Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
The aggregate demand curve will shift to the right ________ the initial decrease in taxes.
1)
A)
by more than
B)
by less than
C)
by the same amount
D)
sometimes by more than and other times by less than
2)
Suppose the government spending multiplier is 2. The federal government cuts spending by $40
billion. What is the change in GDP if the price level is not held constant?
2)
A)
a decrease of more than $80 billion
B)
an increase of greater than $80 billion
C)
a decrease of less than $80 billion
D)
an increase of less than $80 billion
E)
an increase equal to $80 billion
3)
The federal government debt as a percentage of GDP fell during the period
3)
A)
2002 – 2007.
B)
the Great Depression.
C)
during WWI and WWII.
D)
1997–2001.
E)
1980–1992.
4)
Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back
to potential GDP, Congress should
4)
A)
lower government purchases by an amount less than $200 billion.
B)
raise taxes by an amount more than $200 billion.
C)
lower taxes by $200 billion.
D)
lower government purchases by $200 billion.
E)
raise taxes by $200 billion.
Figure 17–1
5)
Refer to Figure 17–1. An increase in taxes would be depicted as a movement from ________, using
the static AD–AS model in the figure above.
5)
A)
C to D
B)
A to B
C)
B to C
D)
B to A
E)
E to B
6)
If the economy is slipping into a recession, which of the following would be an appropriate fiscal
policy?
6)
A)
a decrease in taxes
B)
an increase in the money supply and a decrease in interest rates
C)
a decrease in oil prices
D)
a decrease in government purchases
Figure 17–3
7)
Refer to Figure 17–3. 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, and no fiscal or monetary policy is
pursued, then at point B
7)
A)
the economy is below full employment.
B)
income and profits are falling.
C)
there is pressure on wages and prices to fall.
D)
the unemployment rate is very low.
E)
firms are operating at below capacity.
8)
The federal government debt equals
8)
A)
government spending minus tax revenues.
B)
the total value of U.S. Treasury bonds outstanding.
C)
tax revenues minus government spending.
D)
the accumulation of past budget deficits.
9)
Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the
budget balanced. What will happen to real equilibrium GDP?
9)
A)
Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.
B)
There will be no change in real equilibrium GDP.
C)
Real equilibrium GDP will rise.
D)
Real equilibrium GDP will fall.
10)
The tax multiplier equals the change in ________ divided by the change in ________.
10)
A)
consumption spending; taxes
B)
equilibrium real GDP; taxes
C)
taxes; equilibrium real GDP
D)
taxes; consumption spending
11)
If the economy is falling below potential real GDP, which of the following would be an appropriate
fiscal policy? An increase in
11)
A)
taxes.
B)
government purchases.
C)
oil prices.
D)
the money supply and a decrease in interest rates.
12)
Suppose the federal budget deficit for the year was $100 billion and the economy was in a
recession. If the economy had been at potential GDP, it is estimated that tax revenues would have
been $60 billion higher and government spending on transfer payments $50 billion lower. Using
these estimates, the cyclically adjusted budget
12)
A)
surplus was $10 billion.
B)
deficit was $210 billion.
C)
deficit was $110 billion.
D)
surplus was $110 billion.
13)
Before the Great Depression of the 1930s, the majority of government spending took place at the
________ and after the Great Depression the majority of government spending took place at the
________.
13)
A)
federal level; state and local levels
B)
state and local levels; federal level
C)
federal level; state level
D)
local level; federal level
14)
Social Security began as a “pay–as–you–go” system, meaning that payments to current retirees
were paid
14)
A)
as the government collected revenues from tariffs and excise taxes in the years Social Security
payments were made.
B)
as long as the government had funds available.
C)
from taxes collected from current workers.
D)
from taxes collected from retired workers.
15)
From an initial long–run equilibrium, if aggregate demand grows more slowly than long–run and
short–run aggregate supply, then the president and the Congress would most likely
15)
A)
increase the required reserve ratio and decrease government spending.
B)
decrease taxes.
C)
lower interest rates.
D)
decrease government spending.
E)
decrease oil prices.
Figure 17–1
16)
Refer to Figure 17–1. Suppose the economy is in short–run equilibrium above potential GDP and
no policy is pursued. Using the static AD–AS model in the figure above, this would be depicted as
a movement from
16)
A)
C to B.
B)
C to D.
C)
D to C.
D)
A to E.
E)
E to A.
17)
Refer to Figure 17–1. Suppose the economy is in short–run equilibrium above potential GDP and
automatic stabilizers move the economy back to long–run equilibrium. Using the static AD–AS
model in the figure above, this would be depicted as a movement from
17)
A)
B to A.
B)
D to C.
C)
A to E.
D)
E to A.
E)
C to B.
18)
The multiplier effect refers to the series of
18)
A)
induced increases in consumption spending that result from an initial increase in autonomous
expenditures.
B)
induced increases in investment spending that result from an initial increase in autonomous
expenditures.
C)
autonomous increases in consumption spending that result from an initial increase in induced
expenditures.
D)
autonomous increases in investment spending that result from an initial increase in induced
expenditures.
19)
The largest and fastest–growing category of federal government expenditures is
19)
A)
interest on the national debt.
B)
transfer payments.
C)
national park spending.
D)
grants to state and local governments.
20)
Government transfer payments include which of the following?
20)
A)
Social Security and Medicare programs
B)
interest on the national debt
C)
grants to state and local governments
D)
national defense
21)
In the long run, most economists agree that a permanent increase in government spending leads to
________ crowding out of private spending.
21)
A)
no
B)
partial
C)
more than complete
D)
complete
Figure 17–1
22)
Refer to Figure 17–1. Suppose the economy is in short–run equilibrium below potential GDP and
no fiscal or monetary policy is pursued. Using the static AD–AS model in the figure above, this
would be depicted as a movement from
22)
A)
A to E.
B)
A to B.
C)
B to A.
D)
C to B.
E)
B to C.
23)
The government purchases multiplier equals the change in ________ divided by the change in
________.
23)
A)
equilibrium real GDP; government purchases
B)
consumption spending; government purchases
C)
government purchases; equilibrium real GDP
D)
government purchases; consumption spending
24)
In the long run, most economists agree that a permanent increase in government spending leads to
24)
A)
a decrease in private spending by more than the amount that government spending
increased.
B)
a decrease in private spending by less than the amount that government spending increased.
C)
a decrease in private spending by the same amount that government spending increased.
D)
no decrease in private spending.
25)
To evaluate over time the size of the federal budget deficit or surplus, it would be better to look at
the
25)
A)
budget deficit or surplus as a percentage of government spending.
B)
absolute size of the budget deficit or surplus.
C)
budget deficit or surplus as a percentage of GDP.
D)
budget deficit or surplus as a percentage of tax revenues.
26)
Refer to Figure 17–1. Suppose the economy is in short–run equilibrium below potential GDP and
Congress and the president lower taxes to move the economy back to long–run equilibrium. Using
the static AD–AS model in the figure above, this would be depicted as a movement from
26)
A)
B to A.
B)
B to C.
C)
C to B.
D)
A to B.
E)
A to E.
27)
Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century
occurred during
27)
A)
the Great Depression.
B)
1998–1999.
C)
the Vietnam war.
D)
WWI and WWII.
E)
1970–1997.
28)
An increase in individual income taxes ________ disposable income, which ________ consumption
spending.
28)
A)
increases; increases
B)
decreases; decreases
C)
increases; decreases
D)
decreases; increases
29)
Fiscal policy is determined by the
29)
A)
president and the Congress.
B)
Congress and the Federal Reserve.
C)
Federal Reserve.
D)
president and the Federal Reserve.
30)
During 1970–1997, the U.S. federal government was
30)
A)
in deficit every year.
B)
in deficit most of those years.
C)
balanced every year.
D)
in surplus every year.
31)
A decrease in the tax rate will ________ the disposable income of households and ________ the size
of the multiplier effect.
31)
A)
increase; decrease
B)
increase; not change
C)
decrease; increase
D)
decrease; decrease
E)
increase; increase
32)
Which of the following would be most likely to induce the president and the Congress to conduct
expansionary fiscal policy? A significant
32)
A)
increase in consumption spending.
B)
increase in net exports.
C)
decrease in oil prices.
D)
decrease in investment spending.
33)
The Federal Reserve plays a larger role than the president and the Congress in stabilizing the
economy because
33)
A)
the Federal Reserve can immediately recognize when real GDP is below or above potential
GDP.
B)
the Federal Reserve can more quickly change monetary policy than the president and the
Congress can change fiscal policy.
C)
changes in interest rates have a considerably larger effect on the economy than changes in
government purchases or taxes.
D)
changes in interest rates have their full effect on the economy in a short period of time,
whereas changes in government spending and taxes have their full effect over a long period
of time.
34)
An economic expansion tends to cause the federal budget deficit to ________ because tax revenues
________ and government spending on transfer payments ________.
34)
A)
decrease; rise; fall
B)
decrease; fall; rise
C)
increase; rise; fall
D)
increase; fall; rise
35)
Which of the following would decrease the tax wedge? A decrease in the
35)
A)
federal budget deficit.
B)
national debt.
C)
marginal tax rate.
D)
money supply.
Figure 17–1
36)
Refer to Figure 17–1. Suppose the economy is in short–run equilibrium above potential GDP and
wages and prices are rising. If contractionary policy is used to move the economy back to long run
equilibrium, this would be depicted as a movement from ________ using the static AD–AS model
in the figure above.
36)
A)
C to B
B)
D to C
C)
B to A
D)
E to A
E)
A to E
A
37)
Fiscal policy refers to changes in
37)
A)
federal taxes and purchases that are intended to fund the war on terrorism.
B)
state and local taxes and purchases that are intended to achieve macroeconomic policy
objectives.
C)
the money supply and interest rates that are intended to achieve macroeconomic policy
objectives.
D)
federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
D
C
38)
The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if
the economy were
38)
A)
in a recession.
B)
at potential GDP.
C)
in an expansion.
D)
at potential tax revenue.
39)
A recession tends to cause the federal budget deficit to ________ because tax revenues ________
and government spending on transfer payments ________.
39)
A)
decrease; fall; rise
B)
increase; rise; fall
C)
increase; fall; rise
D)
decrease; rise; fall
40)
Which of the following is considered a weakness of the flat tax?
40)
A)
Tax compliance would decrease if the tax were implemented.
B)
The complexity of the tax system would increase under the flat tax.
C)
Savings and investment would decline under the flat tax.
D)
The distribution of income would be more unequal under the tax.
41)
An increase in the sensitivity of private spending (consumption, investment, and net exports) to
changes in the interest rate ________ the government purchases multiplier.
41)
A)
may increase or may decrease
B)
will decrease
C)
will not change
D)
will increase
Figure 17–1
42)
Refer to Figure 17–1. Suppose the economy is in a recession and expansionary fiscal policy is
pursued. Using the static AD–AS model in the figure above, this would be depicted as a movement
from
42)
A)
B to C.
B)
C to B.
C)
A to E.
D)
A to B.
E)
B to A.
43)
Which of the following provides health–care coverage to people age 65 and over?
43)
A)
Social Security
B)
Medicaid
C)
Medicare
D)
Health–Aid
44)
The three categories of federal government expenditures, in addition to government purchases, are
44)
A)
interest on the national debt, grants to state and local governments, and transfer payments.
B)
interest on the national debt, defense spending, and transfer payments.
C)
defense spending, Social Security, and Medicare.
D)
defense spending, budgets of federal agencies, and transfer payments.
45)
Which of the following would be most likely to induce the president and the Congress to conduct
contractionary fiscal policy? A significant
45)
A)
decrease in real GDP.
B)
increase in labor productivity.
C)
increase in inflation.
D)
decrease in oil prices.
46)
During the Great Depression, what appeared to be ________ fiscal policy was actually not when the
________ budget deficit or surplus is examined.
46)
A)
expansionary; cyclically adjusted
B)
contractionary; cyclically adjusted
C)
expansionary; actual
D)
contractionary; actual
47)
If Congress passed a one–time tax cut in order to stimulate the economy in 2009, and tax rate levels
returned to their pre–2009 level in 2010, how should this tax cut affect the economy?
47)
A)
The tax cut would stimulate spending by households.
B)
Households on average would save an amount equal to the tax cut.
C)
The tax cut would raise the price level in 2009.
D)
The tax cut would shift the aggregate demand curve to the right.
48)
From an initial long–run equilibrium, if aggregate demand grows faster than long–run and
short–run aggregate supply, then the president and Congress would most likely
48)
A)
decrease the required reserve ratio.
B)
decrease tax rates.
C)
decrease oil prices.
D)
decrease government spending.
49)
If the tax multiplier is –1.5 and a $200 billion tax increase is implemented, what is the change in
GDP, holding everything else constant? (Assume the price level stays constant.)
49)
A)
a $300 billion decrease in GDP
B)
a $133.33 billion decrease in GDP
C)
a $133.33 billion increase in GDP
D)
a $300 billion increase in GDP
E)
a $30 billion increase in GDP
Figure 17–3
50)
Refer to Figure 17–3. 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
50)
A)
expansionary automatic stabilizers.
B)
expansionary fiscal policy.
C)
contractionary monetary policy.
D)
expansionary monetary policy.
E)
contractionary fiscal policy.
E
A
51)
Since the Social Security system began in 1935, the number of workers per retiree has
51)
A)
stayed roughly the same.
B)
continually risen.
C)
risen and declined with different generations.
D)
continually declined.
Figure 17–2
52)
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, and no fiscal or monetary policy is
pursued, then at point B
52)
A)
the unemployment rate is very low.
B)
the economy is above full employment.
C)
income and profits are rising.
D)
there is pressure on wages and prices to rise.
E)
firms are operating at below capacity.
E
D
53)
Economists who believe the supply–side effects of tax cuts are small essentially believe that
53)
A)
tax cuts will increase the quantity of labor supplied.
B)
tax cuts mainly affect aggregate supply.
C)
tax cuts will result in relatively small changes in the price level.
D)
tax cuts mainly affect aggregate demand.
54)
Which of the following would be classified as fiscal policy?
54)
A)
A state government cuts taxes to help the economy of the state.
B)
The federal government passes tax cuts to encourage firms to reduce air pollution.
C)
States increase taxes to fund education.
D)
The Federal Reserve cuts interest rates to stimulate the economy.
E)
The federal government cuts taxes to stimulate the economy.
Figure 17–3
55)
Refer to Figure 17–3. 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
55)
A)
increase government spending.
B)
raise interest rates.
C)
increase taxes.
D)
increase the money supply and decrease the interest rate.
E)
increase oil prices.
56)
Expansionary fiscal policy
56)
A)
can be effective in the long run.
B)
can be effective in the short run.
C)
causes complete crowding out in the short run.
D)
is never effective because of crowding out.
B
C