ECO 001 Lecture Notes - Lecture 7: Laffer Curve, Balanced Budget Amendment

1. If government tax policy requires Jane to pay $28,000 in taxes on an annual income of $200,000 and Mary to pay $10,000 in tax on the annual income of $100,000, then the tax policy is:

2. When increasing oil prices cause aggregate supply to shift to the left, then:

3. What do goods like gasoline, tobacco, and alcohol typically share in common?

4. When inflation begins to climb to unacceptable levels in the economy, the government should:

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending. 

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease 

1. Discretionary fiscal policy refers to:

A. Any change in government spending or taxes that destabilizes the economy.

B. The authority that the President has to change personal income tax rates.

C. Intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

D. The changes in taxes and transfers that occur as GDP changes.

2. Countercyclical discretionary fiscal policy calls for:

A. Surpluses during recessions and deficits during periods of demand-pull inflation.

B. Deficits during recessions and surpluses during periods of demand-pull inflation.

C. Surpluses during both recessions and periods of demand-pull inflation.

D. Deficits during both recessions and periods of demand-pull inflation.

3. Contractionary fiscal policy is so named because of it:

A. Involves a contraction of the nation's money supply.

B. Necessarily reduces the size of government.

C. Is aimed at reducing aggregate demand and thus achieving price stability.

D. Is expressly designed to expand real GDP.