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a.
the economy can get stuck in a recessionary gap.
b.
wages and prices are inflexible downward.
c.
wages and prices are flexible.
d.
government should enact expansionary fiscal policy when the economy is in a recessionary gap.
e.
none of the above
41. Economist B believes that the economy can get stuck in a recessionary gap. This economist most likely believes that
a.
wages and prices are flexible.
b.
wages and prices are inflexible downward.
c.
government may need to enact contractionary fiscal policy to move the economy out of a recessionary gap.
d.
the economy is self-regulating.
e.
none of the above
42. Suppose the government spending multiplier is 1.5. This means that
a.
a $1 decline in government spending will raise Real GDP by $1.50.
b.
a $1 rise in government spending will raise both total spending and Real GDP (assuming prices are constant)
by $1.50.
c.
a $1 rise in government spending will raise investment spending by $1.50.
d.
a $1 rise in government spending will change interest rates by 1.50 times what it was before the $1 rise in
government spending.
e.
none of the above
43. Two economists, A and B, believe that the economy currently needs a strong dose of expansionary fiscal
policy. Economist A wants to cut taxes while economist B wants to raise government spending. It is probably the case
that
a.
Economist A believes the tax multiplier is larger than the government spending multiplier.
b.
Economist B believes the government spending multiplier is equal to the tax multiplier.
c.
Economist A believes the tax multiplier is smaller than the government spending mutiplier.
d.
Economist B believes the tax multiplier is larger than the government spending multiplier.
e.
a and d
44. The choice between increasing government spending and cutting taxes often is related to
a.
what an economist believes the value of both the tax multiplier and the government spending multiplier are.
b.
what an economist believes the right size and scope of government might be.
c.
whether an economist believes that government spending leads to complete crowding out.
d.
a and b
e.
all of the above
45. Economist A believes that the expansionary fiscal policy --- in the form of increased government spending --- should
be implemented to remove the economy from the recessionary gap it is currently in. This economist probably believes
that
a.
crowding out will not present much of a problem.
b.
crowding out will be a big problem.
c.
crowding out is irrelevant to the degree of effectiveness of fiscal policy.
d.
zero crowding out is unlikely.
e.
c and d
46. Economist B says all of the following: Expansionary fiscal policy is needed to raise aggregate demand and remove the
economy from a recessionary gap. The choice of fiscal policy measures is between more government spending and a
___________ in taxes. Since I am in favor of smaller government, I choose a __________________ in
__________________.
a.
rise; decrease; government spending
b.
rise; cut; taxes
c.
decrease; rise; government spending
d.
decrease; cut; taxes
e.
none of the above
47. Economist C says all of the following: Expansionary fiscal policy is needed to raise aggregate demand and remove the
economy from a recessionary gap. The choice of fiscal policy measures is between ________________ government
spending and a _______________ in taxes. Since I am in favor of bigger government, I choose a(n) _________________
in _________________.
a.
less; decrease; increase; government spending
b.
more; decrease; increase; government spending
c.
less; rise; decrease; government spending
d.
less; reduction; increase; taxes
e.
b or d
48. A rise in government spending could
a.
decrease both the size and scope of government.
b.
increase the size, but not the scope of government.
c.
decrease the size, but increase the scope of government.
d.
increase both the size and scope of government
e.
none of the above
49. Economist A says all of the following: The economy needs expansionary fiscal policy to remove it from a
recessionary gap. Government should either raise its _____________ or cut ___________________. I believe the
government spending multiplier is ____________ than the tax multiplier, so I favor _____________________.
a.
spending; taxes; larger; cutting taxes
b.
taxes; spending; larger; raising; spending
c.
spending; taxes; larger; raising; spending
d.
b or c
e.
a or c
50. Economist B says all of the following: The economy needs expansionary fiscal policy to remove it from a
recessionary gap. Government should either raise its __________ or cut _________________. I believe the tax
multiplier is larger than the government spending multiplier, so I suggest government ___________________.
a.
taxes; spending; cut taxes
b.
spending; taxes; cut taxes
c.
taxes; spending; raise spending
d.
spending; taxes; raise spending
e.
none of the above
51. Economist A argues that a “dollar spent is a dollar spent.” This economist is most likely to agree with which of the
following:
a.
What matters is that government increase spending and what it spends the money on doesn’t matter as much.
b.
What matters is that government increase spending and what it spends the money on matters quite a bit.
c.
What matters is that government cut taxes and what taxes it cuts matters little.
d.
What matters is that government raise taxes and what taxes it raises matters little.
e.
none of the above
52. Which of the following statements is false?
a.
Economists who advocate discretionary monetary policy argue that it is more likely to achieve the desired
economic results because the monetary authority has the flexibility to shape the best monetary policy to the
existing circumstances.
b.
Here is an example of zero crowding out: The government spends $100 more and the private sector doesn’t
spend any less.
c.
Here is an example of complete crowding out: The government spends $100 more and the private sector
spends $100 less.
d.
Not all economists believe that rule-based monetary policy is preferable to discretionary monetary policy.
e.
none of the above
53. The Taylor Rule is an example of
a.
discretionary monetary policy.
b.
rule-based monetary policy.
c.
a monetary policy measure that always sets the money supply growth rate at 3 percent.
d.
contractionary monetary policy.
e.
none of the above
54. Which of the following statements is false?
a.
Not all economists are agreed as to whether government should bail out companies in financial trouble.
b.
Not all economists prefer a rule-based monetary policy to discretionary monetary policy.
c.
Rule-based monetary policy advocates often assert that discretionary monetary policy can be motivated by
politics.
d.
The tax multiplier is always larger than the government spending multiplier.
55. If the aggregate supply curve is vertical, it follows that a change in
a.
Real GDP can originate on the demand side of the economy.
b.
Real GDP can originate on the supply side of the economy.
c.
Real GDP can originate on either the demand side or the supply side of the economy.
d.
price level can originate on the demand side of the economy.
e.
b and d
56. “We lose more by letting the company fail than by having the government save it.” This was most likely said by an
economist who believes that
a.
crowding out is complete.
b.
bailouts are sometimes necessary.
c.
the tax multiplier is larger than the government spending multiplier.
d.
the AS curve is vertical.
e.
the AS curve is upward-sloping.
57. “Demand-side fiscal policy is capable of changing Real GDP.” This statement would be most likely to be said by an
economist who believes that
a.
the AS curve is vertical.
b.
the AS curve is upward sloping.
c.
complete crowding out exists.
d.
there is little, if any, crowding out.
e.
b and d
58. If the AS curve is vertical, then it follows that
a.
Real GDP changes will always arise from the supply side of the economy.
b.
Real GDP changes will always arise from the demand side of the economy.
c.
Price level changes will always arise from the demand side of the economy.
d.
Price level changes will always arise from the supply side of the economy.
e.
a and c
59. If tax rates are cut, tax revenues may rise, fall, or remain unchanged. What actually happens is considered a(n)
a.
theoretical issue.
b.
corrective issue.
c.
empirical issue.
d.
self-regulating issue.
e.
multiplier issue.
60. Economist A believes the economy is self-regulating. Economist B believes that wages and prices are inflexible
downward. Economist C believes that the AS curve is vertical. Economist D believes that crowding out is likely to be
complete. Which economist is most likely to advocate for expansionary fiscal policy in the in the form of greater
government spending to remove an economy from a recessionary gap?
a.
Economist A
b.
Economist B
c.
Economist C
d.
Economist D
61. “Expansionary fiscal policy is needed to increase Real GDP --- at least in the short run.” The economist who said this
most likely believes that
a.
the tax multiplier is larger than the government spending multiplier.
b.
the AS curve is vertical.
c.
there will be a great deal of crowding out connected with a rise in government spending.
d.
the AS curve is upward-sloping.
e.
c and d
62. “It matters how the government spends any extra dollars.” The economist who said this most likely believes that
a.
a dollar spent on one government project could raise Real GDP more than a dollar spent on some alternative
government project.
b.
the AS curve is upward-sloping.
c.
the tax multiplier is larger than the government spending multiplier.
d.
government should increase in both size and scope.
e.
none of the above
63. “The only thing that results from expansionary demand-side fiscal policy is that the price level will rise.” The
economist who said this most likely believes that
a.
there is likely to be a lot of crowding out if government spending rises.
b.
the AS curve is vertical.
c.
there is unlikely to be much crowding out if government spending rises.
d.
investment is interest inelastic.
e.
b and c
64. “Politics is too often the thing that gets in the way of good economic policy being implemented.” The economist who
said this most likely
a.
believes that fiscal policy is preferable to monetary policy when it comes to stabilizing the economy.
b.
prefers discretionary monetary policy to rule-based monetary policy.
c.
believes that there will be a lot of crowding out if government spending is increased.
d.
prefers rule-based monetary policy to discretionary monetary policy.
65. “If we come to a company’s rescue this time, they’ll take more risks and we’ll have to come to their rescue next time,
too.” The economist who said this most likely
a.
believes that the AS curve is upward-sloping.
b.
prefers monetary policy to fiscal policy when it comes to stabilizing the economy.
c.
is against bailouts.
d.
prefers increases in government spending to tax cuts when it comes to stimulating the economy from the
demand side.
e.
none of the above
66. Economist B believes that if tax rates are cut, tax revenue is likely to fall. This economist most likely believes that the
percentage decrease in tax rates will ______________________________ percentage rise in the tax base.
a.
be larger than the resulting
b.
be equal to the resulting
c.
be smaller than the resulting
d.
occur long after the
e.
a and d
67. Economist A believes that if tax rates are cut, tax revenue is likely to rise. This economist most likely believes that
the percentage decrease in tax rates will ______________________________ percentage rise in the tax base.
a.
be larger than the resulting
b.
be equal to the resulting
c.
be smaller than the resulting
d.
occur long after the
e.
a and d
68. Economist C believes that if tax rates are cut, tax revenue is likely to remain constant. This economist most likely
believes that the percentage decrease in tax rates will ______________________________ percentage rise in the tax base.
a.
be larger than the resulting
b.
be equal to the resulting
c.
be smaller than the resulting
d.
occur long after the
e.
a and d
Essay
69. According to the standard textbook Keynesian analysis, which is greater: the tax multiplier or the government
spending multiplier? Explain the reasoning behind this relationship.
70. One area of disagreement among economists is the impact that income tax cuts will have on a budget deficit. Explain
in detail the reasoning of both sides of this argument.
71. Explain how the different views of the shape of the aggregate supply (AS) curve influence economists’ perception of
the impact that government actions have on Real GDP in the short run.
