Chapter 13 Fiscal Policy 603
8) In the United States economy, the progressive income tax and unemployment compensation are
both
A) destabilizers. B) discretionary presidential effectors.
C) automatic stabilizers. D) time lag factors.
9) Refer to the above figure. As the real national income expands from Y 2to Y3
,
A) a budget surplus occurs. B) a budget deficit occurs.
C) tax revenues fall. D) government transfers rise.
10) Refer to the above figure. A budget deficit occurs when real national income is
A) Y1
B) Y2
C) Y3
D) None of the above: cannot be determined given the information
11) Provisions that cause changes in government spending and taxes that do not require action of
the President or Congress are called
A) discretionary fiscal policy. B) discretionary stabilizers.
C) automatic stabilizers. D) private stabilization effects.
12) Many government programs, such as unemployment compensation, operate on a deficit during
recessions and a surplus during periods of economic expansion. The programs are referred to
as
A) discretionary fiscal policy. B) automatic stabilizers.
C) Ricardian equivalence. D) Recognition time lag.
13) The existence of automatic stabilizers will
A) reduce the recognition lag of discretionary fiscal policy.
B) eliminate recessions.
C) reduce the size of recessionary and inflationary gaps.
D) cause the effects of shocks to aggregate demand to have a larger effect on GDP.
14) Which of the following is an example of an automatic stabilizer?
A) cost of living adjustments to Social Security payments
B) unemployment benefits
C) a temporary tax rebate
D) all of the above
15) All of the following are automatic stabilizers EXCEPT
A) discretionary increases in government spending.
B) income transfer payments.
C) progressive income tax system.
D) unemployment compensation.
16) Suppose there are two economies that are identical in every way with the following exception.
Economy A has an unemployment compensation system while economy B does NOT have an
unemployment compensation system. Now suppose both economies experience the same drop
in planned investment. Which of the following is correct?
A) Real GDP will fall more in economy A than in economy B.
B) Real GDP will fall more in economy B than in economy A.
C) Real GDP will fall the same in both economies.
D) The effect on the relative size of the reduction in real GDP in the two economies is
ambiguous.
17) What do automatic stabilizers attempt to stabilize?
A) long run aggregate supply B) aggregate demand
C) exports D) imports
18) Which of the following might be considered an automatic fiscal stabilizer?
A) government spending for the war effort B) 401(k) retirement program
C) unemployment compensation D) government budgeting for education
19) Government provided unemployment insurance is an example of
A) a discretionary fiscal stabilizer. B) an automatic fiscal stabilizer.
C) a monetary stabilizer. D) an automatic monetary stabilizer.
20) Automatic stabilizers have the effect of
A) increasing aggregate demand during a recessionary gap.
B) increasing aggregate demand during an inflationary gap.
C) increasing long run aggregate supply during a recessionary gap.
D) increasing long run aggregate supply during an inflationary gap.
21) Which one of the following is NOT an automatic stabilizer?
A) the income tax system
B) the system of national defense procurement
C) the system of welfare payments
D) unemployment compensation programs
22) Automatic stabilizers are so named because
A) they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits.
B) they occur automatically when real GDP changes.
C) the policy suggestions of the Council of Economic Advisors are automatically followed.
D) the policy suggestions of the Office of Management and Budget are automatically
followed.
23) An example of an automatic stabilizer is
A) the progressive tax system.
B) the decision of the President to cut taxes in a recession.
C) the Congressional decision to increase unemployment benefits in a recession.
D) the raising of taxes on cigarettes to discourage smoking to stabilize health care costs.
24) The advantage of automatic stabilizers is that they
A) help to balance the budget.
B) reduce the size of the net public debt.
C) reduce the fluctuations in the business cycle.
D) help reduce the inflation rate.
25) All of the following are automatic stabilizers EXCEPT
A) the federal income tax system. B) welfare payments.
C) discretionary tax cuts. D) unemployment compensation.
26) Automatic stabilizers are fiscal policy measures that
A) must be determined by the Congress in each budget.
B) do not require new legislation.
C) are determined by the Federal Reserve System.
D) are part of discretionary fiscal policy.
27) Automatic stabilizers
A) work counter cyclically to moderate the business cycle.
B) often make any downturn in the economy worse.
C) must be determined by the Congress in each budget.
D) are never altered.
28) Automatic stabilizers are designed to
A) promote global trade.
B) simplify the tax system.
C) moderate changes in disposable income.
D) stabilize the bi partisan budget process.
29) What are the automatic stabilizers the United States has in place, and how do they function
differently from discretionary fiscal policy?
13.5 What Do We Really Know About Fiscal Policy?
1) If the government increases aggregate demand when the economy is at both short run and
long run equilibrium, the full long run effect of this fiscal policy will be to
A) increase real Gross Domestic Product (GDP).
B) increase the price level.
C) increase either the real Gross Domestic Product (GDP) or the price level, depending on the
length of the time lag.
D) decrease both real Gross Domestic Product (GDP) and the price level.
2) During normal times, discretionary fiscal policy
A) is more effective in influencing real GDP than at times of a recession.
B) is probably not very effective in influencing real GDP due to time lags.
C) is more effective in influencing real GDP than automatic stabilizers.
D) works well because there are no lag problems in influencing real GDP.
3) Discretionary fiscal policy
A) is not very effective in influencing real GDP during normal times because of time lags.
B) can be very effective in influencing real GDP during abnormal times, such as when a
nation is at war.
C) may reassure investors and consumers that the federal government will be able to avert a
major economic downturn.
D) all of the above
4) During which time will fiscal policy be the most effective?
A) Normal times B) Times of war
C) In the middle of expansions D) Times of stagflation
5) During normal times,
A) fiscal policy is very effective because it the effects of fiscal policy will swamp automatic
stabilizers and time lags can be.
B) fiscal policy can immediately correct problems in the economy.
C) the Ricardian equivalence theorem makes fiscal policy very effective.
D) fiscal policy is not effective because of the recognition time lag.
6) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) What are the effects of fiscal policy during normal times? What are the effects of fiscal policy
during abnormal times?
13.6 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)
b
oth 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 increases spending, then
A) consumption will increase, and so real Gross Domestic Product (GDP) will increase by
more than the increase in government spending.
B) consumption will decrease, and so real Gross Domestic Product (GDP) will increase 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.
4) According to the traditional Keynesian analysis, if the government increases spending by $10
million, then
A) consumption will increase, and so total expenditures will increase by more than $10
million.
B) consumption will decrease, and so total expenditures will increase by less than the $10
million.
C) consumption will remain the same, and so total expenditures will increase by exactly $10
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, an increase in government spending raises total planned
real expenditures by more than the original increase 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.
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) a higher 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.
13.7 Appendix D: Changes in Taxes
1) According to the traditional Keynesian approach, if the government increases taxes, then
A) real Gross Domestic Product (GDP) will fall and the price level will remain constant.
B) real Gross Domestic Product (GDP) will fall but the price level will rise.
C)
b
oth real Gross Domestic Product (GDP) and the price level will fall.
D) real Gross Domestic Product (GDP) will remain constant but the price level will rise.
2) In the traditional Keynesian model, a tax cut
A) causes the C I G X line to shift upward.
B) causes the C I G X line to shift downward.
C) causes a movement along the C I G X line.
D) does not affect the C IG X line.
3) In the traditional Keynesian model, an increase in current taxes
A) increases disposable income but does not affect consumption.
B) decreases 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 cut raises aggregate demand because
A) taxes are part of the C I G X line.
B) disposable income available to consumers increases.
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 cuts taxes, then
A)
b
oth consumption and real Gross Domestic Product (GDP) will increase.
B)
b
oth consumption and real Gross Domestic Product (GDP) will decrease.
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 cuts 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) a lower 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 $50 billion, while the second option is to cut taxes by $50 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.
13.8 Appendix D: The Balanced Budget Multiplier
1) In Country Z, the government simultaneously increases its expenditures by $25 billion and
increases taxes by $25 billion. If the MPS is equal to 0.2, the government s action ________ real
GDP by ________.
A) increases; $125 billion B) increases; $25 billion
C) increases; $100 billion D) has no effect on; $0
2) In Country Z, the government simultaneously decreases its expenditures by $20 billion and
decreases taxes by $20 billion. If the MPS is equal to 0.2, the government s action ________ real
GDP by ________.
A) decreases; $100 billion B) decreases; $20 billion
C) decreases; $80 billion D) has no effect on; $0
3) The balanced
b
udget 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) 1.
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 $5
million and raises current taxes by $5 million at the same time, then
A) real GDP will increase by $5 million.
B) real GDP will decrease by $5 million.
C) real GDP will decrease by more than $5 million.
D) real GDP will remain the same.
618 Miller Economics Today, 16th Edition
13.9 Appendix D: The Fixed Price Level Assumption
1) 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 is fixed.
2) If the price level is fixed, then an increase in government spending will lead to
A) a larger increase in nominal GDP than in real GDP.
B) a smaller increase in nominal GDP than in real GDP.
C) no increase in either nominal GDP or real GDP.
D) an increase in nominal GDP by the same amount as an increase in real GDP.
3) According the traditional Keynesian approach, an increase in government spending is effective
in lowering unemployment 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.