Chapter 11: Fiscal Policy Multiple Choice Questions




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Chapter 11: Fiscal Policy



Chapter 11: Fiscal Policy


Multiple Choice Questions


1. According to Keynes, the level of economic activity is predominantly determined by the level of:

A) Aggregate supply. B) Aggregate demand. C) Unemployment. D) Interest rates.


Answer: B Type: Basic Understanding Page: 218


2. According to Keynesian theory, which of the following should be used to increase aggregate demand?

A) Market self-adjustment. C) An increase in government expenditure.

B) A tax increase. D) An increase in interest rates.


Answer: C Type: Complex Understanding Page: 218


3. Keynesians would recommend:

A) Higher taxes when there is excess aggregate demand.

B) Higher government expenditures when there is a shortfall in aggregate demand.

C) Reliance on government rather than the market for adjustment when an undesirable level of aggregate demand occurs.

D) All of the above.


Answer: D Type: Complex Understanding Page: 218


TAXES AND SPENDING


4. Which of the following gave the U.S. federal government the power to tax income?

A) The Sixteenth Amendment to the Constitution.

B) The Full Employment and Balanced Growth Act of 1978.

C) The Social Security Act.

D) The capital gains tax of the Bush administration.


Answer: A Type: Basic Understanding Page: 218


5. Which of the following is an income transfer?

A) Free medical care made available to the poor by a private physician.

B) Unemployment benefits paid to a factory worker who was laid off.

C) A new highway built by the federal government.

D) All of the above.


Answer: B Type: Basic Understanding Page: 218


6. The use of government taxes and spending to alter economic outcomes is known as:

A) Monetary policy. B) Fiscal policy. C) Income policy. D) Foreign-trade policy.


Answer: B Type: Definition Page: 219


7. Fiscal policy is:

A) An internal market force.

B) A macroeconomic outcome.

C) The use of budget levers to influence the macroeconomy.

D) All of the above.


Answer: C Type: Definition Page: 219


8. Fiscal policy levers include:

A) Taxes. B) Government spending. C) Income transfers. D) All of the above.


Answer: D Type: Definition Page: 219


9. Fiscal policy works primarily through:

A) Shifts of the AS curve.

B) Shifts of the AD curve.

C) The improvement of worker skills through subsidized training programs.

D) Shifts of both AD and AS as a result of changes in the interest rate.


Answer: B Type: Basic Understanding Page: 219


10. Which of the following fiscal policies would cause a decrease in aggregate expenditures?

A) An increase in transfer payments and an increase in government spending.

B) An increase in transfer payments and a decrease in taxes.

C) A decrease in taxes and an increase in government spending.

D) An increase in taxes and a decrease in government spending


Answer: D Type: Complex Understanding Page: 219


11. Which of the following would cause both an increase in the price level and an increase in real output?

A) A tax hike. C) A decrease in production costs.

B) An increase in transfer payments. D) All of the above.


Answer: B Type: Complex Understanding Page: 219


12. Which of the following government actions is an example of fiscal policy?

A) Decreasing corporate income tax rates.

B) Purchasing fighter planes from a U.S. manufacturer.

C) Increasing social security tax rates.

D) All of the above.


Answer: D Type: Complex Understanding Page: 219


13. Which of the following is generally considered a desirable outcome of fiscal policy?

A) More jobs. B) A higher price level. C) Higher unemployment rates. D) Greater deficits.


Answer: A Type: Basic Understanding Page: 219


FISCAL STIMULUS


14. Fiscal policy options to stimulate the economy include:

A) An increase in transfer payments.

B) An increase in taxes.

C) A decrease in government spending on goods and services.

D) All of the above.


Answer: A Type: Basic Understanding Page: 220


15. Assume the economy is operating below full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process?

A) Increase government spending and leave tax rates unchanged.

B) Decrease tax rates and leave government spending unchanged.

C) Increase government spending and taxes by the same amount.

D) Decrease government spending by more than an increase in taxes.


Answer: B Type: Basic Understanding Page: 220


16. Which of the following is a fiscal policy tool used to stimulate the economy?

A) Higher interest rates. C) Reducing inefficient employment of resources.

B) Increased imports. D) Increased government purchases.


Answer: D Type: Basic Understanding Page: 220


17. Which of the following will provide fiscal stimulus to the economy?

A) Decreasing taxes.

B) Increasing government spending on goods and services.

C) Increasing transfer payments.

D) All of the above.


Answer: D Type: Basic Understanding Page: 220


18. Which of the following will cause an increase in aggregate demand?

A) Increasing purchases of goods and services. C) Raising income transfers.

B) Reducing taxes. D) All of the above.


Answer: D Type: Basic Understanding Page: 220


19. In Keynesian theory, at macro equilibrium:

A) The economy may or may not be at full employment.

B) Aggregate demand intersects aggregate supply.

C) The economy will stay at that output level, ceteris paribus.

D) All of the above.


Answer: D Type: Definition Page: 220


20. In a diagram of aggregate demand and supply curves, the GDP gap is measured as the:

A) Horizontal distance between the equilibrium output and the full-employment output.

B) Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment.

C) Horizontal distance between the aggregate demand necessary to achieve full employment and the aggregate demand curve at equilibrium output.

D) Vertical distance between the equilibrium output and the full-employment output.


Answer: A Type: Analytical Page: 220


21. The GDP gap will differ from the AD shortfall when the:

A) Multiplier effect raises spending. C) Budget is balanced.

B) Aggregate supply curve slopes upward. D) All of the above.


Answer: B Type: Basic Understanding Page: 220


22. The GDP gap differs from the AD shortfall when:

A) The aggregate supply curve slopes upward.

B) The multiplier effect raises spending.

C) The AS curve is horizontal.

D) There is a time lag in the implementation of fiscal policy.


Answer: A Type: Basic Understanding Page: 220


23. The "naïve" Keynesian model is unrealistic because it:

A) Does not take into account probable changes in the price level as the economy approaches full employment.

B) Assumes that the price level decreases as AD increases.

C) Assumes that AS is upward sloping when it is more probably horizontal.

D) Does not account for changes in output due to the multiplier.


Answer: A Type: Complex Understanding Page: 220


24. In a diagram of aggregate demand and supply curves, the AD shortfall is measured as the:

A) Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment.

B) Horizontal distance between the equilibrium output and the full-employment output.

C) Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve at the equilibrium price.

D) All of the above.


Answer: C Type: Analytical Page: 221


25. The amount of additional income generated by increased government spending depends on the:

A) Marginal propensity to consume.

B) Number of spending cycles that occur in a given period of time.

C) Size of the multiplier.

D) All of the above.


Answer: D Type: Analytical Page: 221


26. Ceteris paribus, if income was transferred from individuals with a low MPC to those with a high MPC, aggregate demand would:

A) Increase. B) Decrease. C) Stay the same. D) Increase or decrease, but not because of the MPC.


Answer: A Type: Complex Understanding Page: 222


27. Which of the following is true when the government attempts to move the economy to full employment by increasing spending?

A) The desired stimulus should be set by the AD short fall multiplied by the multiplier.

B) It must initially spend more than the GDP gap if the aggregate supply curve is upward-sloping.

C) The total change in spending includes both the new government spending and the subsequent increases in consumer spending.

D) All of the above.


Answer: C Type: Complex Understanding Page: 222


28. Suppose the consumption function is C = 100 + 0.90Y. If the government stimulates the economy with $100 billion in increased government purchases, aggregate expenditure would rise by:

A) $10 billion. B) $900 billion. C) $1,000 billion. D) $800 billion.


Answer: C Type: Analytical Page: 222


29. Suppose the consumption function is C = 200 + 0.60Y. If the government stimulates the economy with $100 billion in increased government purchases, aggregate expenditure would rise by:

A) $250 billion. B) $600 billion. C) $800 billion. D) $450 billion.


Answer: A Type: Analytical Page: 222


30. If the multiplier is 5 and a change in fiscal policy leads to a $500 million decrease in total spending, we can conclude that:

A) Government spending decreased by $500 million.

B) Taxes increased by $500 million.

C) Taxes decreased by $100 million.

D) Government spending decreased by $100 million.


Answer: D Type: Analytical Page: 222


31. If the multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand, we can conclude that:

A) Government spending decreased by $125 million.

B) Taxes increased by $500 million.

C) Taxes decreased by $100 million.

D) Government spending decreased by $100 million.


Answer: A Type: Complex Understanding Page: 222


32. Assume the MPC is 0.80. The change in total spending for the economy because of a $200 billion government spending increase is:

A) $160 billion. B) $200 billion. C) $800 billion. D) $1,000 billion.


Answer: D Type: Analytical Page: 222


33. Assume the MPC is 0.75. The change in total spending for the economy because of a $150 billion government spending increase is:

A) $75 billion. B) $150 billion. C) $600 billion. D) $750 billion.


Answer: C Type: Analytical Page: 222


34. To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by:

A) $200 billion. B) $100 billion. C) $50 billion. D) $500 billion.


Answer: C Type: Analytical Page: 223


35. To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75, the government should decrease taxes by:

A) $400 billion. B) $120 billion. C) $30 billion. D) $40 billion.


Answer: D Type: Analytical Page: 224


36. To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.80, the government should increase transfer payments by:

A) $25 billion. B) $100 billion. C) $80 billion. D) $20 billion.


Answer: A Type: Analytical Page: 224


37. If the desired fiscal stimulus is $20 billion and the desired AD increase is $50 billion, we can conclude that:

A) The MPS is 0.60. C) The multiplier is 2.0.

B) There is an inflationary gap. D) The MPC is 0.60.


Answer: D Type: Complex Understanding Page: 223


38. With an upward-sloping aggregate supply curve, real output can be increased to the full-employment output level if:

A) Government expenditures are increased by the amount of the GDP gap.

B) Government expenditures are increased by the amount of the AD shortfall.

C) Aggregate demand is increased by the amount of the GDP gap.

D) Government expenditures are increased by the amount of the AD shortfall divided by the multiplier.


Answer: D Type: Analytical Page: 223


39. The AD shortfall divided by the multiplier is equal to:

A) The MPC.

B) Desired fiscal stimulus.

C) Total gain in income generated from lower spending.

D) First-round consumption that is lost from higher taxes.


Answer: B Type: Basic Understanding Page: 223


40. Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?

A) Price level changes will make up for the difference between the fiscal stimulus and the AD shortfall .

B) The multiplier process will contribute to an additional increase in aggregate demand.

C) The government can increase taxes to create an additional increase in aggregate demand.

D) All of the above.


Answer: B Type: Basic Understanding Page: 223


41. Given a $600 billion AD shortfall and an MPC of 0.50, the desired fiscal stimulus would be:

A) A $1200 billion increase in government expenditures.

B) A $600 billion increase in government expenditures.

C) A $300 billion increase in government expenditures.

D) A $200 billion increase in government expenditures.


Answer: C Type: Basic Understanding Page: 223


42. Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be:

A) A $2 trillion increase in government expenditures.

B) A $375 billion increase in government expenditures.

C) A $500 billion increase in government expenditures.

D) A $125 billion increase in government expenditures.


Answer: D Type: Basic Understanding Page: 223


43. Which of the following is the best choice if the desired fiscal stimulus is $10 billion and the desired AD increase is $100 billion?

A) Tax hike is $11.11 billion. C) Tax cut is $11.11 billion.

B) Tax hike is $10 billion. D) Tax cut is $10 billion.


Answer: C Type: Complex Understanding Page: 224


44. The fiscal stimulus associated with a tax cut is:

A) The same as the stimulus associated with an increase in transfer payments.

B) The same as the stimulus associated with a decrease in transfer payments.

C) Less than the stimulus associated with an increase in transfer payments.

D) Greater than the stimulus associated with an increase in government spending.


Answer: A Type: Complex Understanding Page: 224


45. If the MPC equals 0.80, $200 billion tax decrease will increase consumption in the first round by:

A) $40 billion. B) $160 billion. C) $200 billion. D) $1000 billion.


Answer: B Type: Analytical Page: 224


46. Which of the following equals the initial, or first-round, increase in consumption because of a tax cut?

A) MPC ´ tax cut. B) MPC ´ multiplier x tax cut. C) Tax cut ¸ MPS. D) Multiplier ´ tax cut.


Answer: A Type: Analytical Page: 224


47. The desired tax cut to close a GDP gap is given by:

A) AD shortfall ´ MPS. C) Desired fiscal stimulus ¸ MPC.

B) AD shortfall ¸ MPC. D) Desired fiscal stimulus ´ MPC.


Answer: C Type: Basic Understanding Page: 224


48. A tax cut has less impact on aggregate demand than an increase in government purchases of the same size because:

A) A portion of the tax cut is invested. C) Tax cuts do not increase disposable income.

B) A portion of the tax cut is saved. D) The tax-cut multiplier is equal to 1.


Answer: B Type: Basic Understanding Page: 224


49. A tax cut:

A) Directly increases the disposable income of consumers.

B) Contains less fiscal stimulus than an increase in government spending of the same size.

C) Shifts the AD curve to the right.

D) All of the above.


Answer: D Type: Basic Understanding Page: 224


50. An MPS of 0.25 means a $50 million tax cut ultimately:

A) Reduces spending by $50 million. C) Increases spending by $400 million.

B) Increases spending by $200 million. D) Increases spending by $150 million.


Answer: D Type: Analytical Page: 224


51. What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount?

A) Aggregate demand falls by the amount of the government spending.

B) There is no effect.

C) Aggregate demand rises by the amount of the government spending.

D) Aggregate demand rises by the amount of the government spending times the multiplier.


Answer: C Type: Complex Understanding Page: 227


52. If the government increases spending and maintains a balanced budget at the same time:

A) There will be no effect on the economy, since taxes balance government spending.

B) Income will increase by the amount of the increase in government spending.

C) Income will increases through the multiplier effect by more than the increase in government spending.

D) Income will actually decrease by the amount that taxes have to be increased to offset the effects of the government spending.


Answer: B Type: Basic Understanding Page: 227


53. If the government cuts taxes by $200 million and simultaneously decreases government purchases by $200 million, then:

A) Income will rise because the government decrease in purchases occurs so slowly.

B) Income in the economy will remain unchanged.

C) People will spend only a part of their tax cut, so income will eventually fall by $200 million.

D) Income will decrease by $200 million times the multiplier.


Answer: C Type: Complex Understanding Page: 227


54. Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will:

A) Increase by $400 billion. C) Increase by $100 billion.

B) Decrease by $400 billion. D) Not change.


Answer: C Type: Complex Understanding Page: 227


55. Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion. What effect would there be on aggregate demand?

A) Zero.

B) $50 billion increase.

C) More than $50 billion increase after the multiplier effect.

D) $50 billion decrease.


Answer: A Type: Analytical Page: 227


56. Suppose the government decides to increase taxes by $20 billion in order to increase social security benefits by the same amount. If prices remain at current levels, this combined tax-transfer policy will:

A) Leave aggregate demand unchanged.

B) Increase aggregate demand by $20 billion.

C) Increase aggregate demand by more than $20 billion after all multiplying effects.

D) Decrease aggregate demand by $20 billion.


Answer: A Type: Complex Understanding Page: 227


57. Suppose the consumption function is C = 100 + 0.80 Y. If the government stimulates the economy with $200 billion in increased income transfers, aggregate expenditure would rise by:

A) $200 billion. B) $400 billion. C) $800 billion. D) $1,000 billion.


Answer: C Type: Analytical Page: 227


58. Which of the following would cause the level of income to change by the greatest amount, ceteris paribus?

A) An increase in social security payments of $10 billion.

B) A reduction in personal income taxes of $10 billion.

C) An increase in defense spending of $10 billion.

D) The changes suggested above have equal impacts on the level of income.


Answer: C Type: Complex Understanding Page: 227


59. Which of the following is most powerful in shifting the aggregate spending curve to the right?

A) A $1 reduction in taxes. C) A $1 increase in government purchases.

B) A $1 increase in transfer payments. D) All are equally powerful.


Answer: C Type: Complex Understanding Page: 227


60. For a given amount of desired stimulus, dollar for dollar:

A) Government spending is more effective than tax cuts.

B) Tax cuts are more effective than income transfers.

C) Income transfers are more effective than tax cuts.

D) Income transfers are more effective than government spending.


Answer: A Type: Basic Understanding Page: 227


FISCAL RESTRAINT


61. Aggregate demand shifts to the left when:

A) Government taxes are increased. C) Government purchases are decreased.

B) Government transfers are decreased. D) All of the above.


Answer: D Type: Analytical Page: 228


62. When the macro equilibrium is above full employment, fiscal policy should be used to shift aggregate demand by the amount of:

A) The difference between saving and investment.

B) The difference between desired saving and desired investment.

C) The AD excess.

D) None of the above because aggregate supply is the curve that must be shifted.


Answer: C Type: Analytical Page: 228


63. When there is excess aggregate demand in the economy:

A) Unemployment is higher than at full employment.

B) The GDP gap is negative.

C) Aggregate supply must be shifted leftward.

D) All of the above.


Answer: B Type: Basic Understanding Page: 229


64. Which of the following is equal to the AD excess divided by the multiplier?

A) The desired fiscal restraint.

B) The MPC.

C) The first-round consumption increase.

D) The cumulative change in income because of a spending change.


Answer: A Type: Analytical Page: 229


65. The desired fiscal restraint is equal to:

A) Excess AD times the multiplier. C) Excess AD divided by the multiplier.

B) Desired AD reduction. D) GDP gap divided by the multiplier.


Answer: C Type: Basic Understanding Page: 229


66. When there is excess aggregate demand in the economy:

A) Desired fiscal restraint equals the AD excess divided by the multiplier.

B) The GDP gap is negative.

C) Full-employment output is lower than equilibrium output.

D) All of the above.


Answer: D Type: Basic Understanding Page: 229


67. If the desired fiscal restraint is $80 billion and the AD excess is $160 billion, we can conclude that:

A) The MPS is 0.50. C) The multiplier is 0.50.

B) There is a recessionary gap. D) The MPC is 2.0.


Answer: A Type: Complex Understanding Page: 229


68. If the MPC for an economy is 0.90, a $4 billion increase in taxes will ultimately cause consumption to decrease by:

A) $40 million. B) $36 million. C) $4.4 million. D) $3.6 million.


Answer: B Type: Complex Understanding Page: 231


69. If the MPC for an economy is 0.90, a $4 billion increase in taxes will ultimately cause consumption to decrease by:

A) $40 million. B) $36 million. C) $4.4 million. D) $3.6 million.


Answer: B Type: Complex Understanding Page: 231


70. If the MPC for an economy is 0.80, a $2 billion increase in taxes will ultimately cause consumption to decrease by:

A) $4 million. B) $10 million. C) $8 million. D) $2 million.


Answer: C Type: Complex Understanding Page: 231


71. If the MPC equals 0.75, $100 billion tax increase will decrease consumption in the first round by:

A) $100 billion. B) $300 billion. C) $400 billion. D) $75 billion.


Answer: D Type: Analytical Page: 231


72. If the MPC equals 0.75, a $100 billion transfer payment decrease will decrease consumption in the first round by:

A) $25 billion. B) $75 billion. C) $100 billion. D) $400 billion.


Answer: B Type: Analytical Page: 231


73. An MPC of 0.80 means a $100 million transfer payment decrease:

A) Reduces consumption in the first round by $80 million.

B) Reduces consumption in the first round by $20 million.

C) Increases consumption in the first round by $20 million.

D) Increases consumption in the first round by $80 million.


Answer: A Type: Analytical Page: 231


74. If the MPC is 0.75, a $200 million transfer payment decrease ultimately:

A) Reduces spending by $150 million. C) Increases spending by $600 million.

B) Reduces spending by $600 million. D) Increases spending by $150 million.


Answer: B Type: Analytical Page: 231


75. Assume the economy is at full employment and prices are reasonably stable. If the government wants to increase spending for public schools, which of the following policies will have the least inflationary impact?

A) An increase in taxes by an amount greater than the increase in spending.

B) An increase in taxes by an amount smaller than the increase in spending.

C) An increase in taxes equal to the increase in spending.

D) No change in taxes when expenditures increase.


Answer: A Type: Complex Understanding Page: 231


FISCAL GUIDELINES


76. Crowding out occurs when the government:

A) Increases taxes, thus causing a decrease in consumption.

B) Issues debt, thus making it more difficult for the private sector to issue debt.

C) Prints money, which displaces currency.

D) Does all of the above.


Answer: B Type: Basic Understanding Page: 232


77. Ceteris paribus, which of the following is true about the concept of crowding out?

A) It increases the private sector's ability to raise the level of output.

B) It does not affect the private sector's ability to raise the level of output.

C) It reduces the private sector's ability to raise the level of output.

D) It occurs when spending increases are matched with tax increases.


Answer: C Type: Definition Page: 232


78. The crowding out effect refers to:

A) A decrease in consumption or investment as a result of an increase in government borrowing.

B) A decrease in investment resulting from an increase in consumption and a decrease in savings.

C) A decrease in government spending resulting from a decrease in taxes.

D) A decrease in consumption resulting from an increase in investment.


Answer: A Type: Definition Page: 232


79. Which of the following are likely to limit the effectiveness of fiscal policy in the real world?

A) The crowding out effect.

B) Time lags between the recognition of a macro problem and the implementation of corrective measures.

C) Political considerations which could alter the content and timing of fiscal policy.

D) All of the above.


Answer: D Type: Basic Understanding Page: 232


80. Time lags limit the effectiveness of fiscal policy because in the real world it takes time:

A) To recognize and measure macroeconomic problems.

B) To develop an appropriate corrective fiscal policy.

C) For the multiplier process to occur.

D) All of the above.


Answer: D Type: Basic Understanding Page: 232


81. Suppose economic conditions call for a tax increase but Congress does not implement this measure because an election is approaching. This is an example of which of the real world problems associated with fiscal policy?

A) Pork-barrel politics. B) Time lags. C) Crowding out. D) All of the above.


Answer: A Type: Basic Understanding Page: 233


THE ECONOMY TOMORROW


82. When Joan Robinson is quoted in the text saying "Keynes did not want anyone to dig holes and fill them," she is pointing out that:

A) The content of fiscal policy is as important as its aggregate impact on the economy.

B) The government should not be interfering in the economy because the jobs created are usually unproductive.

C) As far as stabilization objectives are concerned, the level of spending is the only thing that counts.

D) Keynesian economic policies do not work.


Answer: A Type: Complex Understanding Page: 233


83. The second crisis of economic theory refers to:

A) The typical fiscal policy tradeoff between unemployment and inflation.

B) The dominance of Keynesian views in fiscal policy to the exclusion of newer, more enlightened viewpoints.

C) An emphasis on the level of output without concern for the content of output in terms of fiscal policy.

D) Our inability to maintain full employment output over any significant period of time.


Answer: C Type: Basic Understanding Page: 233


84. Fiscal policy affects:

A) The level of output only.

B) The mix of output only.

C) Both the level and the mix of output.

D) Interest rates only and therefore does not affect the level or mix of output.


Answer: C Type: Basic Understanding Page: 233


Use the following to answer questions 85-90:

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