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. |
