ECO 1102 Study Guide - Government Budget Balance, Loanable Funds, Dividend Tax
ECO 1102 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. |
Question 3
According to Joseph Schumpeter, the theory of creative destruction describes a process by which
A | some new products unleash a gale of destruction that drive other new products out of the market. | |
B | new products unleash a gale of destruction that drives old products out of the market. | |
C | new products are created by the destruction of capital. | |
D | the creation of new products never involves the destruction of old products. |
Question 4
Which of the following countries had the highest GDP per capita in 2012?
A Qatar | ||
B | United States | |
C | Japan | |
D | Norway |
Question 5
________ save a ________ of their income. This ________ capital in their economy and raises economic growth.
A | Developing countries; large proportion; decreases | |
B | Developing countries; small proportion; increases | |
C | High-income countries; large proportion; increases | |
D | High-income countries; small proportion; increases |
Question 6
The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.
A
A | government | |
B | households | |
C | banks | |
D | firms |
Question 7
The U.S. economy has been more stable since 1950.
True
False
Question 8
When the economy reaches a trough in a business cycle, which of the following will occur?
A | Income, production, and employment will continue to fall. | |
B | Income, production, and employment will begin to rise. | |
C | Income and production will rise, but employment will continue to fall. | |
D | Employment rises, but income and production will continue to fall. |
Question 9
In a closed economy, what is the relationship between saving and investment?
A | Saving is greater than investment. | |
B | Investment is greater than saving. | |
C | Investment is equal to saving. | |
D | Investment may be greater or smaller than saving. |
Question 10
The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.
A | labor; real GDP; technology | |
B | capital; real GDP; technology | |
C | labor; capital; real GDP | |
D | capital; labor; real GDP |
Question 11
New growth theory states that increases in ________ capital will result in ________ at the ________ level.
A | knowledge; increasing returns to scale; firm | |
B | physical; decreasing returns to scale; firm | |
C | knowledge; decreasing returns to scale; economy | |
D | knowledge; increasing returns to scale; economy |
Question 12
Which of the following is not a reason why the Industrial Revolution occurred when and where it did?
A | The British government was committed to upholding private property rights. | |
B | The British government was able to eliminate arbitrary increases in taxes. | |
C | The British government was able to more easily seize wealth. | |
D | Institutional changes by the British government helped protect wealth. |
Question 13
Growth in real GDP per capita for the world economy was greatest during
A | the seventeenth century. | |
B | the eighteenth century. | |
C | the nineteenth century. | |
D | the twentieth century. |
Question 14
Which of the following is a normative statement about economic growth?
A | Economic growth is associated with higher labor productivity growth. | |
B | Economic growth increases GDP per capita. | |
C | Economic growth hurts developing countries. | |
D | Foreign direct investment stimulates economic growth. |
Question 15
The effect of a recession on a company like Whirlpool Corporation is such that
A | sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods. | |
B | profits fall less sharply as compared to firms that do not produce durable goods. | |
C | the decline in sales is more short-lived as compared to firms that do not produce durable goods. | |
D | there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. |
Question 16
For the recessions in the United States since the 1950s,
A | cyclical unemployment has been non-existent. | |
B | unemployment rises on average by about 1.2 percentage points 12 months after a recession begins. | |
C | unemployment falls on average by 2 percentage points 12 months after a recession begins. | |
D | unemployment rises on average about 5 percentage points 12 months after a recession begins. |
Question 17
You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?
A | a reduction in sales taxes | |
B | an investment tax credit | |
C | a reduction in taxes on luxury yachts | |
D | All of these |
Question 18
In comparison to a government that runs a balanced budget, when the government runs a budget deficit,
A | the equilibrium interest rate will fall. | |
B | business investment will fall. | |
C | household savings will fall. | |
D | None of these |
Question 19
If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.
A | labor force participation | |
B | the quantity of goods or services that can be produced by one hour of work | |
C | the working-age population | |
D | nominal GDP |
Question 20
Policies to promote growth by increasing saving and investment work through
A | decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. | |
B | increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital. | |
C | increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital. | |
D | increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. |