True / False
1. Fiscal policy is the use of taxes and spending by the government to affect aggregate demand.
a.
True
b.
False
True
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
2. In 2009, the U.S. economy was experiencing an inflationary gap.
a.
True
b.
False
False
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
3. Most tax payments increase as GDP increases.
a.
True
b.
False
True
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
4. Taxes constitute the difference between GDP and disposable income.
a.
True
b.
False
True
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
5. When taxes are decreased, disposable income increases even though GDP is unchanged.
a.
True
b.
False
True
Moderate
6. A tax reduction shifts the consumption schedule downward.
a.
True
b.
False
False
Moderate
7. The personal income tax varies as GDP changes.
a.
True
b.
False
True
Moderate
8. Government spending influences spending indirectly.
a.
True
b.
False
False
Moderate
9. The multiplier is increased when income taxes are included.
a.
True
b.
False
False
Moderate
10. The addition of imports reduces the value of the multiplier.
a.
True
b.
False
True
Moderate
11. Government purchases and income taxes have the same effect on the multiplier.
a.
True
b.
False
False
Moderate
12. When the government taxes and spends, each activity affects GDP in the same proportion.
a.
True
b.
False
False
Difficult
13. If increases in government spending lead to inflation, the value of the multiplier is reduced.
a.
True
b.
False
True
Moderate
14. A one-dollar tax reduction has the same effect as a one-dollar increase in government purchases.
a.
True
b.
False
False
Moderate
15. Government purchases have the same multiplier effect as business investment spending.
a.
True
b.
False
True
Easy
16. Transfer payments exactly replace the income lost because of taxes.
a.
True
b.
False
False
Easy
17. Transfer payments represent income that is not earned but received by individuals.
a.
True
b.
False
True
Easy
18. If the MPC in the U.S. was low, it would increase the value of the multiplier.
a.
True
b.
False
False
Moderate
19. Taxes, transfer payments, and government purchases are the components of automatic stabilizers.
a.
True
b.
False
False
Easy
20. Income taxes and transfer payments help prevent extreme macroeconomic fluctuations.
a.
True
b.
False
True
Easy
21. During the 2009-2010 stimulus debate, Republicans argued that increases in government spending would be more
effective than decreases in taxes.
a.
True
b.
False
False
Moderate
22. During the debate on the stimulus package in 2009 and 2010, Republicans argued in favor of increased government
spending as opposed to tax cuts based in part on the impact government spending would have on aggregate supply.
a.
True
b.
False
True
Moderate
23. Reducing transfer payments is an appropriate way to counteract a recessionary gap.
a.
True
b.
False
False
24. An increase in income taxes was part of President George W. Bush’s plan in 2001 and 2008 to increase aggregate
demand.
a.
True
b.
False
False
Moderate
25. In 2006 and 2007 the U.S. faced an inflationary gap which would suggest the use of restrictive fiscal policy.
a.
True
b.
False
True
Easy
26. Raising taxes or increasing transfer payments would reduce total spending.
a.
True
b.
False
False
Moderate
27. Conservatives usually favor increasing government spending to increase aggregate demand.
a.
True
b.
False
False
Moderate
28. Liberals tend to favor increasing taxes as the method of counteracting inflation.
a.
True
b.
False
True
Moderate
29. President Obama would generally advocate increased spending when the economy needs stimulus and increased
taxation when the economy needs to be restricted.
a.
True
b.
False
True
Easy
30. The fiscal policy planner’s job is made easier because full-employment GDP can be accurately measured.
a.
True
b.
False
False
Easy
31. Increasing aggregate demand with fiscal policy may have undesirable inflationary consequences.
a.
True
b.
False
True
Moderate
32. Supply-side policy is based on the assumption that people’s economic behavior is not affected by taxes.
a.
True
b.
False
False
Moderate
33. According to supply siders, tax cuts should increase aggregate supply.
a.
True
b.
False
True
Easy
34. Productivity increases, brought about by increased education and training, may shift the aggregate supply curve
outward.
a.
True
b.
False
True
Moderate
35. If the Bush tax cuts were allowed to expire in 2010, the maximum personal income tax rate in the United States would
have moved above 50 percent.
a.
True
b.
False
False
Easy
36. Critics of supply-side policies argue that the effects of tax cuts are too small to be effective policy.
a.
True
b.
False
True
Moderate
37. Supply-side tax cuts also tend to reduce aggregate demand and promote recession.
a.
True
b.
False
False
Difficult
38. During the 2008 presidential campaign, candidate Barack Obama argued in favor of repealing the majority of the Bush
tax cuts in order to increase government revenue.
a.
True
b.
False
True
Easy
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Idea Behind Supply-Side Tax Cuts
39. The hallmark of Clintonomics was first to reduce the budget deficit.
a.
True
b.
False
True
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Idea behind Supply-Side Tax Cuts
40. Most supply-side initiatives have the effect of reducing inequality.
a.
True
b.
False
False
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Idea behind Supply-Side Tax Cuts
41. The primary reason why the oversimplified formula overstates the multiplier is that it ignores price-level changes,
which reduce the multiplier.
a.
True
b.
False
False
Difficult
DISC: Measuring the Economy
United States – BPROG: Analytic
Measuring the Economy
Multiple Choice
42. “Fiscal Policy” is the federal government’s plan for
a.
international trade, designed to balance exports and imports.
b.
spending and taxes, designed to influence the level of aggregate demand.
c.
manipulating the money supply and the control of interest rates.
d.
All of the above are correct.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
43. Fiscal policy consists of
a.
taxes and interest rates.
b.
government purchases and defense spending.
c.
the money supply and taxes.
d.
taxes and government spending.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
44. The government’s fiscal policy is its plan to influence aggregate demand by changing
a.
the money supply.
b.
minimum wage levels.
c.
sales taxes.
d.
taxation and spending.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
45. Historically, the government has used fiscal policy to affect the economy through
a.
central planning.
b.
indicative planning.
c.
aggregate demand.
d.
aggregate supply.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Stimulus Debate of 2009-2010
46. The use of spending and taxes by the government to influence aggregate demand is known as
a.
monetary policy.
b.
governmental policy.
c.
administrative policy.
d.
fiscal policy.
e.
federal policy.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
47. In 2009, the U.S. economy was experiencing a(n)
a.
recessionary gap.
b.
inflationary gap.
c.
balance of trade deficit.
d.
hyperinflation.
a
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
48. Appropriate fiscal policy in the U.S. in 2009 would attempt to
a.
increase taxes.
b.
decrease aggregate supply.
c.
increase aggregate demand.
d.
decrease aggregate demand.
c
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
49. In 2009, President Obama and Congress stimulated aggregate demand by
a.
increasing taxes and government spending.
b.
decreasing taxes and government spending.
c.
increasing taxes and decreasing government spending.
d.
decreasing taxes and increasing government spending.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Stimulus Debate of 2009-2010
50. During the deliberations on fiscal stimulus in 2009, the debate over fiscal policy focused on
a.
the multiplier effect of tax cuts versus higher government spending.
b.
the multiplier effect of different types of tax cuts.
c.
the incentive effects of tax cuts.
d.
all of the above
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
51. If wealthy U.S. consumers save most of their tax cut, this means that, compared to government spending changes,
a.
tax changes would have a higher multiplier effect.
b.
tax changes would have a weaker multiplier effect.
c.
government spending would have a weaker multiplier effect.
d.
U.S. consumers would spend all of their tax cut.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Reflective Thinking – BPROG: Analysis
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: The Great Debate over Fiscal Stimulus
52. Most of the taxes collected by governments tend to
a.
remain fixed.
b.
move in the opposite direction from GDP.
c.
be sales taxes.
d.
rise and fall with the level of GDP.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
53. ____ is the income actually available to the consumers that determines aggregate demand.
a.
Nominal income
b.
Net domestic product
c.
Income corrected for depreciation
d.
Disposable income
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Income Taxes and the Consumption Schedule
54. At any given price level, equilibrium GDP on the expenditure side occurs when ____.
a.
Y = C + I + G − (X − IM)
b.
Y = C + I − G
c.
Y = C + I + G + (X − IM)
d.
Y = C + X + G + (X − IM)
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
55. Taxes are the difference between
a.
GDP and net exports.
b.
GDP and consumer spending.
c.
Consumer spending and saving.
d.
GDP and disposable income.
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
56. Personal income taxes and corporate income taxes are examples of ____ taxes.
a.
variable
b.
sales
c.
fixed
d.
disposable
a
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
57. With regard to GDP, residential property taxes are an example of ____ taxes.
a.
variable
b.
sales
c.
fixed
d.
disposable
c
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
58. In contrast to changes in government spending, tax changes affect spending
a.
directly.
b.
in the same proportion.
c.
by a greater amount.
d.
indirectly.
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
59. When you compare the effects of government spending on aggregate demand with the effects of taxes on aggregate
demand, the effects of government spending are
a.
smaller.
b.
larger.
c.
the same.
d.
impossible to predict.
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
60. Once the expenditure schedule has been adjusted for tax levels, the determination of equilibrium GDP
a.
is no longer possible.
b.
becomes much more difficult.
c.
proceeds exactly as before.
d.
requires a higher multiplier value.
c
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
61. Taxes reduce total spending
a.
directly by increasing government purchases by an equal amount.
b.
directly by substituting investment spending.
c.
indirectly by reducing government spending.
d.
indirectly by reducing disposable income.
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
62. The difference between a fixed tax and a variable tax is that
a.
fixed taxes can never be changed, but variable taxes can be changed.
b.
a change in fixed taxes has no effect on aggregate demand, but a change in variable taxes has an impact.
c.
a variable tax changes when GDP changes, but a fixed tax does not change with GDP.
d.
a variable tax can be changed easily, whereas changing fixed taxes requires a constitutional amendment.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
63. How does an increase in taxes affect the expenditure schedule?
a.
It causes movement to the left along the schedule.
b.
It causes the schedule to shift upward.
c.
It causes movement to the right along the schedule.
d.
It causes the schedule to shift downward.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
64. How does a tax cut affect the expenditure schedule?
a.
It causes movement to the left along the schedule.
b.
It causes the schedule to shift upward.
c.
It causes movement to the right along the schedule.
d.
It causes the schedule to shift downward.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
65. Why does a tax change affect aggregate demand?
a.
A tax change alters saving by an equal amount.
b.
A tax change alters imports and net exports.
c.
A tax change alters government spending by an equal amount.
d.
A tax change alters disposable income and consumption spending.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
66. If income tax rates are increased in an attempt to balance the federal budget, we should expect to see
a.
an increase in consumption and a decrease in GDP.
b.
an increase in consumption and an increase in GDP.
c.
a decrease in consumption and a decrease in GDP.
d.
a decrease in consumption and an increase in GDP.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
67. If personal income tax rates are decreased in an attempt to stimulate spending, we should expect to see
a.
an increase in consumption and an increase in GDP.
b.
an increase in consumption and a decrease in GDP.
c.
a decrease in consumption and a decrease in GDP.
d.
a decrease in consumption and an increase in GDP.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Income Taxes and the Consumption Schedule
68. If all variable taxes in the United States were removed and only fixed taxes remained, what would be the effect on the
expenditures schedule?
a.
The expenditure schedule will shift upward and become steeper.
b.
The expenditure schedule will shift upward and become less steep.
c.
The expenditure schedule will shift downward and become less steep.
d.
The expenditure schedule will shift downward and become steeper.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Appendix A: Graphical Treatment of Taxes and Fiscal Policy
69. If all fixed taxes in the United States were removed and only variable taxes remained, what would be the effect on the
expenditures schedule?
a.
The expenditure schedule will shift upward.
b.
The expenditure schedule will shift downward.
c.
The expenditure schedule will become flatter.
d.
The expenditure schedule will become steeper.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Appendix A: Graphical Treatment of Taxes and Fiscal Policy
70. If a state government reduces property taxes for residents at the same time that it increases the state income tax, what
will happen to the expenditures schedule of the residents of this state?
a.
It shifts upward.
b.
It shifts downward.
c.
It becomes less steep.
d.
It becomes steeper.
e.
It does not change.
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Appendix A: Graphical Treatment of Taxes and Fiscal Policy
71. Which of the following observations is true?
a.
Increase in taxes shifts the consumption schedule upward.
b.
Tax reductions increase equilibrium GDP.