ECON102 Lecture Notes - Lecture 6: Production Function, Government Spending, Aggregate Supply
ECON102 Full Course Notes
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1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?
Answer
| a. | The aggregate demand curve will shift to the right. | |
| b. | The economy will always approach potential GDP. | |
| c. | The marginal propensity to consume will increase. | |
| d. | The average price level will increase. | |
| e. | The aggregate demand curve will shift to the left. |
2. If the government wants to close a GDP gap, it can:
Answer
| a. | lower government spending on social security. | |
| b. | adopt contractionary fiscal policies to control inflation. | |
| c. | increase its budget deficit. | |
| d. | repay its borrowings. | |
| e. | raise both direct and indirect tax rates. |
3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:
Answer
| a. | lowering average tax rates such that aggregate supply is increased. | |
| b. | increasing government spending such that aggregate expenditures are increased. | |
| c. | increasing transfer payments such that aggregate expenditures decline. | |
| d. | raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased. | |
| e. | decreasing government spending such that aggregate demand is reduced. |
4. A drop in investment spending caused by increased government budget deficits is referred to as:
Answer
| a. | the multiplier effect. | |
| b. | crowding out. | |
| c. | an expansionary gap. | |
| d. | the paradox of thrift. | |
| e. | the Ricardian equivalence. |
5. Discretionary fiscal policy is best defined as:
Answer
| a. | the deliberate manipulation of the money supply to expand the economy. | |
| b. | the deliberate change in tax laws and government spending to change equilibrium income. | |
| c. | the policy action taken by the Congress to reduce the federal budget deficit. | |
| d. | the arbitrary fluctuation in tax laws and budget requirements. | |
| e. | the automatic change in certain fiscal instruments when real GDP changes. |
6. Which of the following can be considered as an automatic stabilizer in the economy?
Answer
| a. | Money supply | |
| b. | Disposable income | |
| c. | Real exchange rate | |
| d. | Real interest rate | |
| e. | Unemployment insurance |
7. Which of the following is true about automatic stabilizers?
Answer
| a. | When income rises, automatic stabilizers increase/boost spending. | |
| b. | Automatic stabilizers are a part of discretionary fiscal policy. | |
| c. | An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations. | |
| d. | Any kind of trade policy adopted by the government will be considered as an automatic stabilizer. | |
| e. | The interest rate is an example of an automatic stabilizer. |
8. Increased budget deficits
Answer
| a. | can cause interest rates to increase and hence decrease net exports | |
| b. | have no effect on net exports | |
| c. | can cause interest rates to decrease and hence increase net exports | |
| d. | never impose additional interest costs on the government |
9. The Ricadian Equivalence implies that when financing additional government expenditures
Answer
| a. | there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way. | |
| b. | there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way. | |
| c. | increasing borrowing is the best option | |
| d. | increasing current taxes is the best option |
10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.
Answer
| a. | right; decrease; increase | |
| b. | right; decrease; decrease | |
| c. | left; decrease; decrease | |
| d. | left; increase; increase | |
| e. | right; increase; increase |
11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?
Answer
| a. | A decrease of $35 | |
| b. | An increase of $105 | |
| c. | An increase of $35 | |
| d. | A decrease of $105 | |
| e. | A decrease of $15 |
1.
12.12. The term fiscal policy refers to
Answer
| a. | the adjustment of the GDP for inflation. | |
| b. | the purchase and sale of U.S. government securities to regulate the money supply. | |
| c. | the use of government spending and taxation to influence the level of economic growth and inflation. | |
| d. | the use of fines to penalize unfair business practices. | |
| e. | a policy action by Congress to overrule unpopular budget cuts by the president. |
13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will
Answer
| a. | raise the price level and leave real GDP unchanged. | |
| b. | raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged. | |
| c. | raise both real GDP and the price level by a multiple of the initial spending increase. | |
| d. | have no effect on real GDP or on the price level, because all private investment will be crowded out. | |
| e. | lower real GDP by an amount equal to the spending increase and reduce inflation. |
14. Which of the following is not a means to finance government spending?
Answer
| a. | Government subsidies | |
| b. | Government debt | |
| c. | Capital gains taxes | |
| d. | Personal income taxes | |
| e. | Money creation |
15. An automatic stabilizer is
Answer
| a. | a change in government spending aimed at achieving a policy goal. | |
| b. | an element of fiscal policy that automatically changes in value as real GDP changes. | |
| c. | an element of monetary policy that automatically changes in value as real GDP changes. | |
| d. | a decrease in tax rates as the economy moves into a recession. | |
| e. | a deliberate change in taxation aimed at increasing real GDP. |
16. Budget deficits tend to grow during recessions because
Answer
| a. | real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow. | |
| b. | real GDP growth is positive, which reduces both tax receipts and transfer payments. | |
| c. | real GDP growth is negative, which reduces transfer payments in relation to tax receipts. | |
| d. | real GDP growth is negative, which reduces tax receipts in relation to government expenditures. | |
| e. | real GDP growth is positive, which increases tax receipts in relation to government expenditures. |
|
Taxable Income Range |
Marginal Tax Rate |
|
$0 to $10,000 |
12% |
|
$10,001 to $24,500 |
18% |
|
$24,501 to $68,000 |
27% |
|
$68,001 and above |
38% |
The table shows the taxable income range and marginal tax rates for a single taxpayer in Oceania. There are no exemptions or deductions on personal income taxes in Oceania.
1. Refer to Table 20.1. The income tax paid by George, a single taxpayer with an income of $65,000, is
A.$11,100.
B.$14,745.
C.$15,345.
D.$17,550.
2.The table shows the taxable income range and marginal tax rates for a single taxpayer in Oceania. There are no exemptions or deductions on personal income taxes in Oceania.
Refer to Table 20.1. George is a single taxpayer with an income of $65,000. What is George's average tax rate?
A.19.00%
B.22.68%
C.23.61%
D.27%
3.Of the following countries, in which one was the true marginal tax rate faced by the typical worker lowest and the average number of hours worked per week highest from 1993 through 1996?
A.Italy
B.Canada
C.the United States
D.Germany
4.Unlike with Social Security taxes, there is no threshold on earnings beyond which the Medicare tax collection stops.
False
True
5.Which of the following expenditures is classified as a discretionary expenditure of the U.S. federalâ government?
A.food stamps
B.Social Security
C.federal employee pensions
D.student loans and grants
6.For the U.S. federal government, mandatory spending refers to
A.spending that is not subject to Congress's annual appropriations process.
B.spending on federal employee salaries.
C.spending that never changes in amount from year to year.
D.spending that must be authorized by Congress each year.
7.Based on the current state of revenue of the Social Security and Medicare programs, the government has two options for funding, which are
A.cutting payroll taxes or raising benefits.
B.cutting payroll taxes or cutting benefits.
C.raising payroll taxes or cutting benefits.
D.raising payroll taxes or raising benefits.
8.Which of the following would be classified as fiscal policy?
A.The Environmental Protection Agency enacts stricter air pollution regulations.
B.The Federal Reserve cuts interest rates to stimulate the economy.
C.The federal government cuts taxes to stimulate the economy.
D.States increase taxes to fund education.
9.Automatic stabilizers refer to
A.the money supply and interest rates that automatically increase or decrease along with the business cycle.
B.changes in the money supply or interest rates that are intended to achieve economic stability.
C.changes in federal taxes and purchases that are intended to influence economic activity.
D.government spending and taxes that automatically increase or decrease along with the business cycle.
10.The implementation lag for fiscal policy ________ it is for monetary policy.
A.can be much longer than
B.is usually the same as
C.is generally much shorter than
D.There is not an implementation lag for fiscal policy.
11.When government decides to increase spending, interest rates generally ________ and this change in interest rates ________ investment spending.
A.decrease; increases
B.increase; decreases
C.decrease; decreases
D.increase; increases
12.The marginal propensity to consume is the proportion of each newâ dollar's worth of income that is spent.
True
False
