rise.
105. If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the
Keynesian model indicates the likely effect will be to
a.
counteract the recession.
b.
prolong the recession and increase its severity.
c.
end the recession sooner.
d.
increase the level of real GDP.
106. According to the Keynesian view, if policy makers thought the economy was about to fall into a
recession, which of the following would be most appropriate?
a.
a reduction in government expenditures and/or an increase in taxes
b.
an increase in government expenditures and/or a reduction in taxes
c.
make no policy changes because market forces will assure the maintenance of full
employment.
d.
maintain a balanced budget
107. Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its
budget surplus)
a.
is appropriate during a period of inflation.
b.
will increase the money supply.
c.
will stimulate aggregate supply and, thereby, promote employment.
d.
will stimulate aggregate demand and, thereby, promote employment.
ESSAY
108. What is fiscal policy? What is the relationship between fiscal policy and the federal budget?
109. How does Keynesian economic theory recommend that fiscal policy be conducted?
110. According to the Keynesian model, in what ways will expansionary fiscal policy stimulate aggregate
demand?
ANS:
111. What three types of timing problems might policy makers experience when conducting discretionary
fiscal policy?
112. Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?
