34) Deficit financing
A) is when the government adjusts taxes to raise money to pay for government projects.
B) is the mechanism behind the Laffer curve.
C) is how the automatic stabilizers work.
D) is when discretionary fiscal policy leads to spending more than is collected in taxes.
35) The traditional Keynesian approach to fiscal policy assumes
A) the price level is constant.
B) government expenditures are often substitutes for private expenditures.
C) the Ricardian equivalence theorem is correct.
D) the validity of supply-side economics.
36) The traditional Keynesian approach to fiscal policy assumes
A) current taxes are the only taxes taken into account by firms and consumers.
B) the focus of attention should be the long run.
C) prices are flexible while interest rates are not.
D) exchange rates are fixed.
37) The traditional Keynesian approach to fiscal policy assumes that
A) the effect of unemployment compensation is to destabilize the economy.
B) an equal income distribution ensures a stable economy.
C) consumers spend more when their incomes are higher.
D) cutting taxes is a more effective way to stimulate the economy than is increasing government
spending.
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38) Fiscal policy during periods of relatively low unemployment and low inflation have
A) little effect due to time lags and the crowding-out effect.
B) significant effect due to the timely intervention of the president and congress.
C) significant effect because the changes in fiscal policy gives investors confidence in the
economy.
D) little effect because the global market makes up fifty percent of aggregate spending.
39) What are the automatic stabilizers the United States has in place, and how do they function
differently from discretionary fiscal policy?
40) What are the effects of fiscal policy during normal times? What are the effects of fiscal
policy during abnormal times?
13.5 Appendix D: Changes in Government Spending
1) In the traditional Keynesian model, if the government increases spending, then
A) real Gross Domestic Product (GDP) will rise and the price level will remain constant.
B) real Gross Domestic Product (GDP) will increase and the price level will fall.
C) both real Gross Domestic Product (GDP) and the price level will rise.
D) real Gross Domestic Product (GDP) will remain constant and the price level will rise.
2) In the traditional Keynesian model, an increase in government spending
A) causes the C + I + G + X line to shift upward by the full amount of the increase in
government spending.
B) causes the C + I + G + X line to shift upward by an amount less than the increase in
government spending.
C) causes the C + I + G + X line to shift upward by more than the increase in government
spending.
D) causes no change in the C + I + G + X line.
3) In the traditional Keynesian model, if the government decreases spending, then
A) consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by more
than the increase in government spending.
B) consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by less
than the increase in government spending.
C) consumption will remain the same, and so real Gross Domestic Product (GDP) will increase
by the same amount of the increase in government spending.
D) consumption will increase or decrease, and so real Gross Domestic Product (GDP) will
increase or decrease depending on the change in consumption.
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4) According to the traditional Keynesian analysis, if the government increases spending by $20
million, then
A) consumption will increase, and so total expenditures will increase by more than $20 million.
B) consumption will decrease, and so total expenditures will increase by less than the $20
million.
C) consumption will remain the same, and so total expenditures will increase by exactly $20
million.
D) consumption will increase or decrease, and so total expenditures will increase or decrease
depending on the change in consumption.
5) In the traditional Keynesian model, if the government increases government spending,
A) the C + I + G + X line will shift down but the aggregate demand curve will not shift.
B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left.
C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right.
D) the C + I + G + X line will shift up but the aggregate demand curve will not shift.
6) In the traditional Keynesian model, a decrease in government spending lowers total planned
real expenditures by more than the original decrease in government spending because
A) consumption spending depends negatively on real GDP.
B) consumption spending depends positively on real GDP.
C) consumption spending is not related to real GDP.
D) of the crowding-out effect on consumption spending.
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7) In the traditional Keynesian model, an increase in government spending leads to all of the
following EXCEPT
A) an increase in aggregate demand.
B) an increase in the price level.
C) an increase in consumption.
D) higher real GDP.
8) The traditional Keynesian approach concludes that an increase in government spending
A) generates a greater increase in investment spending.
B) generates an equal increase in total spending because government spending makes up part of
total spending.
C) generates a greater increase in total spending because consumption spending increases as
incomes increase.
D) has no effect on total spending because consumers increase saving by an equal amount.
13.6 Appendix D: Changes in Taxes
1) According to the traditional Keynesian approach, if the government cuts taxes, then
A) real Gross Domestic Product (GDP) will rise and the price level will remain constant.
B) real Gross Domestic Product (GDP) will fall but the price level will rise.
C) both real Gross Domestic Product (GDP) and the price level will rise.
D) real Gross Domestic Product (GDP) will remain constant but the price level will rise.
2) In the traditional Keynesian model, a tax increase
A) causes the C + I + G + X line to shift downward.
B) causes the C + I + G + X line to shift upward.
C) causes a leftward movement along the C + I + G + X line.
D) does not affect the C + I + G + X line.
3) In the traditional Keynesian model, a cut in current taxes
A) increases disposable income but does not affect consumption.
B) increases both disposable income and consumption.
C) decreases disposable income but increases consumption.
D) has no effect on either disposable income or consumption.
4) According to the traditional Keynesian approach, a tax increase lowers aggregate demand
because
A) taxes are part of the C + I + G + X line.
B) disposable income available to consumers decreases.
C) taxpayers anticipate a tax increase in the future.
D) a tax cut always results in a balanced budget.
5) In the traditional Keynesian model, if the government raises taxes, then
A) both consumption and real Gross Domestic Product (GDP) will decrease.
B) both consumption and real Gross Domestic Product (GDP) will increase.
C) consumption will increase but Gross Domestic Product (GDP) will decrease.
D) consumption will decrease but Gross Domestic Product (GDP) will increase.
6) In the traditional Keynesian model, if the government raises current taxes
A) the C + I + G + X line will shift down but the aggregate demand curve will not shift.
B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left.
C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right.
D) the C + I + G + X line will shift up but the aggregate demand curve will not shift.
7) In the traditional Keynesian model, an income tax cut raises real GDP because
A) consumption spending depends negatively on after-tax income.
B) consumption spending depends positively on after-tax income.
C) consumption spending is not related to after-tax income.
D) of the crowding-out effects of taxes.
8) In the traditional Keynesian model, an increase in taxes leads to all of the following EXCEPT
A) a decrease in aggregate demand.
B) an increase price level.
C) a decrease in consumption.
D) lower real GDP.
9) According to the Keynesian approach, an increase in taxes
A) will reduce consumption exactly by the amount of the taxes.
B) will reduce consumption by an amount less than the change in taxes.
C) will not impact consumption, as most consumption is autonomous.
D) will increase consumption, as the government will spend the extra tax revenue and that
increases consumption.
10) According to the Keynesian approach, a decrease in taxes
A) will increase consumption exactly by the amount of the taxes.
B) will increase consumption by an amount of less than the change in taxes.
C) will not impact consumption, as most consumption is autonomous.
D) will decrease consumption, as the government will have to spend less.
11) The Keynesian perspective on the effect of an increase in taxes is that this policy action
A) generates reductions in consumption and in saving.
B) generates reductions in consumption and an increase in saving to pay for the new taxes.
C) has no impact on consumption.
D) increases current consumption and reduces future consumption.
12) Suppose there are two policy options facing a vote in the Senate. In the first, government
spending will increase $100 billion, while the second option is to cut taxes by $100 billion. A
Keynesian economist would argue for
A) the tax option because it also affects the incentives workers face. Long-run aggregate supply
will increase with the tax cut, but not with the spending increase.
B) the tax option because it is easier to pass. The effects on total spending would be identical.
C) the spending option because it won’t affect the deficit the way the tax cut would.
D) the spending option because it has a bigger impact on total spending. The spending directly
raises total spending plus it works through the multiplier, while the tax cut only works through
the multiplier.
13.7 Appendix D: The Balanced-Budget Multiplier
1) In Country X, the government simultaneously increases its expenditures by $100 billion and
increases taxes by $100 billion. If the MPS is equal to 0.4, the government’s action ________
real GDP by ________.
A) increases; $250 billion
B) decreases; $250 billion
C) increases; $100 billion
D) has no effect on; $0
2) In Country Z, the government simultaneously decreases its expenditures by $25 billion and
decreases taxes by $25 billion. If the MPS is equal to 0.2, the government’s action ________ real
GDP by ________.
A) decreases; $50 billion
B) decreases; $25 billion
C) increases; $50 billion
D) has no effect on; $0
3) The balanced-budget multiplier is equal to
A) the percentage increase in government expenditures.
B) the reciprocal of the increase in government expenditures.
C) the percentage increase in taxes.
D) one.
4) According to the traditional Keynesian analysis, if the government increases spending and
pays for all of it by raising current taxes, then
A) aggregate demand will decrease.
B) a budget deficit will occur.
C) a budget surplus will occur.
D) aggregate demand will increase.
5) According to the traditional Keynesian approach, if the government increases spending by $10
million and raises current taxes by $10 million at the same time, then
A) real GDP will increase by $10 million.
B) real GDP will decrease by $10 million.
C) real GDP will decrease by more than $10 million.
D) real GDP will remain the same.
6) The Keynesian approach assumes that
A) there is no unemployment in the economy.
B) the economy is self-regulating.
C) the government budget is always in deficit.
D) the price level does not change.
7) If the price level is fixed, then a decrease in government spending will lead to
A) a larger decrease in nominal GDP than in real GDP.
B) a smaller decrease in nominal GDP than in real GDP.
C) no decrease in either nominal GDP or real GDP.
D) a decrease in nominal GDP by the same amount as a decrease in real GDP.
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8) According the traditional Keynesian approach, an increase in government spending is
effective in raising real Gross Domestic Product (GDP) if
A) the price level is fixed.
B) the price level is flexible.
C) the price level does not exist.
D) Ricardian equivalence occurs, regardless of the price level.