57)
Economists refer to the series of induced increases in consumption spending that result from an
initial increase in autonomous expenditures as the ________ effect.
57)
A)
expenditure
B)
consumption
C)
aggregate demand
D)
multiplier
58)
The aggregate demand curve will shift to the right ________ the initial increase in government
purchases.
58)
A)
by less than
B)
sometimes by more than and other times by less than
C)
by the same amount as
D)
by more than
59)
Stabilization policy is used by the federal government to
59)
A)
offset the effects of inflation.
B)
stabilize foreign–exchange rates.
C)
offset the effects of the business cycle on the economy.
D)
stabilize interest rates.
60)
Compare the effect on the price level and real GDP of a decrease in tax rates assuming a
supply–side effect versus no supply–side effect. Compared to no supply–side effect, including a
supply–side effect for the decrease in tax rates will cause the price level to increase ________ and
real GDP to increase ________.
60)
A)
more; more
B)
less; less
C)
more; less
D)
less; more
61)
An increase in government purchases will increase aggregate demand because
61)
A)
the decline in the interest rate will increase demand.
B)
the decline in the price level will increase demand.
C)
consumption expenditures are a component of aggregate demand.
D)
government expenditures are a component of aggregate demand.
62)
From the 1960s to 2007, transfer payments
62)
A)
have declined by half as a percentage of total federal government expenditures.
B)
have grown very slowly as a percentage of total federal government expenditures.
C)
have risen from about 25 percent to 44 percent of federal government expenditures.
D)
remained the same percentage of total federal government expenditures.
Figure 17–2
63)
Refer to Figure 17–2. In the dynamic model of AD–AS in the figure above, if the economy is at
point A in year 1 and is expected to go to point B in year 2, the Congress and the president would
most likely
63)
A)
increase taxes.
B)
increase government spending.
C)
lower interest rates.
D)
decrease government spending.
E)
increase oil prices.
64)
The impact of crowding out may be least
64)
A)
during a deep recession.
B)
when real GDP is above but close to potential GDP.
C)
when real GDP is below but close to potential GDP.
D)
during an expansion.
65)
Expansionary fiscal policy involves
65)
A)
decreasing the money supply and increasing interest rates.
B)
increasing taxes or decreasing government purchases.
C)
increasing the money supply and decreasing interest rates.
D)
increasing government purchases or decreasing taxes.
Figure 17–2
66)
Refer to Figure 17–2. In the dynamic model of AD–AS in the figure above, if the economy is at
point A in year 1 and is expected to go to point B in year 2, the president and the Congress would
most likely pursue
66)
A)
contractionary monetary policy.
B)
contractionary automatic stabilizers.
C)
contractionary fiscal policy.
D)
expansionary monetary policy.
E)
expansionary fiscal policy.
E
D
67)
The aggregate demand curve will shift to the left ________ the initial decrease in government
purchases.
67)
A)
sometimes by more than and other times by less than
B)
by the same amount as
C)
by more than
D)
by less than
Figure 17–4
68)
Refer to Figure 17–4. In the graph above, if government purchases increased by $50 billion, then the
distance from point A to point B would be ________ $50 billion.
68)
A)
less than
B)
equal to
C)
may be greater than or less than
D)
greater than
69)
Tax cuts on business income ________ aggregate demand.
69)
A)
would not change
B)
may increase or decrease
C)
would decrease
D)
would increase
70)
Which of the following is considered contractionary fiscal policy?
70)
A)
The New Jersey legislature cuts highway spending to balance its budget.
B)
Congress increases defense spending.
C)
Congress increases the income tax rate.
D)
Legislation removes a college tuition deduction from federal income taxes.
71)
The crowding out of private spending by government spending will be greater the
71)
A)
more sensitive consumption, investment, and net exports are to changes in the price level.
B)
less sensitive consumption, investment, and net exports are to changes in the price level.
C)
more sensitive consumption, investment, and net exports are to changes in interest rates.
D)
less sensitive consumption, investment, and net exports are to changes in interest rates.
72)
The use of fiscal policy to stabilize the economy is limited because
72)
A)
the legislative process can be slow, which means that it is difficult to make fiscal policy
actions in a timely way.
B)
changes in government spending and tax rates have a small effect on interest rates.
C)
the Internal Revenue Service (IRS) resists changes in tax rates, because of all the changes they
would have to make to the tax code.
D)
changes in government spending and tax rates have a small effect on aggregate demand.
73)
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause
the inflation rate to be ________ and real GDP to be ________.
73)
A)
lower; higher
B)
higher; higher
C)
higher; lower
D)
lower; lower
74)
Which of the following is a reason why we should consider the federal national debt a problem?
74)
A)
If the debt was incurred to finance improvements in infrastructure, crowding out will occur.
B)
The federal government is in danger of defaulting on its debt.
C)
If the debt drives up interest rates, crowding out will occur.
D)
If the debt was incurred to finance research and development, crowding out will occur.
75)
Crowding out refers to a decline in ________ as a result of an increase in ________.
75)
A)
tax revenues; unemployment
B)
government purchases; tax rates
C)
private expenditures; government purchases
D)
government purchases; private expenditures
76)
Tax cuts on business income increase aggregate demand by increasing
76)
A)
consumption spending.
B)
business investment spending.
C)
government spending.
D)
wage rates.
77)
The increase in the amount the government collects in taxes when the economy expands and the
decrease in the amount the government collects in taxes when the economy goes into a recession is
an example of
77)
A)
discretionary fiscal policy.
B)
automatic monetary policy.
C)
automatic stabilizers.
D)
discretionary monetary policy.
78)
The automatic budget surpluses and budget deficits that occur in the federal budget over the
business cycle
78)
A)
increase potential GDP.
B)
destabilize the economy.
C)
decrease potential GDP.
D)
stabilize the economy.
79)
A change in consumption spending caused by income changes is ________ change in spending, and
a change in government spending that occurs to improve roads and bridges is ________ change in
spending.
79)
A)
an autonomous; an induced
B)
an expansionary; a contractionary
C)
a contractionary; an expansionary
D)
an induced; an autonomous
80)
The increase in government spending on unemployment insurance payments to workers who lose
their jobs during a recession and the decrease in government spending on unemployment
insurance payments to workers during an expansion is an example of
80)
A)
automatic stabilizers.
B)
automatic monetary policy.
C)
discretionary monetary policy.
D)
discretionary fiscal policy.
A
81)
Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back
to potential GDP, Congress should
81)
A)
lower taxes by $500 billion.
B)
lower government purchases by $500 billion.
C)
lower taxes by an amount less than $500 billion.
D)
raise government purchases by more than $500 billion.
E)
raise government purchases by $500 billion.
C
82)
The largest source of federal government revenue in 2007 was
82)
A)
sales taxes.
B)
individual income taxes.
C)
corporate income taxes.
D)
payroll taxes to fund Social Security and Medicare programs.
B
D
83)
Automatic stabilizers refer to
83)
A)
changes in federal taxes and purchases that are intended to achieve macroeconomic policy
objectives.
B)
government spending and taxes that automatically increase or decrease along with the
business cycle.
C)
changes in the money supply and interest rates that are intended to achieve macroeconomic
policy objectives.
D)
the money supply and interest rates that automatically increase or decrease along with the
business cycle.
84)
Federal government expenditures, as a percentage of GDP,
84)
A)
rose from 1950 to 1980, fell from 1981 to 2001, and have risen from 2001 to the present.
B)
rose from 1950 to 2001, fell from 2001 and to the present.
C)
have fallen since the early 1950s to the present.
D)
have risen since the early 1950s to the present.
E)
rose from 1950 to 1991, fell from 1992 to 2001, and have risen from 2001 to the present.
E
85)
Which of the following best describes supply–side economics?
85)
A)
Education affects labor productivity which affects aggregate supply.
B)
Education affects the incentive to work, save, and invest and, therefore, aggregate supply.
C)
Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and,
therefore, aggregate supply.
D)
Labor productivity affects aggregate supply.
C
86)
Federal government purchases, as a percentage of GDP,
86)
A)
have remained roughly the same since the early 1950s.
B)
have risen since the early 1950s.
C)
have fallen since the early 1950s.
D)
rose from the early 1950s until the mid 1980s, and then fell.
C
B
87)
The tax increases necessary to fund future Social Security and Medicare benefit payments would be
87)
A)
small, but could discourage work effort, entrepreneurship and investment, thereby slowing
economic growth.
B)
large, and could discourage work effort, entrepreneurship and investment, thereby slowing
economic growth.
C)
small, and have little effect on economic growth.
D)
large, but would have little effect on economic growth.
88)
If real GDP exceeded potential real GDP and inflation was increasing, which of the following
would be an appropriate fiscal policy?
88)
A)
an increase in oil prices
B)
an increase in taxes
C)
an increase in government spending
D)
a decrease in the money supply and an increase in the interest rate
B
89)
Which of the following is not true about the alternative minimum tax (AMT)?
89)
A)
Persons who pay low state and local taxes are disproportionately affected by the AMT.
B)
One way for Congress to offset the revenue lost from permanently overhauling the AMT is to
improve tax compliance.
C)
The AMT was established to ensure that wealthy individuals do not take advantage of
deductions to reduce their income tax liability.
D)
Persons who have children and high medical expenses are disproportionately affected by the
AMT.
E)
The AMT does not adjust individuals’ incomes for inflation.
A
B
90)
The tax multiplier is smaller in absolute value than the government purchases multiplier because
some portion of the
90)
A)
increase in government purchases will be saved by households and not spent, and some
portion will be spent on imported goods.
B)
decrease in taxes will be saved by households and not spent, and some portion will be spent
on consumer durable goods.
C)
increase in government purchases will be saved by households and not spent, and some
portion will be spent on consumer durable goods.
D)
decrease in taxes will be saved by households and not spent, and some portion will be spent
on imported goods.
91)
Which of the following does not reflect the state of the tax system in the United States today?
91)
A)
Many taxpayers use software or professional tax preparation companies to file their income
taxes.
B)
The tax laws are used to achieve social policy goals such as energy conservation.
C)
The tax laws are used to achieve macroeconomic goals of high employment and economic
growth.
D)
The tax laws have become increasingly simplified as private citizens have demanded these
changes.
92)
Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause
the inflation rate to be ________ and real GDP to be ________.
92)
A)
lower; higher
B)
higher; lower
C)
lower; lower
D)
higher; higher
93)
The tax wedge is the difference between the
93)
A)
amount of taxes needed to pay off the national debt and the actual amount of taxes.
B)
pre–tax and post–tax returns to an economic activity.
C)
nominal and real interest rates.
D)
amount of taxes needed to balance the federal budget and the actual amount of taxes.
94)
Which of the following would increase the size of the government purchases multiplier?
94)
A)
an increase in the tax rate
B)
an increase in the quantity of imports purchased by households from an increase in income
C)
a decrease in the amount saved by households from an increase in income
D)
a decrease in the amount spend on consumption spending by households from an increase in
income
95)
Which of the following is an objective of fiscal policy?
95)
A)
energy independence from Middle East oil
B)
health care coverage for all Americans
C)
high rates of economic growth
D)
homeland security
E)
discovering a cure for AIDs
96)
Which of the following would not be considered an automatic stabilizer?
96)
A)
rising income tax collections due to rising incomes during an expansion
B)
legislation increasing funding for job retraining passed during a recession
C)
declining food stamp payments due to more persons finding jobs during an expansion
D)
decreasing unemployment insurance payments due to decreased jobless during an expansion
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
97)
Consider the following statement, “The Federal Reserve fights recessions by increasing the
money supply so people will have more money to spend.” What is wrong with the
statement and how can it be corrected?
97)
98)
Assume a country has an annual balanced budget amendment. Suppose aggregate
demand falls causing a recession and a budget deficit. To balance the budget, as required
by the annual balanced budget amendment, what would the government need to do with
the level of government spending and taxes? How would these changes in government
spending and taxes affect aggregate demand and the economy?
98)
99)
Why will there be less crowding out of private spending by government spending the less
sensitive consumption, investment, and net exports are to changes in interest rates?
99)
100)
Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion. If the
president and the Congress increased government purchases by $500 billion, what would
be the result on the economy?
100)
101)
Does expansionary fiscal policy directly increase the money supply? Isn’t it true that the
president and Congress fight recessions by spending more money?
101)
102)
If real GDP is $300 billion below potential GDP and the tax multiplier equals –1.5, then
how much would the government need to change taxes to bring the economy to
equilibrium at potential?
102)
103)
Why would a higher tax rate lower the government purchases multiplier? What does the
tax rate have to do with the government purchases multiplier?
103)
104)
What economic impact would the closing of a nearby military base have on a town?
Would people and businesses that did not directly deal with the military personnel be
affected?
104)
105)
In Year 1 suppose the economy is at potential GDP and that the federal budget deficit
equals $100 billion. In Year 2 the federal budget deficit rises to $150 billion, but the
cyclically adjusted budget deficit falls to $75 billion. How can the actual budget deficit rise
and the cyclically adjusted budget deficit fall?
105)
106)
How does expansionary monetary policy increase spending in the economy compared to
how expansionary fiscal policy increases spending in the economy?
106)
107)
The problem typically during a recession is not that there is too little money, but too little
spending. If the problem was too little money, what would be its cause? If the problem
was too little spending, what could be its cause?
107)
108)
Suppose Political Party A proposes a tax cut on business income to stimulate the economy.
Political Party B opposes the tax cut on business income asserting that it would only help
businesses, not the average working man and woman. If you were hired as an economist
for Political Party A, explain how the tax cut on business income would help the average
working man and woman.
108)
109)
If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2,
does it follow that the federal government acted to raise taxes or cut government spending
in Year 2?
109)
110)
Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a
long–run macroeconomic equilibrium. For Year 2, graph aggregate demand, long–run
aggregate supply, and short–run aggregate supply such that the condition of the economy
will induce the president and the Congress to conduct expansionary fiscal policy. Briefly
explain the condition of the economy and what the president and the Congress are
attempting to do.
110)
111)
Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a
long–run macroeconomic equilibrium. For Year 2, graph aggregate demand, long–run
aggregate supply, and short–run aggregate supply such that the condition of the economy
will induce the president and the Congress to conduct contractionary fiscal policy. Briefly
explain the condition of the economy and what the president and the Congress are
attempting to do.
111)
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
112)
The Social Security and Medicare programs have been a failure in terms of reducing poverty
among elderly U.S. citizens.
112)
113)
If real equilibrium GDP is above potential GDP, expansionary fiscal policy should be pursued.
113)
114)
Timing stabilization policy is easier using monetary policy than fiscal policy.
114)
115)
Most economists believe that it is a good idea for the federal government to balance its budget
every year.
115)
116)
The double taxation problem occurs because households pay taxes on dividends and capital gains
from stock and corporations pay taxes on corporate profits.
116)
117)
The majority of the federal government debt is held by government agencies.
117)
118)
As spending on government purchases increases, income rises and money demand falls.
118)
119)
Increasing the federal budget deficit will contribute to increasing the federal government debt.
119)
120)
When the federal government runs a deficit, it has to borrow from the Treasury.
120)
121)
According to economist Christopher Ruhm, during recessions the unemployed may experience
improved health due to more available time to exercise, prepare healthy meals, and visit their
doctors.
121)
122)
The budget deficit increases during wars and recessions.
122)