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True / False
1. It is a fact that the government spending multiplier is always greater than the tax multiplier.
a.
True
b.
False
2. Tax revenues can rise as a result of a decrease in income tax rates, as long as the tax base increases sufficiently.
a.
True
b.
False
3. Those economists who view the AS curve as being vertical see more government tools capable of raising Real GDP
than do the economists who view the AS curve as being upward-sloping.
a.
True
b.
False
4. If income tax rates are cut, the size of the budget deficit will necessarily increase.
a.
True
b.
False
5. Some economists believe that government bailouts privatize the benefits of doing business and socialize the costs,
leading to more companies needing to be bailed out.
a.
True
b.
False
6. If the (average) tax rate is cut by 10%, and as a result the tax base rises by 15%, tax revenues will rise.
a.
True
b.
False
7. The Taylor rule is an example of a rule-based monetary policy system.
a.
True
b.
False
8. Those economists who believe that the economy is self-regulating argue that wages are flexible, so they think that the
economy can remove itself from a recessionary gap without government intervention.
a.
True
b.
False
9. There are economists who believe that some types of government spending are better for the economy than other types
of government spending.
a.
True
b.
False
10. If wages are flexible, it is very likely that government intervention will be needed to push the economy out of a
recessionary gap.
a.
True
b.
False
11. A theory must be capable of being proved wrong if, in fact, it is wrong.
a.
True
b.
False
Multiple Choice
12. Elasticity of investment measures the responsiveness of
a.
interest rates to changes in investment.
b.
investment to changes in government spending.
c.
investment to changes in the interest rate.
d.
investment to changes in consumption.
13. The government spending multiplier is the number that, when multiplied by the
a.
budget deficit, gives us the change in total spending.
b.
budget deficit, gives us the change in the public debt.
c.
change in taxes, gives us the change in total spending.
d.
change in government spending, gives us the change in total spending.
14. Which of the following is true?
a.
All economists agree that the tax multiplier is greater than the government spending multiplier.
b.
All economists agree that the tax multiplier is smaller than the government spending multiplier.
c.
There is disagreement among economists regarding the size of the tax multiplier relative to the size of the
government spending multiplier.
d.
In the standard Keynesian textbook analysis, the tax multiplier is greater than the government spending
multiplier.
e.
c and d
15. The tax multiplier is the number that, when multiplied by the
a.
budget deficit, gives us the change in total spending.
b.
budget deficit, gives us the change in the public debt.
c.
change in taxes, gives us the change in total spending.
d.
change in government spending, gives us the change in total spending.
16. A $40 billion reduction in taxes increases Real GDP by $150 million. Assuming a constant price level, what does the
tax multiplier equal?
a.
3.75
b.
3.00
c.
37.50
d.
0.27
e.
0.73
17. A $10 billion reduction in taxes increases Real GDP by $60 billion. Assuming a constant price level, what does the
tax multiplier equal?
a.
70
b.
6
c.
50
d.
0.17
e.
0.83
18. A $100 billion increase in government spending increases Real GDP by $900 billion. Assuming a constant price
level, what does the government spending multiplier equal?
a.
9
b.
900
c.
800
d.
8
e.
7
19. A $300 billion increase in government spending increases Real GDP by $1,800 billion. Assuming a constant price
level, what does the government spending multiplier equal?
a.
0.17
b.
120
c.
6
d.
60
e.
0.83
20. Suppose that a $30 billion increase in government spending increases Real GDP by $150 billion, and that a $10 billion
tax reduction increases Real GDP by $40 billion. In this situation, the tax multiplier is _______________ the government
spending multiplier.
a.
less than
b.
greater than
c.
equal to
d.
none of the above
21. Suppose that a $4 billion increase in government spending increases Real GDP by $60 billion, and that a $3 billion tax
reduction increases Real GDP by $68 billion. In this situation, the tax multiplier is _______________ the government
spending multiplier.
a.
less than
b.
greater than
c.
equal to
d.
none of the above
22. Which of the following is true?
a.
When income tax rates fall, it is possible for tax revenues to rise.
b.
When income tax rates fall, it is possible for tax revenues to fall.
c.
All economists agree that a monetary rule is preferred to discretionary Fed policy.
d.
All economists agree that discretionary Fed policy is preferred to a monetary rule.
e.
a and b
23. Economists who view the AS curve as vertical believe that government ________________ to raise Real GDP (in the
short run) from the demand side of the economy. Economists who view the AS curve as upward-sloping believe that
changes in Real GDP (in the short run) _________ result from changes on the demand side.
a.
can do many things; cannot
b.
cannot do anything; may
c.
can do many things; may
d.
cannot do anything; cannot
24. Which of the following is false?
a.
Economists who believe that the AS curve is vertical assert that changes in Real GDP originate only on the
supply side of the economy.
b.
Economists who believe that the AS curve is upward-sloping assert that changes in Real GDP originate only
on the supply side of the economy.
c.
For economists who believe that the AS curve is upward-sloping, government policy that aims to impact either
side of the economy (supply or demand) will change both prices and Real GDP.
d.
Compared to the economists who believe that the AS curve is upward-sloping, the economists who believe
that the AS curve is upward-sloping assert that the government has fewer tools with which to change Real
GDP.
25. In order for an increase in aggregate demand to raise Real GDP and the price level, the aggregate supply curve must
be ____________________. If an increase in aggregate demand raises the price level but leaves Real GDP unchanged,
the aggregate supply curve must be _____________________.
a.
upward-sloping; vertical
b.
upward-sloping; horizontal
c.
downward sloping; vertical
d.
vertical; upward-sloping
e.
vertical; downward-sloping
26. The U.S. Congress passed a stimulus bill in February 2009 to help remove the economy from a recessionary gap. This
is an example of the use of
a.
expansionary monetary policy.
b.
contractionary monetary policy.
c.
contractionary fiscal policy.
d.
expansionary fiscal policy.
27. Those economists who argue that a significant amount of crowding out exists believe that the impact of expansionary
fiscal policy will be _________________ by the crowding out. Their reasoning is that if the government increases
purchases, and finances that spending by borrowing money, spending in the private sector will _______________, leading
ultimately to _____________ in aggregate demand.
a.
strengthened; fall; little or no change
b.
strengthened; rise; a significant rise
c.
weakened; fall; little or no change
d.
weakened; rise; a significant rise
28. Which U.S. president said, “Give me a one-handed economist. All my economists say ‘On the one hand, and then on
the other hand.'"?
a.
Barack Obama
b.
Bill Clinton
c.
Ronald Reagan
d.
Dwight D. Eisenhower
e.
Harry S. Truman
29. If the (average) tax rate falls by 10% and as a result the tax base rises by 20%, then tax revenues will
a.
rise.
b.
decline.
c.
remain unchanged.
d.
There is not enough information given to answer this question.
30. If the (average) tax rate falls by 10% and as a result the tax base rises by 8%, then tax revenues will
a.
rise.
b.
decline.
c.
remain unchanged.
d.
There is not enough information given to answer this question.
31. If the (average) tax rate falls by 20% and as a result the tax base rises by 20%, tax revenues will
a.
rise.
b.
decline.
c.
remain unchanged.
d.
There is not enough information given to answer this question.
32. According to many economists, if wages are _________________, the economy _____________ remove itself from a
recessionary gap, and thus ____________ government intervention is needed.
a.
flexible; can; no
b.
inflexible; may not; some
c.
flexible; may not; some
d.
inflexible; can; no
e.
a and b
33. Some economists believe that corporate bailouts are bad for the economy because they ________________ gains and
they _____________ the costs, which ultimately lead to _____________ companies needing to be bailed out.
a.
privatize; socialize; fewer
b.
socialize; privatize; fewer
c.
privatize; socialize; more
d.
socialize; privatize; more
34. Economists who asset that the AS curve is vertical believe that changes in Real GDP originate only on the
_____________of the economy; so government policy that is intended to impact the ____________________ of the
economy will change only ______________, not ________________.
a.
demand side; supply side; Real GDP; prices
b.
demand side; supply side; prices; Real GDP
c.
supply side; demand side; Real GDP; prices
d.
supply side; demand side; prices; Real GDP
35. Economists who believe in complete crowding out would argue that
a.
jobs created or saved because of increased government spending will be matched by an equal number of jobs
created by an increase in private sector spending.
b.
jobs created or saved because of increased government spending will be completely offset by jobs destroyed
by a decline in private sector spending.
c.
government policies intended to stimulate aggregate demand will be completely ineffective.
d.
government policies intended to stimulate aggregate demand will tend to be effective.
e.
a and c
36. Economists who are in favor of smaller government tend to prefer ________________ when expansionary
_______________ policy is needed to raise aggregate demand.
a.
tax cuts; fiscal
b.
tax cuts; monetary
c.
more government spending; fiscal
d.
more government spending; monetary
37. Economists who are in favor of an increase in the size and scope of government tend to prefer ________________
when expansionary _______________ policy is needed to raise aggregate demand.
a.
tax cuts; fiscal
b.
tax cuts; monetary
c.
more government spending; fiscal
d.
more government spending; monetary
38. Which of the following questions is most likely to bring forth the same answer from each of 100 economists:
a.
What role should government play in the economy?
b.
How does the Fed go about changing the money supply?
c.
Is it better to use monetary or fiscal policy to stabilize the economy at the current time?
d.
What are the effects on the economy of expansionary fiscal policy?
e.
b and d
39. Which of the following is an empirical issue?
a.
The degree to which investment will decline as the interest rate rises.
b.
The assumptions of the simple quantity theory of money.
c.
The predictions of the simple quantity theory of money.
d.
The degree to which wages are flexible.
e.
a and d
40. Economist A says that the economy is self-regulating. This economist most likely believes that
