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a.
decreasing; decreasing
b.
increasing; increasing
c.
increasing; decreasing
d.
decreasing; increasing
72. Suppose the economy's current AD and SRAS curves intersect to the right of Natural Real GDP. Keynesians might
advise a policy of tax __________ to shift __________.
a.
increases; SRAS to the left
b.
increases; AD to the left
c.
cuts; SRAS to the right
d.
cuts; AD to the right
73. Between the data lag and the legislative lag falls the __________ lag.
a.
effectiveness
b.
wait-and-see
c.
expansionary
d.
legislative
74. Supply-side economists believe reductions in tax rates can
a.
shift the aggregate demand curve to the left.
b.
shift the short run aggregate supply curve to the left.
c.
increase output and lower prices.
d.
decrease output and lower prices.
75. Crowding out suggests that
a.
high taxes reduce both consumption and saving.
b.
increases in consumption are always at the expense of saving.
c.
increases in government spending may raise the interest rate, thereby reducing investment.
d.
increases in government spending will close a recessionary gap.
76. Some of the crowding out of private expenditures may come in the form of
a.
an increase in consumption.
b.
an increase in net exports.
c.
a decrease in taxes.
d.
a decrease in net exports.
77. Increased government spending and tax cuts characterize
a.
contractionary fiscal policy.
b.
expansionary fiscal policy.
c.
expansionary monetary policy.
d.
deflationary policy.
e.
none of the above
78. Fiscal policy is
a.
the money supply policy that the Fed pursues to achieve particular economic goals.
b.
the spending and tax policy that the government pursues to achieve particular macroeconomic goals.
c.
the investment policy that businesses pursue to achieve particular macroeconomic goals.
d.
the spending and saving policy that consumers pursue to achieve particular macroeconomic goals.
e.
none of the above
79. An example of expansionary fiscal policy is
a.
an increase in government spending, or an increase in taxes, or both.
b.
a decrease in government spending, or a decrease in taxes, or both.
c.
an increase in government spending, or a decrease in taxes, or both.
d.
a decrease in government spending, or an increase in taxes, or both.
e.
holding government spending constant while increasing taxes.
80. An example of contractionary fiscal policy is
a.
an increase in government expenditures, or an increase in taxes, or both.
b.
a decrease in government expenditures, or a decrease in taxes, or both.
c.
an increase in government expenditures, or a decrease in taxes, or both.
d.
a decrease in government expenditures, or an increase in taxes, or both.
e.
increasing government expenditures while holding taxes constant.
81. An example of expansionary fiscal policy is
a.
increasing government expenditures.
b.
increasing taxes.
c.
decreasing government expenditures.
d.
decreasing taxes.
e.
a and d
82. An example of contractionary fiscal policy is
a.
increasing government spending.
b.
increasing taxes.
c.
decreasing government spending.
d.
decreasing taxes.
e.
b and c
83. To eliminate a recessionary gap, Keynesian theory indicates that government should
a.
increase taxes.
b.
decrease taxes.
c.
increase government purchases.
d.
decrease government purchases.
e.
b or c
84. To eliminate an inflationary gap, Keynesian theory indicates that government should
a.
increase taxes.
b.
decrease taxes.
c.
increase government purchases.
d.
decrease government purchases.
e.
either a or d
85. Keynesians believe
a.
in laissez-faire.
b.
that equilibrium may exist at less than full employment.
c.
in the use of fiscal policy to stabilize the economy.
d.
b and c
e.
all of the above
86. When a decrease in one or more components of private spending completely offsets an increase in government
spending, there is
a.
incomplete crowding out.
b.
zero crowding out.
c.
complete crowding out.
d.
complete crowding in.
e.
either c or d
87. The transmission lag is the time between
a.
the implementation of a policy and when the impact of the policy is felt.
b.
the enactment of a policy (getting a policy passed by Congress with the president's approval) and the
implementation of the policy (putting a policy into effect).
c.
realizing a policy is needed and enacting the policy.
d.
the occurrence of an event and policymakers realizing the event has occurred.
88. The effectiveness lag is the time between
a.
the implementation of a policy and when the impact of the policy is felt.
b.
the enactment of a policy and the implementation of the policy.
c.
realizing a policy is needed and enacting the policy.
d.
the occurrence of an event and policymakers realizing the event has occurred.
89. The data lag is the time between
a.
the implementation of a policy and when the impact of the policy is felt.
b.
the enactment of a policy and the implementation of the policy.
c.
realizing a policy is needed and enacting the policy.
d.
the occurrence of an event and policymakers realizing the event has occurred.
90. The Laffer curve illustrates that
a.
there are two tax rates at which zero tax revenues are raised.
b.
a decrease in tax rates can cause an increase in tax revenues.
c.
an increase in tax rates can cause an increase in tax revenues.
d.
an increase in tax rates can cause a decrease in tax revenues.
e.
all of the above
91. Complete crowding out implies that as government increases purchases by $1,
a.
private spending decreases by $1.
b.
Real GDP remains unchanged.
c.
there is an equal offsetting decrease in one or more of the components of private expenditures.
d.
all of the above
e.
none of the above
92. A permanent marginal tax decrease is likely to
a.
shift the short-run aggregate supply curve to the left and the long-run aggregate supply curve to the right.
b.
shift both the short-run and the long-run aggregate supply curves to the left.
c.
shift the short-run aggregate supply curve to the right, and the long-run aggregate supply curve to the left.
d.
shift both the short run and the long run aggregate supply curves to the right.
93. If an economist recommends that the government reduce the tax rate in order to increase tax revenues (based on the
Laffer curve), she is implicitly assuming that the economy is currently operating at a point
a.
inside the Laffer curve.
b.
outside the Laffer curve.
c.
on the upward-sloping portion of the Laffer curve.
d.
on the downward-sloping portion of the Laffer curve.
e.
where tax revenues are maximized.
94. If there is complete crowding out, the change in Real GDP that results from a given change in autonomous spending
will be
a.
zero.
b.
greater than if there was incomplete crowding out.
c.
infinite.
d.
There is not enough information to answer the question.
95. Some economists believe that higher marginal income tax rates __________ the incentive to work and thus shift the
__________.
a.
increase; AD curve to the right
b.
increase; SRAS curve to the right
c.
increase; SRAS curve to the left
d.
decrease; AD curve to the left
e.
decrease; SRAS curve to the left
96. Some economists believe that permanently lower marginal income tax rates __________ the incentive to work and
thus shift the __________.
a.
increase; LRAS curve to the right
b.
increase; AD curve to the right
c.
increase; SRAS curve to the left
d.
decrease; LRAS curve to the right
e.
decrease; AD curve to the left
97. The Laffer curve makes the point that cutting a very high marginal tax rate can __________ the tax base enough so
that tax revenues __________.
a.
lower; rise
b.
lower; fall
c.
raise; rise
d.
raise; fall
98. Suppose that in a certain nation the flat income tax rate of 40 percent is reduced to 35 percent and as a result the tax
base rises from $400 billion to $600 billion. As a result, ax revenues __________, indicating the nation is on the
__________ portion of its Laffer curve.
a.
rise; upward-sloping
b.
rise; downward-sloping
c.
fall; upward-sloping
d.
fall; downward-sloping
99. The marginal tax rate is equal to the
a.
total amount of a person's tax payment divided by the total amount of the person's taxable income.
b.
total amount of a person's tax payment divided by the change in the person's taxable income.
c.
change in the person's tax payment divided by the total amount of the person's taxable income.
d.
change in the person's tax payment divided by the change in the person's taxable income.
100. Which of the following is not an example of a "lag" that diminishes the potential impact of fiscal policy?
a.
the data lag
b.
the recessionary lag
c.
the legislative lag
d.
the transmission lag
e.
None of the above; all are examples of such lags.
101. There is zero crowding out and the federal budget is balanced at the time government purchases are increased. It
follows that the __________ curve shifts to the __________, and in the short run both the price level and Real GDP
__________.
a.
AD; left; rise
b.
AD; right; fall
c.
AD; right; rise
d.
AD; left; fall
e.
SRAS; right; rise
102. The economy is in a recessionary gap and a Keynesian economist advocates expansionary fiscal policy. What is a
likely reason this economist advocates expansionary fiscal policy?
a.
The economist believes the economy is stuck in a recessionary gap and crowding out will be complete.
b.
The economist believes the economy is stuck in a recessionary gap and there will be no crowding out.
c.
The economist believes that wages are too flexible and that crowding out will be incomplete.
d.
The economist believes the AD curve is downward-sloping, the SRAS curve is upward-sloping, and prices are
flexible.
e.
none of the above
103. The economy is in a recessionary gap, wages are inflexible downward, and there is complete crowding out. Which of
the following is consistent with this state of affairs?
a.
The economy will soon self-regulate and produce Natural Real GDP.
b.
Expansionary fiscal policy will be effective at removing the economy from the recessionary gap.
c.
If expansionary fiscal policy is implemented, the AD curve will shift to the right, and eventually the price level
and Real GDP will rise.
d.
b and c
e.
none of the above
104. Suppose government spending rises by $120 billion. It follows that if private expenditures
a.
rise by $120 billion, complete crowding out exists.
b.
fall by $100 billion, incomplete crowding out exists.
c.
remain unchanged, complete crowding out exists.
d.
rise by more than $120 billion, complete crowding out exists.
e.
b and c
105. Smith says that if government purchases rise by $100 billion, the AD curve will shift to the right. Jones says that if
government purchases rise by $100 billion, the AD curve will not shift to the right. It follows that
a.
Smith believes there will be zero or complete crowding out and Jones believes there will be complete
crowding out.
b.
Smith believes there will be incomplete or zero crowding out and Jones believes there will be complete
crowding out.
c.
Smith believes there will be complete crowding out and Jones believes there will be zero crowding out.
d.
Both Smith and Jones believe there will be incomplete crowding out, although Jones believes there will be
more incomplete crowding out than Smith believes there will be.
e.
none of the above
106. The economy is in a recessionary gap, there is incomplete crowding out, and government implements expansionary
fiscal policy. It follows that
a.
Real GDP will fall.
b.
the AD curve will shift to the right.
c.
the price level will fall.
d.
the recessionary gap will necessarily be completely eliminated.
e.
b and d
107. Expansionary fiscal policy is ineffective if
a.
there are idle resources in the economy.
b.
the MPC is less than 0.60.
c.
the government has a budget surplus.
d.
there is complete crowding out.
e.
a and d
108. Tax revenues can be found by
a.
multiplying the tax base by the (average) tax rate.
b.
dividing the tax base by the (average) tax rate.
c.
summing the tax base and the (average) tax rate.
d.
multiplying taxable income by the marginal tax rate.
109. The answer is: "Policymakers are not aware of changes in the economy as soon as they happen." What is the
question?
a.
What is the wait-and-see lag?
b.
What is the data lag?
c.
What is the effectiveness lag?
d.
What is the transmission lag?
e.
none of the above
110. The answer is: "After a policy measure is implemented, it takes time to affect the economy." What is the question?
a.
What is the wait-and-see lag?
b.
What is the data lag?
c.
What is the effectiveness lag?
d.
What is the transmission lag?
e.
What is the legislative lag?
111. The economy is in a recessionary gap. There is no crowding out and government has correctly estimated that to bring
the economy into long-run equilibrium it should raise government purchases by $123 billion. If government purchases are
raised by $123 billion, does it follow that the economy will be moved into long-run equilibrium?
a.
Yes, because all the necessary conditions for effective fiscal policy are present.
b.
No, because the economy may be self-regulating, and by the time expansionary fiscal policy is effective, the
AD curve may intersect the SRAS curve at an inflationary-gap level of Real GDP.
c.
Yes, because of the validity of the balanced budget theorem.
d.
No, because of inflexible wages and the fact that the SRAS curve is upward-sloping.
e.
none of the above
112. Taxable income rises by $1,500 and taxes rise by $435. What is the marginal tax rate?
a.
4 percent
b.
29 percent
c.
10 percent
d.
30 percent
e.
25 percent
113. Income tax revenues rise as income tax rates fall. It follows that the
a.
percentage cut in the tax rate is greater than the percentage increase in the tax base.
b.
percentage cut in the tax rate is less than the percentage increase in the tax base.
c.
percentage cut in the tax rate is equal to the percentage increase in the tax base.
d.
marginal tax rate is equal to the average tax rate
e.
b and d
114. If a person predicts that a cut in income tax rates will decrease income tax revenues, he or she implicitly assumes that
the percentage __________ in the tax base will be __________ the percentage cut in the tax rate.
a.
rise; less than
b.
rise; greater than
c.
rise; equal to
d.
fall; equal to
e.
none of the above
115. Suppose that income tax revenues are maximized at an average (income) tax rate of 45 percent. If the Laffer curve is
a correct diagrammatic representation of the relationship between tax rates and tax revenue, it follows that a tax rate of
a.
35 percent will reduce tax revenues.
b.
48 percent will reduce tax revenues.
c.
48 percent will generate as much tax revenue as a tax rate of 45 percent.
d.
35 percent will generate as much tax revenue as a tax rate of 45 percent.
e.
a and b
116. The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates
are cut and government purchases are increased. Is a budget deficit inevitable?
a.
No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and
if the increase in tax revenues equals the increase in government purchases there is no deficit.
b.
Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues.
c.
No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and
if the decrease in tax revenues is less than the increase in government purchases there is no deficit.
d.
Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and
higher interest rates discourage investment spending.
117. Both Jones and Smith agree that the economy is in a recessionary gap. Jones proposes a tax cut and believes that it
will raise Real GDP and lower the price level. Smith agrees that a tax cut will raise Real GDP, but he argues that it will
not lower the price level in the short run. It follows that
a.
both Jones and Smith believe that lower taxes will shift the AD curve rightward, but will not shift the SRAS
curve.
b.
both Jones and Smith believe that lower taxes will shift the SRAS curve rightward, but will not shift the AD
curve.
c.
Jones believes that the tax cut will shift the SRAS curve rightward and the AD curve will not shift. Smith
believes that the AD curve will shift rightward and the SRAS curve will not shift.
d.
Smith believes that the tax cut will shift the SRAS curve rightward and the AD curve will not shift. Jones
believes that the AD curve will shift rightward and the SRAS curve will not shift.
118. If Smith believes the economy is self-regulating, then Smith
a.
is less likely to advocate expansionary fiscal policy when the economy is in a recessionary gap than Jones,
who believes the economy is not self-regulating.
b.
is more likely to advocate expansionary fiscal policy when the economy is in a recessionary gap than Jones,
who believes the economy is not self-regulating.
c.
will believe that there is zero crowding out, too.
d.
will believe that wages are inflexible downward, too.
e.
b and d
119. Which of the following is not an example of crowding out?
a.
Government purchases rise, the budget deficit rises, the federal government's demand for loanable funds rises,
the interest rate rises, and investment falls.
b.
Government spends more on X, prompting individuals to spend less on X.
c.
Taxes decline, the budget deficit rises, the federal government's demand for loanable funds rises, the interest
rate rises, the demand rises for U.S. dollars, the dollar appreciates, and net exports decline.
d.
Business firms spend more on X, prompting households to spend less on Y.
e.
none of the above
120. Which piece of evidence is consistent with zero crowding out?
a.
Government purchases rise and Real GDP does not change.
b.
Government purchases rise and investment spending declines.
c.
Government purchases rise and net exports decline.
d.
Government purchases rise and consumption declines.
e.
none of the above
121. If the economy is on the downward-sloping portion of the Laffer curve, a(an) __________ in tax rates will
__________ tax revenues.
a.
decrease; reduce
b.
increase; raise
c.
decrease; raise
d.
decrease; not change
e.
increase; not change
122. Which of the following is an example of automatic fiscal policy?
a.
The government deliberately raises taxes.
b.
The government deliberately lowers taxes.
c.
The government deliberately increases spending.
d.
The government deliberately decreases spending.
e.
none of the above
123. What are the two types of discretionary fiscal policy?
a.
automatic and expansionary
b.
expansionary and contractionary
c.
expansionary and recessionary
d.
automatic and contractionary
124. In 2013, federal government spending made up approximately __________ percent of GDP in the United States.
a.
14
b.
23
c.
34
d.
44
e.
54
125. In 2013, the U.S. federal government spent approximately ___________ trillion.
a.
$4.9
b.
$7.3
c.
$3.7
d.
$2.1
126. In 2013, U.S. federal government revenues (made up of taxes and fees), totaled ________ trillion.
a.
$4.3
