Page 1
1.
All of the following are sources of federal tax revenue EXCEPT:
A)
the personal income tax.
B)
sales taxes.
C)
social insurance taxes.
D)
the corporate profits tax.
2.
The federal government’s largest source of revenue is:
A)
property taxes.
B)
personal income and corporate profit taxes.
C)
sales taxes.
D)
social insurance taxes.
3.
Social insurance programs are:
A)
government programs intended to protect families against economic hardships.
B)
private insurance policies to protect families from hardships caused by government
actions.
C)
private insurance policies that cover gaps in government-provided health care.
D)
programs to help unemployed people have a social life.
4.
Which of the following is a government transfer?
A)
wages paid to U.S. senators
B)
purchases of tanks for the army
C)
Social Security payments to retired auto workers
D)
payments to contractors for repairs on interstate highways
5.
All of the following are sources of state and local revenue EXCEPT:
A)
social insurance taxes.
B)
property taxes.
C)
sales taxes.
D)
income taxes.
6.
Which of the following is NOT an example of government purchases of goods and
services?
A)
a federal prosecutor’s salary
B)
new pavement for interstate highway I-95
C)
a surgeon’s bill reimbursed under the Medicare program
D)
equipping U.S. air marshals with electroshock weapons
Page 2
7.
Which of the following is NOT an example of government transfers?
A)
Medicaid-paid prescription drugs for low-income individuals
B)
unemployment insurance
C)
a Social Security disability pension
D)
a reimbursement of personal income tax withheld from wages
8.
Government payments to households for which no good or service is provided in return
are called:
A)
transfer payments.
B)
government purchases.
C)
consumption expenditures.
D)
investment expenditures.
9.
Medicaid, Medicare, and Social Security are examples of:
A)
unilateral payments.
B)
transfer payments.
C)
monetary policy.
D)
taxes.
10.
The largest source of federal tax revenues is:
A)
property taxes.
B)
personal income taxes.
C)
corporate income taxes.
D)
sales taxes.
11.
Which of the following is the largest source of tax revenue for the U.S. federal
government?
A)
personal income taxes
B)
corporate profit taxes
C)
sales taxes
D)
social insurance taxes
12.
Which of the following is NOT a government transfer payment?
A)
the federal payroll
B)
Social Security
C)
Medicare
D)
Medicaid
Page 3
13.
Spending for Medicare and Medicaid accounts for approximately _____ of federal
spending.
A)
10%
B)
20%
C)
30%
D)
40%
14.
The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand.
A)
expansionary; increased
B)
expansionary; decreased
C)
contractionary; increased
D)
contractionary; decreased
15.
In the basic equation of national income accounting, GDP = C + I + G + X – IM, the
government directly controls _____ and influences _____ through fiscal policy.
A)
G; C and I
B)
T; G and C
C)
C; X and M
D)
I; G and T
16.
A change in taxes or a change in government transfers affects consumption through its
effect on:
A)
autonomous consumption.
B)
the marginal propensity to save.
C)
disposable income.
D)
government spending.
17.
The basic equation of national income accounting is GDP = C + I + G + X – IM. When
the government uses fiscal policy to make changes to taxes and transfers, this policy
primarily affects:
A)
IM.
B)
I.
C)
C.
D)
X.
18.
Consumer spending will likely rise if:
A)
government transfers rise.
B)
the government raises tax rates.
C)
government transfers fall.
D)
the government raises tax rates or government transfers fall.
Page 4
19.
Consumer spending will likely fall if:
A)
government transfers rise.
B)
the government raises tax rates.
C)
the government lowers tax rates.
D)
government transfers rise or tax rates are lowered.
20.
Which of the following is NOT a tool of fiscal policy?
A)
changing tax rates
B)
government transfers
C)
government purchases of goods and services
D)
changes in the money supply
21.
Suppose the economy is in a recessionary gap. To move equilibrium aggregate output
closer to the level of potential output, the best fiscal policy option is to:
A)
decrease government purchases.
B)
decrease taxes.
C)
decrease government transfers.
D)
increase real interest rates.
22.
If the actual output lies below potential output, then an appropriate fiscal policy would
be to _____, which will shift the _____ curve to the _____.
A)
increase government purchases; AD; left
B)
increase transfer payments; AS; right
C)
increase tax rates; AD; right
D)
increase government purchases; AD; right
23.
Suppose the economy is in an inflationary gap. To move equilibrium aggregate output
closer to the level of potential output, the best fiscal policy option is to:
A)
lower tax rates.
B)
decrease government purchases.
C)
increase the investment tax credit.
D)
lower the real interest rate.
24.
If the current equilibrium output lies above potential output, then an appropriate fiscal
policy would be to _____, which will shift the AD curve to the _____.
A)
decrease government purchases; right
B)
increase government purchases; left
C)
decrease government purchases; left
D)
raise tax rates; right
Page 5
Use the following to answer questions 25-29:
Figure: Short-Run Equilibrium
25.
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. Appropriate
fiscal policy action is:
A)
a decrease in transfer payments.
B)
an increase in government purchases.
C)
a decrease in tax rates.
D)
an increase in transfer payments.
26.
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. It reflects a
short-run inflationary gap. According to the labeling on the graph, the size of the
inflationary gap is equal to:
A)
P2 – P1.
B)
Y1 – YP.
C)
P2 – P0.
D)
P1 – P0.
27.
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the
economy is at equilibrium at Y1 and P1, it is in a(n):
A)
recessionary gap.
B)
inflationary gap.
C)
high level of unemployment.
D)
liquidity trap.
Page 6
28.
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the
economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy
to shift the aggregate demand curve to the _____.
A)
expansionary; right
B)
expansionary; left
C)
contractionary; right
D)
contractionary; left
29.
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the
economy is at equilibrium at Y1 and P1, the appropriate policy to return the economy to
potential output would be a(n):
A)
increase in transfer payments.
B)
increase in government spending.
C)
increase in taxes.
D)
decrease in taxes.
Use the following to answer questions 30-33:
Figure: Short- and Long-Run Equilibrium
30.
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run
Equilibrium. The government should _____ aggregate demand by _____ taxes to close
the _____ gap.
A)
expand; increasing; inflationary
B)
reduce; cutting; inflationary
C)
expand; cutting; recessionary
D)
reduce; increasing; recessionary
Page 7
31.
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run
Equilibrium. If the economy is at equilibrium at E1, it is in a(n):
A)
recessionary gap.
B)
inflationary gap.
C)
high level of unemployment.
D)
liquidity trap.
32.
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run
Equilibrium. If the economy is at equilibrium at E1, the government should use _____
fiscal policy to shift the aggregate demand curve to the _____ .
A)
expansionary; right
B)
expansionary; left
C)
contractionary; right
D)
contractionary; left
33.
(Figure: Short- and Long-Run Equilibrium) Look at the figure Short- and Long-Run
Equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the
economy to potential output is a(n):
A)
increase in transfer payments.
B)
decrease in transfer payments.
C)
increase in taxes.
D)
decrease in government spending.
34.
If the economy is at equilibrium below potential output, there is a(n) _____ gap, and
_____ fiscal policy is appropriate.
A)
recessionary; expansionary
B)
inflationary; expansionary
C)
recessionary; contractionary
D)
inflationary; contractionary
35.
Expansionary fiscal policy:
A)
increases long-run aggregate supply.
B)
decreases long-run aggregate supply.
C)
increases aggregate demand.
D)
decreases aggregate demand.
Page 8
36.
If the economy is at potential output and consumption spending suddenly decreases
because of a fall in consumer confidence, the appropriate fiscal policy is:
A)
a decrease in government transfers.
B)
an increase in government spending.
C)
a decrease in government spending.
D)
an increase in the money supply to decrease interest rates.
37.
Which of the following is an expansionary fiscal policy?
A)
an increase in the money supply that decreases interest rates
B)
an increase in taxes that reduces the budget deficit and decreases consumption
C)
a decrease in government spending
D)
an increase in unemployment benefits
38.
If the economy is at equilibrium above potential output, there is a(n) _____ gap, and
_____ fiscal policy is appropriate.:
A)
recessionary; expansionary
B)
inflationary; contractionary
C)
recessionary; contractionary
D)
inflationary; expansionary
39.
If overall spending declines and thus the economy contracts, the government could
counter this by:
A)
raising tax rates.
B)
decreasing government transfers.
C)
increasing government spending.
D)
decreasing government spending.
Page 9
Use the following to answer questions 40-43:
Figure: Short- and Long-Run Equilibrium II
40.
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run
Equilibrium II. Which of the following would be the appropriate response on the part of
the government upon viewing the state of the economy?
A)
Increase government spending to close the recessionary gap.
B)
Decrease government spending to close the recessionary gap.
C)
Lower tax rates to close the inflationary gap.
D)
Raise tax rates to close the inflationary gap.
41.
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run
Equilibrium II. If the economy is at equilibrium at E1, it is in a(n):
A)
recessionary gap.
B)
inflationary gap.
C)
high level of unemployment.
D)
liquidity trap.
42.
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run
Equilibrium II. If the economy is at equilibrium at E1, the government should use _____
fiscal policy to shift the aggregate demand curve to the _____.
A)
expansionary; right
B)
expansionary; left
C)
contractionary; right
D)
contractionary; left
Page 10
43.
(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run
Equilibrium II. If the economy is at equilibrium at E1, the appropriate policy to return
the economy to potential output would be a(n):
A)
increase in government spending.
B)
decrease in government spending.
C)
increase in transfer payments.
D)
decrease in taxes.
44.
A reduction in government transfers _____, therefore shifting the aggregate demand
curve to the _____.
A)
increases labor costs to companies, increasing investment; left
B)
decreases government purchases of goods and services, decreasing consumption;
right
C)
increases the marginal propensity to save, decreasing consumption; right
D)
decreases disposable income and consumption; left
45.
A cut in taxes _____, shifting the aggregate demand curve to the _____.
A)
decreases government transfers and consumption; right
B)
increases disposable income and consumption; right
C)
decreases the marginal propensity to save, increasing consumption; left
D)
increases corporate profits and investment; left
46.
An increase in government transfers is an example of _____ fiscal policy because it
shifts the aggregate demand curve to the _____ aggregate output.
A)
expansionary; left, increasing
B)
contractionary; left, decreasing
C)
expansionary; right, increasing
D)
contractionary; right, decreasing
47.
To close a recessionary gap with fiscal policy, the government could:
A)
increase national savings so that the interest rate falls.
B)
lower the annual income exempt from paying the personal income tax.
C)
lower the corporate income tax rate.
D)
lower the amount of unemployment insurance benefits.
Page 11
48.
To close an inflationary gap with fiscal policy, the government could:
A)
reduce budget allocations to interstate highway maintenance.
B)
increase federal subsidies to state universities.
C)
lower the corporate income tax rate.
D)
raise the average amount awarded for a disability pension.
49.
Contractionary fiscal policy includes:
A)
increasing government purchases.
B)
increasing government transfers.
C)
raising tax rates.
D)
decreasing money growth.
Use the following to answer questions 50-56:
Figure: Inflationary and Recessionary Gaps
50.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. At E1, the economy:
A)
is in equilibrium.
B)
has an inflationary gap.
C)
has a recessionary gap.
D)
has low unemployment.
Page 12
51.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. At E2, the economy:
A)
is in equilibrium.
B)
has an inflationary gap.
C)
has a recessionary gap.
D)
has high unemployment.
52.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. At E3, the economy:
A)
is in equilibrium.
B)
has an inflationary gap.
C)
has a recessionary gap.
D)
is stagnating.
53.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. A movement from AD1 to AD3 could be caused by:
A)
increased government purchases.
B)
decreased government transfers.
C)
higher tax rates.
D)
decreased government purchases.
54.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. A movement from AD3 to AD1 could be caused by:
A)
increased government purchases.
B)
increased government transfers.
C)
higher tax rates.
D)
lower tax rates.
55.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. Which of the following measures an inflationary gap?
A)
Y3 – Y1
B)
Y3 – Y2
C)
Y2 – Y1
D)
Y3 – Y0
Page 13
56.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. Which of the following measures a recessionary gap?
A)
Y3 – Y1
B)
Y3 – Y2
C)
Y2 – Y1
D)
Y3 – Y0
57.
A government might want to increase aggregate demand to:
A)
close an inflationary gap.
B)
close a recessionary gap.
C)
reduce prices.
D)
reduce employment.
58.
An inflationary gap occurs when:
A)
prices are too low.
B)
real output is too low.
C)
potential output exceeds actual output.
D)
actual output exceeds potential output.
Use the following to answer questions 59-63:
Figure: Fiscal Policy I
Page 14
59.
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is
in equilibrium at E1. If there is an increase in government purchases,_____ will shift to
the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; right; decrease; increase
60.
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is
in equilibrium at E2. If there is a decrease in government purchases, _____ will shift to
the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; right; decrease; increase
61.
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is
in equilibrium at E1. If there is a decrease in taxes, _____ will shift to the _____,
causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; right; decrease; increase
62.
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is
in equilibrium at E2. If there is an increase in taxes_____ will shift to the _____, causing
a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; right; decrease; increase
63.
(Figure: Fiscal Policy I) Look at the figure Fiscal Policy I. Suppose that this economy is
in equilibrium at E2. If there is an increase in government transfers_____ will shift to the
_____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; right; increase; increase
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; right; decrease; increase
Page 15
Use the following to answer questions 64-70:
Figure: Fiscal Policy II
64.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E1. If there is a decrease in government transfers, _____ will shift to
the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; left; decrease; decrease
65.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E2. If there is a decrease in government transfers, _____ will shift to
the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; left; decrease; decrease
Page 16
66.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E2. If there is an increase in government transfers, _____ will shift to
the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; right; increase; increase
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; left; decrease; decrease
67.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E1. If there is a decrease in government purchases, _____ will shift
to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; left; decrease; decrease
68.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E1. If there is an increase in government purchases, _____ will shift
to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD2; left; increase; decrease
B)
AD2; left; decrease; decrease
C)
AD1; right; increase; increase
D)
AD1; right; decrease; increase
69.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E1. If there is an increase in taxes, _____ will shift to the _____,
causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD1; left; increase; decrease
B)
AD1; left; decrease; decrease
C)
AD2; right; increase; increase
D)
AD2; right; decrease; increase
70.
(Figure: Fiscal Policy II) Look at the figure Fiscal Policy II. Suppose that this economy
is in equilibrium at E1. If there is a decrease in taxes, _____ will shift to the _____,
causing a(n) _____ in the price level and a(n) _____ in real GDP.
A)
AD1; right; increase; increase
B)
AD1; left; decrease; decrease
C)
AD2; right; increase; increase
D)
AD2; right; decrease; increase
Page 17
71.
Fiscal policy that increases aggregate demand is:
A)
balanced.
B)
supplemental.
C)
contractionary.
D)
expansionary.
72.
Fiscal policy that decreases aggregate demand is:
A)
balanced.
B)
supplemental.
C)
contractionary.
D)
expansionary.
73.
Expansionary fiscal policy includes:
A)
increasing taxes.
B)
increasing the money supply.
C)
decreasing government expenditures.
D)
increasing government expenditures.
74.
Expansionary fiscal policy includes:
A)
decreasing taxes.
B)
increasing taxes.
C)
increasing the money supply.
D)
decreasing government expenditures.
75.
Contractionary fiscal policy includes:
A)
decreasing taxes.
B)
decreasing the money supply.
C)
decreasing government expenditures.
D)
increasing government expenditures.
76.
Contractionary fiscal policy includes:
A)
decreasing taxes.
B)
increasing taxes.
C)
increasing the money supply.
D)
increasing government expenditures.
Page 18
77.
An expansionary fiscal policy either _____ government spending or _____ taxes.
A)
increases; increases
B)
decreases; increases
C)
increases; decreases
D)
decreases; decreases
78.
A contractionary fiscal policy either _____ government spending or _____ taxes.
A)
increases; increases
B)
decreases; increases
C)
increases; decreases
D)
decreases; decreases
79.
An expansionary fiscal policy:
A)
usually decreases a government budget deficit or increases a government budget
surplus.
B)
may include decreases in government spending.
C)
may include increases in taxes.
D)
may include decreases in taxes.
80.
A contractionary fiscal policy:
A)
decreases a government budget deficit or increases a government budget surplus.
B)
may include increases in government spending.
C)
may include reductions in taxes.
D)
may include discretionary increases in transfer payments.
81.
A recessionary gap can be closed with:
A)
contractionary monetary policy.
B)
an increase in taxes.
C)
a decrease in government purchases.
D)
expansionary fiscal policy.
82.
An inflationary gap can be closed with:
A)
expansionary monetary policy.
B)
a decrease in taxes.
C)
a decrease in government purchases.
D)
expansionary fiscal policy.
Page 19
83.
Expansionary fiscal policy shifts the aggregate demand curve to the _____ and is used
to close a(n) _____ gap.
A)
right; inflationary
B)
right; recessionary
C)
left; inflationary
D)
left; recessionary
84.
Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used
to close a(n) _____ gap.
A)
right; inflationary
B)
right; recessionary
C)
left; inflationary
D)
left; recessionary
85.
If there is an inflationary gap in the economy, discretionary fiscal policy will likely
include action to:
A)
shift aggregate demand to the right.
B)
prevent the aggregate demand curve from shifting.
C)
shift aggregate demand to the left.
D)
shift both aggregate demand and short-run aggregate supply to the left.
86.
If there is a recessionary gap, discretionary fiscal policy would likely include action to:
A)
shift aggregate demand to the right.
B)
shift aggregate demand to the left.
C)
leave aggregate demand alone and shift short-run aggregate supply to the left.
D)
shift aggregate demand to the right and shift short-run aggregate supply to the left.
Page 20
Use the following to answer questions 87-92:
Figure: Fiscal Policy Choices
87.
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a),
the economy is initially at output level Y1 and there is:
A)
an inflationary gap.
B)
a recessionary gap.
C)
equilibrium at full employment.
D)
no gap.
88.
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (b), if
real GDP is equal to Y1, there is:
A)
an inflationary gap.
B)
a recessionary gap.
C)
equilibrium at full employment.
D)
no gap.
89.
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be
appropriate to use contractionary fiscal policy to shift aggregate demand in _____ from
_____.
A)
panel (b); AD1 to AD2
B)
panel (a); AD2 to AD1
C)
panel (a); AD1 to AD2
D)
panel (b); AD2 to AD1
Page 21
90.
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be
appropriate to use expansionary fiscal policy to shift aggregate demand in _____ from
_____.
A)
panel (b); AD1 to AD2
B)
panel (a); AD2 to AD1
C)
panel (a); AD1 to AD2
D)
panel (b); AD2 to AD1
91.
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the
government uses discretionary fiscal policy for the economy in panel (a) when real GDP
is Y1, government spending is likely to be _____ and taxes are likely to be _____.
A)
reduced; cut
B)
increased; increased
C)
reduced; increased
D)
increased; cut
92.
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. If the
government uses discretionary fiscal policy for the economy in panel (b) when real GDP
is Y1, government spending is likely to be _____ and taxes are likely to be _____.
A)
reduced; cut
B)
increased; increased
C)
reduced; increased
D)
increased; cut
Use the following to answer questions 93-99:
Figure: Fiscal Policy Options
Page 22
93.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is AD, the most appropriate discretionary fiscal policy is to _____
government spending and _____ income tax rates.
A)
decrease; increase
B)
decrease; maintain
C)
increase; increase
D)
increase; maintain
94.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is AD’, the most appropriate discretionary fiscal policy is to _____
government spending and _____ income tax rates.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; maintain
95.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____
government spending and _____ income tax rates.
A)
increase; decrease
B)
increase; maintain
C)
decrease; decrease
D)
decrease; maintain
96.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____
government transfer payments and _____ income tax rates.
A)
decrease; increase
B)
decrease; decrease
C)
increase; maintain
D)
increase; decrease
97.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is AD:
A)
a contractionary fiscal policy may be warranted.
B)
an expansionary fiscal policy may be warranted.
C)
no change in discretionary fiscal policy is warranted.
D)
the economy is in an inflationary gap.
Page 23
98.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is AD’:
A)
a contractionary fiscal policy may be warranted.
B)
an expansionary fiscal policy may be warranted.
C)
the economy is in long-run equilibrium.
D)
the economy is experiencing an inflationary gap.
99.
(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate
demand curve is AD”:
A)
the economy is in long-run equilibrium.
B)
an expansionary fiscal policy may be warranted.
C)
a contractionary fiscal policy may be warranted.
D)
the economy is in a recessionary gap.
100.
Each of the following is an expansionary fiscal policy EXCEPT:
A)
an increase in government transfers.
B)
an increase in government purchases.
C)
an increase in tax rates.
D)
a reduction in marginal tax rates.
101.
A contractionary fiscal policy is one that reduces aggregate demand by decreasing:
A)
government purchases.
B)
the money supply.
C)
interest rates.
D)
taxes.
102.
Policy makers use a contractionary fiscal policy when they want to close:
A)
a recessionary gap.
B)
any kind of output gap.
C)
an inflationary gap.
D)
an open economy.
Page 24
Use the following to answer questions 103-104:
Figure: AD–AS
103.
(Figure: AD–AS) Look at the figure AD–AS. Suppose the economy is producing the
output level Yp and a negative demand shock shifts the AD1 curve to AD3. The economy
now has a(n) _____ gap, which can be closed by _____ fiscal policy.
A)
inflationary; expansionary
B)
recessionary; contractionary
C)
recessionary; expansionary
D)
inflationary; contractionary
104.
(Figure: AD–AS) Look at the figure AD–AS. Consider an economy that is producing an
output level of Y1. The economy has a(n) _____ gap, which can be closed by _____
fiscal policy.
A)
recessionary; expansionary
B)
inflationary; contractionary
C)
inflationary; expansionary
D)
recessionary; contractionary
105.
Which of the following is NOT an argument AGAINST the use of expansionary fiscal
policy?
A)
Government spending may crowd out private spending.
B)
Government borrowing may crowd out private investment spending.
C)
Government borrowing may reduce the marginal propensity to consume.
D)
Government budget deficits may lead to reduced private spending.
Page 25
106.
Government spending will NOT crowd out private spending if:
A)
all of the resources in the economy are employed.
B)
aggregate income is at its potential level.
C)
there is an inflationary gap.
D)
there is a recessionary gap.
107.
If _____, expansionary fiscal policy is most likely to crowd out private spending.
A)
the unemployment rate is 15%
B)
aggregate income is $500 billion above its potential level
C)
aggregate income is $800 billion below its potential level
D)
aggregate output is $300 billion below its potential level
108.
Government borrowing will not crowd out private investment spending if
unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n)
_____ in saving at each interest rate.
A)
high; increase; increase
B)
high; increase; decrease
C)
low; increase; decrease
D)
low; decrease; decrease
109.
After passage of the American Recovery and Reinvestment Act in 2009 government
borrowing _____, and interest rates_____.
A)
increased; increased to record levels
B)
increased; remained very low
C)
decreased; increased
D)
decreased; decreased
110.
Some argue that budget deficits will lead to reduced private spending because:
A)
the government will purchase so many goods and services that it will lead to a
shortage of consumer goods and services.
B)
budget deficits will reduce interest rates on savings and decrease consumers’
wealth.
C)
consumers, anticipating higher taxes, will reduce consumption to save money to
pay the future taxes.
D)
the government will have to increase transfer payments to finance the deficit.
Page 26
111.
The theory of Ricardian equivalence argues that expansionary fiscal policy:
A)
will have no effect on the economy because consumers, anticipating higher taxes to
pay for government spending, will decrease spending today to save for the higher
taxes.
B)
is not effective because it causes higher interest rates and crowds out investment
spending.
C)
is effective, but contractionary fiscal policy is not.
D)
is more effective than expansionary monetary policy.
112.
If the economy is at full employment, expansionary fiscal policy is most likely to lead
to:
A)
lower inflation rates.
B)
higher inflation rates.
C)
increases in unemployment.
D)
decreases in interest rates.
113.
One of the shortcomings of fiscal policy is that:
A)
it has significant time lags, which make it more effective.
B)
it takes effect immediately, so it is the best policy to use in an economic crisis.
C)
it affects aggregate demand indirectly through the interest rate.
D)
it has time lags, so sometimes it may end up destabilizing the economy.
114.
Government’s efforts to stabilize the business cycle through fiscal policy can destabilize
the economy because of:
A)
the time necessary to draw up a budget appropriate to the circumstances.
B)
a negative interaction between fiscal and monetary policy due to the multiplier
effect.
C)
a tendency of prices to change faster than the interest rate.
D)
business cycles that are closely synchronized to the political cycle.
115.
Discretionary fiscal policy may fail to stabilize the economy or may even make the
economy less stable because of:
A)
its ineffectiveness.
B)
government waste.
C)
lags in deciding on and implementing a policy change.
D)
the business cycle.
Page 27
116.
Time lags associated with policy decision making and implementation suggest that:
A)
increases in spending to fight a recessionary gap can be timed correctly.
B)
increases in spending to fight a recessionary gap may occur too early.
C)
increases in spending to fight a recessionary gap may occur too late.
D)
most information is old before the public is aware of it.
117.
Suppose the government increases taxes by more than is necessary to close an
inflationary gap. Which of the following is the most likely result?
A)
Equilibrium real GDP will be more than anticipated.
B)
The economy will move into a recession.
C)
The economy will generate a larger inflationary gap than anticipated.
D)
This will not have any adverse effects on the economy, since inflation has been
abated.
118.
Suppose the government increases spending more than is necessary to close a
recessionary gap. What is the most likely result?
A)
Inflation will increase.
B)
The price level will decline.
C)
The equilibrium real GDP will fall.
D)
The equilibrium real GDP will fall short of potential GDP.
119.
Decreasing funding for space exploration will shift the _____ curve to the _____.
A)
short-run aggregate supply; left
B)
short-run aggregate supply; right
C)
aggregate demand; left
D)
aggregate demand; right
120.
The decision to build more aircraft carriers to keep employment high is an example of:
A)
prudent defense spending.
B)
expansionary fiscal policy.
C)
neutral fiscal policy.
D)
being prepared to defend our country.
121.
All of the following are examples of fiscal policy EXCEPT:
A)
increasing Medicaid reimbursements.
B)
reducing the money supply to raise the interest rate.
C)
increasing personal income tax deductions for home ownership.
D)
reducing federal subsidies to state universities.
Page 28
122.
President Johnson’s use of a temporary 10% surcharge on income taxes is a classic
example of _____ policy.
A)
expansionary fiscal
B)
contractionary fiscal
C)
expansionary monetary
D)
contractionary monetary
123.
Assume that the marginal propensity to consume is 0.8 and potential output is $800
billion. The government spending multiplier is:
A)
0.8.
B)
1.25.
C)
5.
D)
4.
124.
Assume that marginal propensity to consume is 0.8 and potential output is $800 billion.
If the actual real GDP is $700 billion, _____ government spending by _____ would
bring the economy to potential output.
A)
increasing; $25 billion
B)
increasing; $100 billion
C)
increasing; $20 billion
D)
decreasing; $100 billion
125.
The multiplier effect of changes in government purchases of goods and services is equal
to:
A)
1 / (1 – MPS).
B)
1 / (1 – MPC).
C)
MPS / (1 – MPC).
D)
MPC / (1 – MPS).
126.
If the marginal propensity to save is 0.25, investment spending is $700 million, and the
government increases its purchases of goods and services by $100 million, then real
GDP increases by:
A)
$25 million.
B)
$175 million.
C)
$400 million.
D)
$2,800 million.
Page 29
127.
A $100 million increase in government spending increases equilibrium GDP by:
A)
$100 million.
B)
more than $100 million.
C)
less than $100 million.
D)
zero.
128.
If the marginal propensity to consume is 0.9, then the government spending multiplier
is:
A)
0.1.
B)
1.11.
C)
9.
D)
10.
129.
If the marginal propensity to consume is 0.8 and the government spending decreases by
$50 million, then equilibrium GDP will decrease by:
A)
$40 million.
B)
$50 million.
C)
$200 million.
D)
$250 million.
130.
If the government spends an extra $5 billion on goods and services, GDP will:
A)
go up by $5 billion.
B)
remain unchanged.
C)
increase by less than $5 billion.
D)
increase by more than $5 billion.
131.
If the marginal propensity to save is 0.1, then the government spending multiplier has a
value of
A)
0.1.
B)
9.
C)
10.
D)
0.11.
Page 30
Use the following to answer question 132:
Figure: Short-Run Equilibrium
132.
(Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. The
economy is in short-run equilibrium. To move the economy to potential GDP, the
government should reduce its spending by an amount equal to:
A)
(Y1 – YP).
B)
(Y1 – YP) / (1 – MPC).
C)
(Y1 – YP)MPC.
D)
(Y1 – YP)(1 – MPC).
133.
The income expenditure model predicts that if the marginal propensity to consume is
0.75 and the federal government increases spending by $100 billion, real GDP will
increase by:
A)
$100 billion.
B)
$750 billion.
C)
$400 billion.
D)
$300 billion.
134.
The income–expenditure model predicts that if the marginal propensity to consume is
0.8 and the federal government decreases spending by $200 billion, real GDP will fall
by:
A)
$160 billion.
B)
$200 billion.
C)
$800 billion.
D)
$1,000 billion.
Page 31
135.
The marginal propensity to consume is:
A)
equal to one.
B)
between zero and one.
C)
greater than one.
D)
often negative.
136.
If the marginal propensity to consume is 0.75, the multiplier for government purchases
of goods and services will be:
A)
0.75.
B)
1.33.
C)
4.
D)
7.5.
137.
If the marginal propensity to consume is 0.75 and government purchases of goods and
services decrease by $30 billion, real GDP will:
A)
increase by $30 billion.
B)
increase by $22.5 billion.
C)
decrease by $30 billion.
D)
decrease by $120 billion.
138.
If policy makers want to increase real GDP by $100 billion and the marginal propensity
to consume is 0.75, they should _____ government purchases of goods and services by
_____ .
A)
increase; $25 billion
B)
increase; $33 billion
C)
increase; $100 billion
D)
decrease; $100 billion
139.
If policy makers want to decrease real GDP by $100 billion and the marginal propensity
to consume is 0.6, they should _____ government purchases of goods and services by
_____ .
A)
decrease; $100 billion
B)
decrease; $60 billion
C)
decrease; $40 billion
D)
increase; $100 billion
Page 32
140.
A change in government transfers shifts the aggregate demand curve by _____ than a
change in government spending for goods and services and has a _____ effect on real
GDP.
A)
more; smaller
B)
more; larger
C)
less; smaller
D)
less; larger
141.
A change in taxes shifts the aggregate demand curve by _____ than a change in
government spending for goods and services and has a _____ effect on real GDP.
A)
more; smaller
B)
more; larger
C)
less; smaller
D)
less; larger
142.
For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100
billion in government purchases of goods and services is larger than the multiplier effect
of a tax cut of $100 billion because:
A)
the government pays a higher price than households for the same goods and
services.
B)
production of the goods and services the government purchases has a bigger impact
on real GDP than production of consumer goods.
C)
many households fail to file their income tax and claim their refund.
D)
in the first round of spending only $90 billion of the tax cut will be spent and $10
billion will be saved, while the entire $100 billion of government purchases will be
spent.
143.
If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer
payments is:
A)
less than 4.
B)
equal to 4.
C)
greater than 4.
D)
equal to 0.75.
144.
If the marginal propensity to consume is 0.75 and taxes increase by $30 billion, real
GDP will:
A)
increase by exactly $30 billion.
B)
decrease by exactly $30 billion.
C)
decrease by less than $120 billion.
D)
decrease by more than $120 billion.
Page 33
145.
If the marginal propensity to consume is 0.75 and transfer payments increase by $30
billion, real GDP will:
A)
increase by exactly $30 billion.
B)
decrease by exactly $30 billion.
C)
increase by more than $120 billion.
D)
increase by less than $120 billion.
146.
If policy makers want to increase real GDP by $100 billion and the marginal propensity
to consume is 0.75, they should _____ taxes by _____ .
A)
decrease; more than $25 billion
B)
decrease; less than $25 billion
C)
increase; more than $25 billion
D)
increase; less than $25 billion
147.
If policy makers want to decrease real GDP by $100 billion and the marginal propensity
to consume is 0.6, they should _____ transfer payments by _____ $40 billion.
A)
increase; less than
B)
increase; more than
C)
decrease; less than
D)
decrease; more than
148.
If the marginal propensity to consume is 0.9, then the tax multiplier will be:
A)
impossible to determine.
B)
greater than 10.
C)
less than 10.
D)
zero, because there is no multiplier effect from taxes.
149.
Suppose an economy is producing real GDP of $300 billion. The potential output is
equal to $400 billion, and the marginal propensity to consume is equal to 0.80. The
government should _____ taxes by _____ to bring the economy to potential output.
A)
raise; $25 billion
B)
cut; $33.33 billion
C)
raise; $33.33 billion
D)
cut; $25 billion
Page 34
150.
Consider an economy whose households save 20% of increases in their income. If the
government lowers its transfers by $100 billion, then the real GDP will:
A)
decrease by $125 billion.
B)
decrease by $400 billion.
C)
increase by $125 billion.
D)
decrease by $500 billion.
151.
Suppose that marginal propensity to consume is equal to 0.9 and the government
increases its spending by $200 billion. This increase in spending is financed by a $200
billion increase in taxes. As a result of this, GDP will:
A)
not change at all.
B)
decrease by $200 billion.
C)
increase by $2,000 billion.
D)
increase by $200 billion.
152.
Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by
$40 billion. Real GDP will _____ by _____.
A)
increase; $200 billion
B)
decrease; $200 billion
C)
increase; $160 billion
D)
decrease; $160 billion
153.
Assume that marginal propensity to consume is 0.8 and potential output is $800 billion.
The tax multiplier is:
A)
exactly 0.8.
B)
impossible to determine.
C)
greater than 5.
D)
less than 5.
154.
The multiplier effect of changes in government transfers is:
A)
greater than the multiplier effect of a change in government spending.
B)
zero because transfer payments do not affect aggregate demand.
C)
less than the multiplier effect of a change in government spending.
D)
impossible to determine.
Page 35
155.
If the marginal propensity to save is 0.25, investment spending is $600 million, and the
government increases its transfers by $100 million, then real GDP increases by:
A)
$25 million.
B)
$150 million.
C)
$300 million.
D)
$1,800 million.
156.
Changes in taxes and government transfers shift the aggregate demand curve _____
government purchases.
A)
by more than
B)
by exactly as much as
C)
by less than
D)
in inverse proportion to
157.
If the marginal propensity to consume is 0.1, then the tax multiplier is:
A)
exactly 0.1.
B)
more than 10.
C)
less than 10.
D)
exactly 10.
158.
If the marginal propensity to consume is 0.8 and government transfers decrease by $50
million, then equilibrium GDP will decrease by:
A)
$40 million.
B)
$50 million.
C)
$200 million.
D)
$250 million.
159.
A cut in taxes will have the most effect on aggregate demand if it is given to:
A)
people with a low marginal propensity to consume.
B)
people with a high marginal propensity to consume.
C)
everyone in the economy.
D)
those who hold a large amount of wealth.
160.
Discretionary fiscal policy entails:
A)
changing the money supply to influence interest rates and investment spending.
B)
using government spending or tax policy to affect aggregate demand.
C)
lifting trade barriers on imports.
D)
setting policy to raise the natural rate of unemployment.
Page 36
161.
Discretionary fiscal policy refers to changes in:
A)
interest rates.
B)
the money supply.
C)
government spending or taxes to close a recessionary or inflationary gap.
D)
taxes to account for externalities and control pollution.
162.
Suppose the government increases spending to fund tuition assistance for qualified
college students. Automatic stabilizers will _____ the _____ effect of the _____ in
aggregate demand.
A)
increase; contractionary; decrease
B)
decrease; contractionary; increase
C)
increase; expansionary; increase
D)
decrease; expansionary; increase
163.
Congress increases personal income tax rates to balance the budget. Automatic
stabilizers will _____ the _____ effect of the _____ in aggregate demand.
A)
increase; contractionary; decrease
B)
decrease; contractionary; decrease
C)
increase; expansionary; increase
D)
decrease; expansionary; increase
164.
When the economy expands, income tax receipts will:
A)
rise, but sales tax revenues will remain the same.
B)
fall, but sales tax revenues will rise.
C)
stay the same unless the government changes the tax rates.
D)
rise, and sales tax revenues will rise.
165.
The automatic stabilizer in government tax revenue that occurs when GDP rises _____
the multiplier.
A)
has no effect on
B)
increases
C)
decreases
D)
may either increase or decrease
166.
The fact that tax receipts fall during a recession:
A)
makes the multiplier stronger.
B)
has no impact on the multiplier.
C)
reduces the adverse effect of the initial fall in aggregate demand.
D)
acts as an automatic contractionary fiscal policy.
Page 37
167.
Fiscal policies that require no government action but that are expansionary when the
economy contracts and contractionary when the economy expands are known as:
A)
discretionary fiscal policy.
B)
automatic stabilizers.
C)
autonomous spending policies.
D)
destabilizing fiscal policies.
168.
Because the revenue from personal income taxes increases as disposable income
increases:
A)
the multiplier effect decreases.
B)
the marginal propensity to consume decreases as income increases.
C)
the multiplier effect increases.
D)
the marginal propensity to save increases as income decreases.
169.
Government tax revenue rises and falls with the business cycle as:
A)
the multiplier effect of taxes and government transfers.
B)
a discretionary fiscal policy.
C)
the multiplier effect of government purchases.
D)
an automatic stabilizer.
170.
Automatic stabilizers are government spending and taxation changes that cause fiscal
policy to be _____ when the economy contracts.
A)
expansionary
B)
contractionary
C)
neutral
D)
ineffective
171.
An example of an automatic stabilizer is:
A)
tax receipts rising when GDP rises.
B)
a discretionary increase in taxes.
C)
government purchases of goods and services rising when GDP rises.
D)
government transfers rising when GDP rises.
172.
An automatic stabilizer that works when the economy contracts is:
A)
a rise in tax receipts.
B)
a fall in government purchases.
C)
a discretionary decrease in government purchases.
D)
a rise in government transfers as more people receive unemployment insurance
benefits.
Page 38
173.
Which of the following is an automatic stabilizer?
A)
military spending
B)
unemployment compensation payments
C)
disability payments to war veterans
D)
Medicare payments
174.
Which statement is CORRECT?
A)
Automatic stabilizers indicate deliberate action by policy makers.
B)
Discretionary fiscal policy shows automatic adjustments without any specific effort
by policy makers.
C)
Discretionary fiscal policy indicates deliberate action by policy makers.
D)
Automatic stabilizers are risky to use and sometimes can get the economy
destabilized.
175.
When the economy is in a recession, tax receipts _____ and unemployment insurance
payments _____.
A)
decrease; increase
B)
increase; increase
C)
increase; decrease
D)
decrease; decrease
176.
If the government increases its spending when the economy is expanding, automatic
stabilizers _____ the government spending multiplier.
A)
may or may not affect
B)
will increase
C)
will not affect
D)
will decrease
177.
Government transfer payments rise when the economy is contracting and fall when the
economy is expanding. In this role, transfer payments are described as:
A)
automatic stabilizers.
B)
discretionary fiscal policy.
C)
balanced budget policy.
D)
deficit reduction policy.
Page 39
178.
Assume the marginal propensity to consume is 0.8 and potential output is $800 billion.
If actual real GDP is $700 billion, which of the following policies would bring the
economy to potential output?
A)
Decrease taxes by $100 billion.
B)
Increase taxes by $100 billion.
C)
Decrease taxes by $25 billion.
D)
Decrease government transfers by $25 billion.
179.
Assume the marginal propensity to consume is 0.8 and potential output is $800 billion.
If actual real GDP is $850 billion, which of the following policies would bring the
economy to potential output?
A)
Increase taxes by $50 billion.
B)
Increase taxes by $10 billion.
C)
Increase taxes by $12.5 billion.
D)
Increase transfers by $12.5 billion.
Use the following to answer questions 180-184:
Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There
are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.
180.
(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose actual real GDP in
Arcadia is 500 billion arcs. This economy has:
A)
a recessionary gap.
B)
production at the full employment level.
C)
an inflationary gap.
D)
a liquidity trap.
181.
(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. The government spending
multiplier is:
A)
5.
B)
0.75.
C)
4.
D)
3.
Page 40
182.
(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500
billion arcs, to restore the economy to potential output the government should _____ by
25 billion arcs.
A)
increase taxes
B)
decrease taxes
C)
increase spending
D)
decrease spending
183.
(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose the government
decides to tax its citizens. The tax multiplier is:
A)
greater than the government spending multiplier.
B)
less than the government spending multiplier.
C)
zero, because changes in taxes have no effect on aggregate demand.
D)
impossible to determine.
184.
(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose that actual output
is 700 billion arcs, and the government of Arcadia decides to tax its citizens. To bring
the economy to potential output, the government should:
A)
increase taxes by 33.33 billion arcs.
B)
increase taxes by 3.33 billion arcs.
C)
keep taxes at zero.
D)
increase both taxes and government spending by 0.33 billion arcs.
185.
Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase
real GDP by the largest amount.
A)
decrease in taxes
B)
increase in government purchases
C)
increase in transfer payments
D)
increase in government purchases, paid for by a $100 billion increase in taxes
186.
Assume that the marginal propensity to consume is 0.8 and potential output is $800
billion. If real GDP is $700 billion:
A)
there is an inflationary gap.
B)
there is a recessionary gap.
C)
the economy is in long-run equilibrium.
D)
government transfers should be decreased.
Page 41
187.
Assume that the marginal propensity to consume is 0.8 and potential output is $800
billion. If GDP is $850 billion:
A)
there is an inflationary gap.
B)
there is a recessionary gap.
C)
the economy is in long-run equilibrium.
D)
taxes should be decreased.
188.
Assume that the marginal propensity to consume is 0.8 and potential output is $800
billion. If real GDP is $850 billion, to bring the economy to potential output the
government should:
A)
decrease spending by $50 billion.
B)
increase spending by $50 billion.
C)
decrease transfers by $50 billion.
D)
decrease spending by $10 billion.
189.
Suppose the economy is operating at an output of $4,000 billion. Assume furthermore
that potential output is $5,000 billion and the marginal propensity to consume is 0.75.
_____ would close this recessionary gap.
A)
A $25 billion increase in government spending
B)
A $25 billion increase in taxes
C)
A $250 billion increase in government spending
D)
A $1,000 billion increase in government spending
190.
Suppose the economy is operating at an output level of $5,400 billion. Assume
furthermore that potential output is $5,000 billion and the marginal propensity to
consume is 0.75. _____ would close this inflationary gap.
A)
A $400 billion tax hike
B)
Raising government purchases of goods and services by $400 billion
C)
Decreasing government purchases of goods and services by $100 billion
D)
Increasing government purchases of goods and services by $100 billion
191.
Assume that the marginal propensity to consume is 0.8. Government purchases of
goods and services increase by $100 billion, financed by a $100 billion tax increase.
Real GDP will:
A)
expand by $100 billion.
B)
contract by $100 billion.
C)
expand by $500 billion.
D)
expand by $400 billion.
Page 42
192.
The federal budget tends to move toward _____ as the economy ____.
A)
deficit; contracts
B)
deficit; expands
C)
surplus; contracts
D)
a balanced budget; contracts
193.
Which of the following represents the government budget balance most accurately?
A)
T + G + TR
B)
T + G – TR
C)
T – G – TR
D)
T + TR – G
194.
A government budget surplus would be contractionary because of all of the following
EXCEPT _____ are contractionary.
A)
increases in government purchases
B)
decreases in government purchases
C)
increases in taxes
D)
decreases in government transfers
195.
The budget balance is calculated as:
A)
T – G – TR.
B)
T + G – TR.
C)
T – G + TR.
D)
T + G + TR.
196.
The government budget balance equals taxes _____ purchases _____ transfers.
A)
plus; plus
B)
minus; minus
C)
minus; plus
D)
plus; minus
197.
The effect of a government deficit is:
A)
contractionary.
B)
expansionary.
C)
neutral.
D)
biased.
Page 43
198.
A government surplus is contractionary because _____ are contractionary.
A)
increases in taxation
B)
increases in government purchases
C)
increases in government transfers
D)
decreases in taxation
199.
Expansionary fiscal policies:
A)
make the budget surplus smaller.
B)
make the budget deficit smaller.
C)
affect only taxes.
D)
affect only government purchases of goods and services.
200.
The government has a budget deficit if:
A)
its total revenues are equal to its total expenditures.
B)
its total revenues are less than its total expenditures.
C)
its total revenues are greater than its total expenditures.
D)
the money supply is less than total expenditures.
201.
The government has a budget surplus if _____ expenditures.
A)
its revenues are equal to
B)
its revenues are less than
C)
its revenues are greater than
D)
the money supply is less than
202.
If the government’s revenues are less than its expenditures, then it has a budget:
A)
deficit.
B)
surplus.
C)
balance.
D)
equality.
203.
If the government’s revenues are greater than its expenditures, then it has a budget:
A)
deficit.
B)
surplus.
C)
balance.
D)
equality.
Page 44
204.
Changes in the budget balance:
A)
can be the result of fluctuations in the economy.
B)
can cause fluctuations in the economy.
C)
can be both the result of and the cause of changes in the economy.
D)
are always bad idea.
205.
Which of the following fiscal policies would make a budget surplus smaller or a budget
deficit larger?
A)
an increase in government purchases of goods and services
B)
lower government transfers
C)
higher taxes
D)
lower interest rates
206.
Which of the following fiscal policies would make a budget surplus larger or a budget
deficit smaller?
A)
an increase in government purchases of goods and services
B)
lower government transfers
C)
lower taxes
D)
higher interest rates
207.
An increase in government spending of $300 billion and a tax cut of $300 billion will
have _____ effects on the budget balance and _____ effects on real GDP.
A)
equal; equal
B)
equal; unequal
C)
unequal; equal
D)
unequal; unequal
208.
An increase in government transfer payments of $250 billion and a tax cut of $250
billion will have _____ effects on the budget balance and _____ effects on real GDP.
A)
equal; equal
B)
equal; unequal
C)
unequal; equal
D)
unequal; unequal
209.
When the unemployment rate increases, the budget:
A)
is unaffected.
B)
tends to move into deficit.
C)
tends to move into a surplus.
D)
remains neutral.
Page 45
210.
Because of the role of automatic stabilizers and discretionary fiscal policy, the historical
record of the United States since 1970 shows that the budget tends to:
A)
move into a deficit during expansions.
B)
move into a surplus during recessions.
C)
move into a deficit during recessions.
D)
remain balanced throughout expansions and recessions.
211.
The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.
A)
more than
B)
less than
C)
about the same as
D)
inversely with
212.
If the economy is operating well below potential output, the cyclically adjusted budget
balance deficit is _____ than the actual budget balance.
A)
smaller than
B)
larger than
C)
unrelated to
D)
the same as
213.
The cyclically adjusted budget balance is an estimate of:
A)
the contractionary fiscal policy needed to close an inflationary gap.
B)
the tax increase needed to compensate for larger government transfers so that the
budget remains balanced.
C)
the expansionary fiscal policy needed to close a recessionary gap.
D)
what the budget balance would be if real GDP were exactly equal to potential
output.
214.
The cyclically adjusted budget balance refers to:
A)
the size of the budget in the current year.
B)
the average size of the budget over the long run.
C)
the swings in the budget as the business cycle changes.
D)
the budget balance if actual output were equal to potential output.
215.
Over the past few decades in the United States, large federal budget deficits most often
have been caused by:
A)
decreased spending on welfare payments.
B)
excessive spending by the state governments.
C)
a depressed economy.
D)
excessive tax increases.
Page 46
216.
A cyclically adjusted budget balance:
A)
shows what the budget balance would be with a significant amount of cyclical
unemployment.
B)
is an estimate of what the budget balance would be if real GDP were equal to
potential output.
C)
is a good indicator of the structural deficit in the economy.
D)
is the same as the national debt, and it rises as interest cost is accrued.
217.
The cyclically adjusted budget deficit:
A)
is no different from the actual budget deficit.
B)
fluctuates less than the actual budget deficit.
C)
fluctuates more than the actual budget deficit.
D)
remains unchanged throughout the business cycles.
218.
Budget deficits almost always:
A)
decrease with inflation and increase with deflation.
B)
increase when unemployment increases and fall when unemployment falls.
C)
decrease when unemployment increases and increase when unemployment falls.
D)
increase when the aggregate price level increases and fall when the aggregate price
level falls.
219.
When the unemployment rate decreases, the budget:
A)
will always be balanced.
B)
surplus gets smaller or the deficit gets larger.
C)
surplus gets larger or the deficit gets smaller.
D)
is unaffected.
220.
The cyclically balanced budget is important because it:
A)
is an estimate of the amount of expansionary fiscal policy necessary to close an
inflationary gap.
B)
is an estimate of the amount of contractionary fiscal policy necessary to close a
recessionary gap.
C)
indicates the amount of tax revenue that will be available for implicit liabilities.
D)
helps to determine whether the government’s taxing and spending policies are
sustainable in the long run.
Page 47
221.
Since 1964, the budget deficit _____ of GDP.
A)
has never been more than 12%
B)
has been as high as 50%
C)
has usually been 0%
D)
has usually been between 0% and –20%
222.
Do economists believe that the budget should be balanced each fiscal year?
A)
Yes, a budget should be balanced annually; otherwise persistent budget deficits can
cause havoc in the economy.
B)
Yes, as the law states that both the federal and state budgets should always be
balanced.
C)
Yes, since the balanced budget multiplier is larger, so it makes the economy grow
faster.
D)
No, a budget should be balanced only on average; it can be in a deficit during a
recession and offset by surpluses when the economy is doing well.
223.
States that are required by their constitution to have annually balanced budgets are
likely to _____ than those not required to balance their budget.
A)
have less severe business cycles
B)
have more severe business cycles
C)
grow faster
D)
have a better quality of life
224.
If legislation required the budget to be balanced at all times, _____ as an automatic
stabilizer of the business cycle.
A)
fiscal policy could not operate
B)
it would reduce the effectiveness of monetary policy
C)
it would increase the effectiveness of discretionary fiscal policy
D)
monetary policy could not operate
225.
Most economists believe that a balanced budget requirement would:
A)
undermine the role of taxes and transfers as automatic stabilizers.
B)
enhance the effect of automatic stabilizers.
C)
strengthen the ability of policy makers to conduct discretionary fiscal policy.
D)
not have any impact on the role of taxes and transfers as automatic stabilizers.
Page 48
226.
A law requiring the federal budget to be balanced each year would likely:
A)
make business cycles more severe.
B)
make business cycles less severe.
C)
not affect the severity of business cycles.
D)
increase the effectiveness of automatic stabilizers.
227.
The stability pact signed in 1999 by the European nations that adopted the euro required
each country to:
A)
balance its budget annually.
B)
keep its actual budget deficit below 3% of its GDP.
C)
keep its cyclically balanced budget below 3% of its GDP.
D)
supply a certain amount of euros each year.
228.
The new stability pact signed in 2011 by the nations that adopted the euro required each
country to:
A)
balance its budget annually.
B)
keep its actual budget deficit below 3% of its GDP.
C)
keep its structural budget balance to 0.5% or less of its GDP.
D)
supply a certain amount of euros each year.
229.
The stability pact signed by many of the countries that adopted the euro limited each
member nation’s deficit to 3% of GDP. This:
A)
enhanced member countries’ ability to conduct fiscal policy.
B)
enhanced member countries’ ability to conduct monetary policy.
C)
limited member countries’ ability to use fiscal policy.
D)
did away with budget deficits altogether.
230.
What can the federal government do to finance a deficit?
A)
cut taxes
B)
increase purchases of goods and services
C)
increase transfer payments
D)
borrow funds
Page 49
231.
What was the main financial problem that the government of Greece faced in 2009?
A)
It had a large budget surplus that it needed to invest, but it was unable to find
investments that offered a high rate of return.
B)
It had a large budget surplus, but the president vetoed attempts to use the surplus to
give tax refunds to the citizens.
C)
It had a large budget deficit, but the parliament refused to raise transfer payments
to reduce the deficit.
D)
It had a large budget deficit, but most of its creditors were unwilling to make loans
to Greece or charged extremely high interest rates to compensate them for the risk
of loss.
232.
Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal
year, its purchases of goods and services and its transfers are $2 trillion, and tax
revenues are $1.5 trillion. At the end of the fiscal year, the debt is:
A)
$10.5 trillion.
B)
$6.5 trillion.
C)
$9 trillion.
D)
$7.5 trillion.
233.
When the government has a deficit, it will most likely finance the deficit by:
A)
cutting the salaries of the president and Congress.
B)
selling some military bases.
C)
borrowing the money.
D)
charging higher admission fees at national parks.
234.
If government spending increases and taxes decrease:
A)
implicit liabilities will increase.
B)
implicit liabilities will decrease.
C)
the public debt will increase.
D)
the public debt will decrease.
235.
According to the text, the public debt of the U.S. federal government at the end of fiscal
year 2013 equaled about:
A)
$30 trillion.
B)
$12 trillion.
C)
$7.4 trillion.
D)
$4.8 trillion
Page 50
236.
When the budget is in deficit, the government generally:
A)
raises taxes.
B)
increases the public debt.
C)
sells public assets like national parks.
D)
decreases military spending.
237.
Public debt is:
A)
taxes minus government purchases minus government transfers.
B)
government debt held by foreigners.
C)
government debt held by individuals and institutions outside the government.
D)
the government deficit divided by GDP.
238.
Suppose that the budget deficit of a country remains level for five years. The federal
debt will:
A)
remain constant.
B)
fall.
C)
rise.
D)
either remain constant or fall.
239.
The national debt _____ when the federal government incurs a _____.
A)
falls; deficit
B)
rises; surplus
C)
stays the same; surplus
D)
rises; deficit
240.
The national debt:
A)
is the sum of all past federal surpluses.
B)
grows when the government runs a deficit.
C)
grows when the government runs a surplus.
D)
did not exist until 1998.
241.
The difference between a budget deficit and government debt is that:
A)
a deficit is the amount by which government spending exceeds tax revenues,
whereas debt is the sum of money the government owes.
B)
debt is the amount by which government spending exceeds tax revenues, whereas a
deficit is the sum of money the government owes.
C)
a deficit is measured as of a particular time, whereas debt is measured over time.
D)
a deficit harms the economy, whereas debt improves the economy.
Page 51
242.
In the United States in 2013, public debt accounted for about _____ of GDP.
A)
12%
B)
18%
C)
72%
D)
91%
243.
In Japan during the 1990s _____ policies were put into effect to _____.
A)
contractionary tax; counter inflation
B)
contractionary spending; counter inflation
C)
expansionary tax; counter inflation
D)
expansionary spending; prop up aggregate demand
244.
The U.S. national debt as a percentage of GDP is _____ that of Greece.
A)
slightly higher than
B)
equivalent to
C)
substantially higher than
D)
lower than
245.
When the government borrows funds to pay for budget deficits:
A)
planned aggregate spending decreases rather than increases.
B)
the multiplier effect of government purchases increases.
C)
private investment spending may be crowded out.
D)
the interest rate and savings decrease.
246.
The larger the amount of outstanding public debt:
A)
the lower the tax revenue the government must collect.
B)
the more spending the government can afford.
C)
the smaller the crowding out of private investment spending.
D)
the larger the fraction of the federal budget deficit that must be devoted to interest
payments.
247.
A government can pay off its debt if:
A)
GDP and the debt grow at the same rate.
B)
the ratio of debt to GDP is increasing.
C)
GDP grows faster than the debt.
D)
the debt grows faster than GDP.
Page 52
248.
Consider an economy that already has a sizable budget deficit. If the economy is facing
a major downturn, the government should:
A)
stimulate the economy by raising expenditure as long as the ratio of debt to GDP is
declining.
B)
stimulate the economy by raising expenditure irrespective of the ratio of debt to
GDP.
C)
not stimulate the economy by raising expenditure because of the burden of debt.
D)
not increase government expenditure, since the budget should be balanced.
249.
Fiscal experts in the United States are most concerned about the country’s:
A)
implicit liabilities.
B)
high ratio of debt to GDP.
C)
risk of debt default.
D)
low ratio of debt to GDP.
250.
If the average retirement age decreases:
A)
implicit liabilities will increase.
B)
implicit liabilities will decrease.
C)
implicit liabilities will be unaffected.
D)
the public debt will immediately increase.
251.
Spending promises made by governments that are effectively a debt, despite the fact that
they are not included in the usual debt statistics, are known as:
A)
implicit liabilities.
B)
explicit liabilities.
C)
implicit assets.
D)
explicit assets.
252.
Implicit liabilities of a government are:
A)
bonds held by foreigners.
B)
spending promises, like Social Security benefits, that are effectively debt although
no bond is associated with the promise.
C)
debt of a country adjusted for the price ratio.
D)
the ratio of a country’s debt to its GDP.
253.
Implicit liabilities refers to promises made by the government, such as:
A)
aid to foreign countries.
B)
building roads and bridges.
C)
Social Security and Medicare payments.
D)
contributions to the National Endowment for the Arts.
Page 53
254.
Social Security spending is projected to:
A)
increase as baby boomers retire.
B)
decrease as baby boomers retire.
C)
stay the same over the next decade.
D)
increase for this decade and then decline.
255.
The Social Security trust fund is the:
A)
cash held in a savings account by the government.
B)
government bonds held by the Social Security system.
C)
money held by the government from the Medicare tax.
D)
interest earned over time by the money from Social Security taxes.
256.
Spending promises made by the government that are effectively a debt, although they
are not included in the usual debt statistics, are known as:
A)
burden of debt.
B)
structural deficit.
C)
implicit liabilities.
D)
constructive debt.
257.
Real GDP equals $200 billion, the government collects 20% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of
the expenditure multiplier?
A)
1
B)
2
C)
2.8
D)
5
258.
Real GDP equals $200 billion, the government collects 20% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If the government
increases spending by $10 billion, real GDP will increase by:
A)
$10 billion.
B)
$20 billion.
C)
$27.8 billion.
D)
$50 billion.
Page 54
259.
Real GDP equals $200 billion, the government collects 20% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If potential output
equals $255.6 billion, the government could close the _____ gap by increasing
government spending by _____.
A)
recessionary; $20 billion
B)
recessionary; $55.6 billion
C)
inflationary; $20 billion
D)
inflationary; $55.6 billion
260.
Real GDP equals $400 billion, the government collects 25% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of
the multiplier?
A)
1
B)
2.5
C)
4
D)
5
261.
Real GDP equals $400 billion, the government collects 25% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If the government
decreases spending by $40 billion, real GDP will decrease by:
A)
$40 billion.
B)
$80 billion.
C)
$100 billion.
D)
$200 billion.
262.
Real GDP equals $400 billion, the government collects 25% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If potential output
equals $250 billion, the government could close the _____ gap by decreasing
government spending by _____.
A)
recessionary; $30 billion
B)
recessionary; $150 billion
C)
inflationary; $30 billion
D)
inflationary; $60 billion
263.
Fiscal policy is the use of taxes, government transfers, or government purchases to shift
the aggregate demand curve.
A)
True
B)
False
Page 55
264.
Medicare covers much of the cost of medical care for Americans with low incomes.
A)
True
B)
False
265.
The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate
demand.
A)
True
B)
False
266.
When faced with a recessionary gap, the government can increase taxes and cut
spending to close it.
A)
True
B)
False
267.
Expansionary fiscal policy pushes the aggregate demand curve to the right.
A)
True
B)
False
268.
Increased government transfers constitute contractionary fiscal policy.
A)
True
B)
False
269.
Lyndon Johnson’s tax surcharge was an expansionary fiscal policy that increased
aggregate demand.
A)
True
B)
False
270.
One of the lags associated with fiscal policy is the time it takes to recognize that the
economy has developed a recessionary or inflationary gap.
A)
True
B)
False
271.
Some economists argue that when a government tries too hard to stabilize the economy
through fiscal or monetary policy, it can end up making the economy less stable.
A)
True
B)
False
Page 56
272.
The size of the multiplier increases as the size of the marginal propensity to consume
increases.
A)
True
B)
False
273.
The marginal propensity to consume is the percentage of a household’s income that is
used to pay income tax.
A)
True
B)
False
274.
If the marginal propensity to consume is 0.80, the multiplier for government purchases
of goods and services will be 1.25.
A)
True
B)
False
275.
If the marginal propensity to consume is 0.8 and government purchases of goods and
services decrease by $30 billion, real GDP will decrease by $24 billion.
A)
True
B)
False
276.
An increase in government spending for goods and services is an autonomous increase
in aggregate demand.
A)
True
B)
False
277.
If policy makers want to increase real GDP by $100 billion and the marginal propensity
to consume is 0.75, they should increase government purchases of goods and services
by $75 billion.
A)
True
B)
False
278.
If policy makers want to decrease real GDP by $100 billion and the marginal propensity
to consume is 0.6, they should decrease government purchases of goods and services by
$40 billion.
A)
True
B)
False
Page 57
279.
A change in government transfers shifts the aggregate demand curve by more than a
change in government spending for goods and services and has a larger effect on real
GDP.
A)
True
B)
False
280.
A change in taxes shifts the aggregate demand curve by less than a change in
government spending for goods and services and has a smaller effect on real GDP.
A)
True
B)
False
281.
For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100
billion in government purchases of goods and services is smaller than the multiplier
effect of a tax cut of $100 billion.
A)
True
B)
False
282.
The multiplier effect of an increase in transfer payments is smaller than that of an equal
increase in government purchases of goods and services because some of the transfer
payment is likely to be saved.
A)
True
B)
False
283.
The tax and government transfer payment multiplier is smaller than the government
purchases multiplier because all of an increase in government purchases is spent, only
some of tax cuts or increases in government transfers is spent.
A)
True
B)
False
284.
Suppose the marginal propensity to consume is 0.8. If the government cut taxes by $100
billion, then real GDP would increase by $400 billion.
A)
True
B)
False
285.
The tax multiplier for someone living below the poverty line is smaller than the tax
multiplier for someone with an annual income of $1 million.
A)
True
B)
False
Page 58
286.
If the marginal propensity to consume is 0.8, the multiplier for taxes and transfer
payments will be more than 5.
A)
True
B)
False
287.
If the marginal propensity to consume is 0.8 and government transfers decrease by $30
billion, real GDP will decrease by less than $150 billion.
A)
True
B)
False
288.
If policy makers want to increase real GDP by $100 billion and the marginal propensity
to consume is 0.75, they should increase government transfers by $75 billion.
A)
True
B)
False
289.
If policy makers want to decrease real GDP by $100 billion and the marginal propensity
to consume is 0.6, they should increase taxes by more than $40 billion.
A)
True
B)
False
290.
The effect of automatic stabilizers is to increase the size of the multiplier.
A)
True
B)
False
291.
If government purchases decrease so the budget may be balanced, some government
transfers will automatically increase, reducing the multiplier effect.
A)
True
B)
False
292.
Taxes increase as GDP rises. This is an example of an automatic stabilizer.
A)
True
B)
False
293.
Discretionary government spending is an automatic stabilizer.
A)
True
B)
False
Page 59
294.
Discretionary fiscal policy is the direct result of deliberate actions by policy makers
rather than an automatic adjustment.
A)
True
B)
False
295.
The Works Progress Administration, a government program that put millions of
unemployed Americans to work building bridges, roads, and parks in the 1930s, was an
automatic stabilizer.
A)
True
B)
False
296.
Automatic stabilizers are government spending and taxation rules that cause fiscal
policy to be automatically expansionary when the economy contracts and automatically
contractionary when the economy expands.
A)
True
B)
False
297.
Automatic stabilizers are government spending and taxation rules that cause fiscal
policy to be automatically contractionary when the economy contracts and automatically
expansionary when the economy expands.
A)
True
B)
False
298.
Medicaid, food stamps, and sales taxes are all automatic stabilizers.
A)
True
B)
False
299.
A lump sum tax is a tax whose rate increases as income increases.
A)
True
B)
False
300.
A budget deficit necessarily indicates that fiscal policy is expansionary.
A)
True
B)
False
Page 60
301.
Higher government transfers or lower taxes make a budget surplus smaller or a budget
deficit larger.
A)
True
B)
False
302.
Lower government transfers or higher taxes make a budget surplus smaller or a budget
deficit larger.
A)
True
B)
False
303.
Fiscal policy measures of the same dollar amounts will have equal effects on the budget
balance but may change real GDP by different amounts.
A)
True
B)
False
304.
An increase in government transfer payments of $100 billion and a tax cut of $100
billion will have equal effects on the budget balance and unequal effects on real GDP.
A)
True
B)
False
305.
Changes in the budget balance may be the result of economic policy, or they may be
caused by fluctuations in the economy.
A)
True
B)
False
306.
The business cycle and the budget balance are unrelated.
A)
True
B)
False
307.
The budget deficit usually decreases when the unemployment rate increases.
A)
True
B)
False
308.
The cyclically balanced budget is an estimate of what the budget balance would be if
real GDP were exactly equal to potential output.
A)
True
B)
False
Page 61
309.
The cyclically balanced budget is an estimate of what the budget balance would be
during a recessionary gap with real GDP less than potential output.
A)
True
B)
False
310.
The cyclically balanced budget deficit doesn’t fluctuate as much as the actual budget
deficit.
A)
True
B)
False
311.
In most years since 1970, the actual budget deficit has been more than 25% of GDP.
A)
True
B)
False
312.
Most economists oppose a constitutional amendment requiring the federal budget to be
balanced annually.
A)
True
B)
False
313.
Most economists believe that the government should balance the budget on average,
allowing deficit years when the economy is in recession to be offset by surpluses during
years of expansion.
A)
True
B)
False
314.
If the government were required to balance the budget during a recession, it would have
to decrease taxes and increase government spending.
A)
True
B)
False
315.
If the government were required to balance the budget during a recession, it would have
to increase taxes and decrease government spending.
A)
True
B)
False
Page 62
316.
Most economists oppose an annually balanced budget because it would undermine
automatic stabilizers.
A)
True
B)
False
317.
In 1999 many European countries signed a stability pact in which they agreed to accept
the dollar as their common currency.
A)
True
B)
False
318.
In 1999 many European countries signed a stability pact in which they agreed to limit
their actual budget deficits to less than 3% of their country’s GDP.
A)
True
B)
False
319.
In 2011 many European countries signed a stability pact in which they agreed to keep
their structural budget balanced.
A)
True
B)
False
320.
The main problem with the European stability pacts of 1999 and 2011 was that they
forced countries to follow contractionary fiscal policies during a recession to keep the
budget deficit to the required level.
A)
True
B)
False
321.
In the United States 49 of the 50 states are required to have an annually balanced
budget, which worsens the severity of the business cycle.
A)
True
B)
False
322.
The main problem facing the government of Greece in 2009 was that it had a large
budget surplus.
A)
True
B)
False
Page 63
323.
In 2009 many lenders refused to make more loans to Greece because they were not
confident that Greece was able to repay its debt.
A)
True
B)
False
324.
In 2009 Greece received emergency loans from other European countries and the
International Monetary Fund. These loans required the Greek government to cut
spending, which worsened the Greek recession.
A)
True
B)
False
325.
A fiscal year for the federal government runs from January 1 to December 31.
A)
True
B)
False
326.
Public debt is government debt held by individuals and institutions outside the
government.
A)
True
B)
False
327.
If at the beginning of the year the public debt is $12 trillion, government spending and
transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the year the public
debt is $13 trillion.
A)
True
B)
False
328.
If debt increases faster than GDP, the ratio of debt to GDP will fall.
A)
True
B)
False
329.
When governments borrow in financial markets to pay for budget deficits, interest rates
may increase and crowd out private investment spending.
A)
True
B)
False
Page 64
330.
As a country’s public debt grows, the portion of its budget devoted to interest payments
on the debt will decrease.
A)
True
B)
False
331.
If a country has a very high level of public debt, lenders may insist on austerity
measures of raising taxes and decreasing government spending, which worsens
economic conditions.
A)
True
B)
False
332.
The ratio of debt to GDP is a way to assess the ability of a government to pay its debts
because it is an indicator of the taxes that the government can collect to pay the debt.
A)
True
B)
False
333.
If the ratio of debt to GDP increases over time, it means that the government’s burden of
paying the debt is decreasing and default is less likely.
A)
True
B)
False
334.
If a government has large consecutive budget deficits and if the public debt is growing
faster than GDP, its ratio of debt to GDP will increase.
A)
True
B)
False
335.
If a government has large consecutive budget deficit but its GDP is growing faster than
its debt, the ratio of debt to GDP will increase.
A)
True
B)
False
336.
The promise to pay Social Security benefits to the baby boomers is an example of the
implicit liabilities of the U.S. government.
A)
True
B)
False
337.
What is meant by the term social insurance? Give an example of a social insurance
program.
Page 65
338.
The economy is in a recessionary gap. What are the fiscal policy options available to the
government?
339.
The economy is in an inflationary gap. What are the fiscal policy options available to
the government?
340.
Many economists caution against extremely active stabilization policy because of time
lags in its use. Explain this rationale.
341.
Suppose that real GDP is $500, potential GDP is $1,000, and the marginal propensity to
consume is 0.9. If the government is going to spend and does not impose taxes, what
specific fiscal policy action should policy makers take?
342.
Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity
to consume is 0.8. If the government is going to close the gap by changing government
purchases of goods and services and imposes no taxes, what specific fiscal policy action
should policy makers take?
343.
Suppose that real GDP is $1,300, potential GDP is $1,800, and the marginal propensity
to consume is 0.6. If the government is going to close the gap by changing government
purchases of goods and services and imposes no taxes, what specific fiscal policy action
should policy makers take?
344.
Why does a $1,000 tax cut generate a smaller multiplier effect than a $1,000 increase in
government purchases?
345.
Explain the difference between automatic stabilizers and discretionary fiscal policy
measures. Provide examples to clarify the distinctions.
346.
Suppose that economic policy makers want to increase real GDP by $100 with as little
impact on the budget balance as possible. Should they increase government purchases of
goods and services, increase transfer payments, or decrease taxes?
347.
Why does the budget surplus get smaller or the deficit get larger, even without
discretionary fiscal policy, when unemployment increases?
Page 66
348.
Explain why a constitutional amendment requiring the federal government to balance
the budget annually is a bad idea.
349.
Most economists do not support a law that requires the federal budget to be balanced
every year. Explain why.
350.
The primary taxes at the U.S. federal level are:
A)
the property tax, sales taxes, and income taxes.
B)
personal income taxes, corporate profit taxes, and social insurance taxes.
C)
sales taxes and fees.
D)
property taxes and user fees.
351.
In terms of dollar costs, in the United States the three primary transfer payments are:
A)
Social Security, Medicare, and Medicaid.
B)
Social Security, education, and welfare.
C)
welfare, interest payments on the debt, and military spending.
D)
Social Security, interest payments on the debt, and education.
352.
Sales taxes, property taxes, income taxes, and fees of various kinds:
A)
fund government spending at the federal level.
B)
provide revenue for state and local governments.
C)
are the state governments’ least used types of revenue generation.
D)
are implicit liabilities.
353.
Transfer payments are payments that:
A)
governments make to households although the government did not receive a good
or service from the household.
B)
governments make to households when the government receives a good or service.
C)
erode the purchasing power of the economy.
D)
are essentially tax refunds.
354.
Social insurance is:
A)
essentially any type of spending by the federal government.
B)
available only when the economy is in an inflation.
C)
a government program designed to protect individuals or families from economic
hardship.
D)
available only when the economy is below the full employment level.
Page 67
355.
If the economy exhibited an inflationary gap, the government should follow a(n) _____
policy, which would shift the AD curve to the _____.
A)
expansionary; right
B)
contractionary; right
C)
expansionary; left
D)
contractionary; left
356.
When potential output is less than actual aggregate output:
A)
the economy faces an inflationary gap.
B)
the SRAS curve intersects the AD curve to the left of the LRAS curve.
C)
the government should follow an expansionary policy to correct the problem.
D)
a decrease in taxes would solve the problem.
357.
When the government decreases spending, the:
A)
AD curve will shift to the left.
B)
SRAS curve will shift to the left.
C)
budget balance will move toward a deficit.
D)
government debt will increase.
358.
An economy is in the midst of a recession. A government policy aimed at moving the
economy back to potential GDP is:
A)
an increase in taxes.
B)
an increase in government purchases for infrastructure improvements.
C)
an increase in the property tax.
D)
a decrease in unemployment benefits.
359.
An expansionary fiscal policy:
A)
in the presence of a budget deficit would decrease the government debt.
B)
would shift AD to the right and increase the government budget deficit.
C)
would shift AD to the left and decrease the government budget deficit.
D)
would not be effective in the presence of a budget surplus.
360.
Time lags make:
A)
fiscal policy more effective than monetary policy.
B)
monetary policy more effective than fiscal policy.
C)
correct use of both fiscal and monetary policy challenging.
D)
both fiscal and monetary policy more effective.
Page 68
361.
Time lags in the implementation of fiscal policy:
A)
make use of fiscal policy easier.
B)
render such policies useless.
C)
must be considered in implementation.
D)
are less problematic than those facing monetary policy.
362.
Holding everything else constant, the multiplier effect for taxes is _____ that for
changes in autonomous aggregate spending.
A)
the same as
B)
less than
C)
bigger than
D)
not relevant to
363.
The marginal propensity to consume:
A)
is the change in consumption divided by the change in saving.
B)
is usually higher for unemployed individuals than for people who are very wealthy.
C)
is equal to the marginal propensity to save plus 1.
D)
tells policy makers the additional amount of investment spending that would
accompany an additional amount of government spending.
364.
When policy makers make a deliberate fiscal policy decision:
A)
it is called discretionary fiscal policy.
B)
it is an example of an automatic stabilizer.
C)
no lag effects will result.
D)
the value of the multiplier will be reduced.
365.
Automatic stabilizers act like:
A)
automatic expansionary fiscal policy when the economy is in inflation.
B)
automatic expansionary fiscal policy when the economy is in a recession.
C)
an additional multiplier effect.
D)
automatic contractionary policy when the economy is in a recession.
366.
When the government decides to increase taxes to fight an inflationary gap, it is:
A)
most likely to increase the budget deficit.
B)
an example of discretionary fiscal policy.
C)
an example of an automatic stabilizer.
D)
likely to dampen the effects of inflation but not to lead to a correction.
Page 69
367.
The government’s budget balance is:
A)
T – G.
B)
G – T – TR.
C)
T – G – TR.
D)
T + TR – G.
368.
During a recessionary gap:
A)
holding everything else constant, the budget deficit would increase.
B)
contractionary fiscal policy would help correct this problem.
C)
an increase in taxes or a decrease in government purchases would shift the AD
curve to the right.
D)
unemployment would most likely be falling.
369.
Holding everything else constant, the government’s budget balance during an expansion
will:
A)
move toward a larger surplus or reduced deficit.
B)
remain the same.
C)
move toward a reduced deficit or a smaller surplus.
D)
be equal to 100.
370.
Economists generally believe that during an expansion, an economy should:
A)
balance its budget.
B)
run a budget deficit.
C)
run a budget surplus.
D)
be able to pay off all of its debt.
371.
The government deficit:
A)
is essentially the same as the government debt.
B)
is much higher than the government debt.
C)
measures the difference between the amount government spends and the amount it
collects in tax revenues in a given period.
D)
is the total amount of money a government owes at a particular time.
372.
Public debt is:
A)
the total debt owed by the government to individuals and institutions outside of
government.
B)
the total amount that the government owes during a given fiscal year.
C)
likely to increase when the government uses contractionary fiscal policy.
D)
the amount that the government owes itself.
Page 70
373.
The public ratio of debt to GDP for the United States in 2013 was:
A)
more or less the same as that of other wealthy countries.
B)
the largest ratio in the world.
C)
less than 5%.
D)
over 200%.
374.
A government encounters a recessionary gap and uses expansionary fiscal policy to
correct the problem. It may:
A)
find the policy ineffective, especially if the level of public debt is already very
high, since additional government borrowing may put pressure on future budgets.
B)
find the policy ineffective if it has to borrow to increase government spending.
C)
cause its budget balance to move toward a surplus.
D)
decrease the level of public debt in the short run.
375.
_____ occur(s) when government spending results in persistent deficits that necessitate
borrowing, leading to a reduction in private investment.
A)
Implicit liabilities
B)
Transfer payments
C)
Crowding out
D)
Automatic stabilizers
376.
If a government’s debt is increasing but its GDP is increasing faster, the government’s:
A)
total debt is falling.
B)
ratio of debt to GDP is falling.
C)
deficit is falling.
D)
ability to pay is falling.
377.
Social Security and Medicare:
A)
are implicit liabilities.
B)
are often included in debt statistics.
C)
are discretionary types of fiscal policy.
D)
result in less spending by government.
378.
Funding for Social Security and Medicare:
A)
must come from government borrowing.
B)
comes from dedicated taxes.
C)
is likely to increase with the retirement of baby boomers.
D)
can be accomplished with lower taxes in the future.
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379.
The multiplier effect of government purchases of goods and services:
A)
has a more direct and bigger impact than an equal amount of tax changes.
B)
has a less direct and smaller impact than an equal amount of tax changes.
C)
is a type of automatic stabilizer.
D)
is useful for recessions but not for inflation.
380.
The 2009 American Recovery and Reinvestment Act was an example of:
A)
an automatic stabilizer.
B)
a contractionary government policy.
C)
a contractionary monetary policy.
D)
an expansionary fiscal policy.
381.
The inclusion of a tax rate in the model results in a new multiplier that is:
A)
larger than the original multiplier.
B)
the same as the original multiplier if the economy is in a recession.
C)
smaller than the original multiplier.
D)
not affected by automatic stabilizers.
382.
If the tax rate is 0.1 and the marginal propensity to consume is 0.5, the multiplier is:
A)
2.
B)
1.8.
C)
2.1.
D)
1.
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Answer Key
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