This Document Contains Chapters 11-Appendix to Chapter 11 Chapter 11 Appendix—The Algebra of Demand-Side Equilibrium 1. A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in taxes. A. True B. False 2. If government purchases increase by $10 billion when the MPC is 0.8, then real GDP will increase by $50 billion. A. True B. False 3. The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects. A. True B. False 4. Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded. A. True B. False 5. "Net taxes" equals "taxes minus transfer payments." A. True B. False 6. Which of the following is a component of aggregate demand? A. transfer payments from government B. taxation by government C. purchases by government D. borrowing by government E. saving by consumers 7. Government purchases are assumed to be autonomous because they are A. independent of the price level B. independent of the level of real GDP C. independent of consumption D. independent of investment E. determined by the government independent of the desires of the households in the economy 8. If government expenditures or taxes are assumed to be autonomous, they A. do not depend upon on the level of GDP B. may be changed only through direct action by Congress C. change only when the price level changes D. change only upon executive order by the president of the United States E. are autonomous at low levels of GDP but not at higher levels of GDP 9. Which of the following assumptions is usually made about government purchases? A. They vary directly with the interest rate. B. They are autonomous. C. They vary directly with the level of income. D. They equal the level of net taxes in equilibrium. E. They vary inversely with the level of income. 10. Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increase A. by $100 B. by $2,000 C. by $1,000 D. to $1,400 E. to $2,000 11. If the MPC equals 0.75 and G increases by $100, real GDP demanded will increase by A. 75 percent B. 25 percent C. $50 D. $200 E. $400 12. If equilibrium real GDP demanded rises from $4 trillion to $6 trillion when government purchases increase by $1 trillion, how large is the marginal propensity to consume? A. 0.8 B. 0.4 C. 0.5 D. 0.2 E. 2 13. Exhibit 11-4 Given the information in Exhibit 11-4, if government purchases increased to $300, equilibrium real GDP demanded would increase by A. $300 B. $500 C. $1,200 D. $1,500 E. $2,500 14. Exhibit 11-4 Given the information in Exhibit 11-4, if government purchases increased to $300, equilibrium real GDP demanded would increase by A. $300 B. $500 C. $1,200 D. $1,500 E. $2,500 15. Exhibit 11-4 Given the information in Exhibit 11-4, if government purchases increased to $100, equilibrium real GDP demanded would A. decrease by $100 B. decrease by $300 C. decrease by $500 D. stay the same E. increase by $100 16. Exhibit 11-4 Given the information in Exhibit 11-4, the government spending multiplier is equal to A. 2 B. 3 C. 4 D. 5 E. 6 17. If the government increases its purchases by $100 and the multiplier is 4, then equilibrium real GDP demanded A. increases by $25 B. decreases by $25 C. increases by $100 D. increases by $400 E. decreases by $400 18. When government purchases increase, the spending multiplier tells us the A. amount of movement along the aggregate demand curve B. amount of movement along the aggregate supply curve C. size of the rightward shift of the aggregate demand curve at a given price level D. size of the rightward shift of the aggregate supply curve at a given price level E. size of the expansionary gap 19. If the Naval Research Labs fired a chemist and the Environmental Protection Agency hired her at the same salary, the net effect of these events would to be __________ in aggregate demand. A. an increase (rightward shift) B. an increase (leftward shift) C. a decrease (rightward shift) D. a decrease (leftward shift) E. no change 20. If the MPC = 0.6 and government purchases increase by $2 trillion, then equilibrium real GDP demanded A. increases by $5 trillion B. decreases by the government multiplier C. increases by $2 trillion D. decreases by $5 trillion E. is indeterminate 21. The effect of a change in net taxes on the quantity of real GDP demanded equals the resulting shift in the consumption function times A. the marginal propensity to consume B. the marginal propensity to save C. the autonomous net tax multiplier D. the simple spending multiplier E. the marginal tax rate 22. If the MPC is 0.75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by A. $75 billion B. $100 billion C. $300 billion D. $400 billion E. $500 billion 23. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, how would a $100 increase in autonomous government spending impact real GDP? A. decrease real GDP by $200 B. decrease real GDP by $100 C. no impact on real GDP D. increase real GDP by $100 E. increase real GDP by $200 24. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, what would the equilibrium real GDP be equal to if autonomous government spending increased by $100? A. $400 B. $500 C. $600 D. $700 E. $800 25. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, how would a $100 decrease in autonomous government spending impact real GDP? A. decrease real GDP by $200 B. decrease real GDP by $100 C. no impact on real GDP D. increase real GDP by $100 E. increase real GDP by $200 26. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, what would the equilibrium real GDP be equal to if autonomous government spending decreased by $100? A. $400 B. $500 C. $600 D. $700 E. $800 27. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, if government spending was independent of the level of real GDP what would the government spending multiplier be equal to? A. 0 B. 1 C. 2 D. 3 E. 4 28. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, what would the equilibrium real GDP be equal to if autonomous net taxes increased by $100? A. $400 B. $500 C. $600 D. $700 E. $800 29. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, what would the equilibrium real GDP be equal to if autonomous net taxes decreased by $100? A. $400 B. $500 C. $600 D. $700 E. $800 30. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, if net taxes was independent of the level of real GDP what would the tax multiplier be equal to? A. 0 B. 1 C. 2 D. 3 E. 4 31. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, how would a $100 increase in autonomous net taxes impact real GDP? A. decrease real GDP by $200 B. decrease real GDP by $100 C. no impact on real GDP D. increase real GDP by $100 E. increase real GDP by $200 32. Exhibit 11-5 In an economy characterized by the aggregate expenditure line in Exhibit 11-5, how would a $100 decrease in autonomous net taxes impact real GDP? A. decrease real GDP by $200 B. decrease real GDP by $100 C. no impact on real GDP D. increase real GDP by $100 E. increase real GDP by $200 33. Government military spending affects aggregate demand the same way government payments for Social Security would. A. True B. False 34. A $200 increase in government purchases has the same effect on the equilibrium level of real GDP as a $200 decrease in autonomous net taxes would. A. True B. False 35. A $200 increase in government purchases has less of an impact on the equilibrium level of real GDP than a decrease in autonomous net taxes of $200 would. A. True B. False 36. A $200 increase in government purchases has a greater effect on the equilibrium level of real GDP than a $200 decrease in autonomous net taxes would. A. True B. False 37. A $100 increase in government purchases will have exactly the same effect on equilibrium real GDP as a $125 decrease in autonomous net taxes when the MPC equals 0.8. A. True B. False 38. A $100 increase in government purchases will have exactly the same effect on equilibrium real GDP as a $125 decrease in autonomous net taxes regardless of the value of the MPC. A. True B. False 39. If government purchases and autonomous net taxes increase by the same amount, the equilibrium level of real GDP will be unchanged. A. True B. False 40. The simple tax multiplier must always be smaller than the simple spending multiplier, regardless of the value of the MPC. A. True B. False 41. An increase in the MPC will increase the simple tax multiplier but have no effect on the simple spending multiplier. A. True B. False 42. In which of the following ways does government affect the consumption component of planned aggregate expenditures? A. through net taxes, which change disposable income B. by purchasing goods and services, which increase consumption C. by using subsidies to encourage firms to invest D. by using net taxes to encourage firms to invest E. by producing public goods 43. Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending? A. Transfer payments and taxes affect aggregate spending directly, just as consumption does. B. Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption. C. Changes in the amount of transfer payments and taxes cancel each other and therefore have no influence on any economic variable. D. Transfer payments and taxes affect disposable income but have no effect on consumption. E. Transfer payments affect disposable income but taxes do not. 44. A decrease in net taxes A. raises aggregate expenditure by raising disposable income, thereby increasing consumption B. raises aggregate expenditure by raising disposable income, thereby decreasing consumption C. lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption D. lowers aggregate expenditure by lowering disposable income, thereby increasing consumption E. has no effect on aggregate expenditure 45. Which of the following will not increase when net taxes decrease? A. saving B. disposable income C. consumption D. government expenditure E. GDP 46. If autonomous net taxes decrease, which of the following correctly describes the effects? A. Disposable income increases, consumption decreases, and saving decreases. B. Disposable income increases, consumption increases, and saving increases. C. Disposable income decreases, consumption increases, and saving increases. D. Disposable income decreases, consumption decreases, and saving decreases. E. There is no effect on either disposable income, consumption, or saving. 47. A tax is considered to be autonomous if it is independent of A. investment B. consumption C. government spending D. real GDP E. the price level 48. The introduction of an autonomous net tax will A. have no effect on real GDP, since real GDP = C + I + G, which does not include taxes B. affect consumption through a change in disposable income C. affect consumption through its effect on investment D. affect government spending, since the government levies the tax E. increase real GDP, since it enables government to increase spending 49. An autonomous net tax will A. decrease disposable income by the same amount regardless of the level of real GDP B. increase disposable income by the same amount regardless of the level of real GDP C. decrease disposable income by more than it increases real GDP D. increase disposable income by more than it increases real GDP E. have no effect on disposable income at some levels of real GDP 50. A change in autonomous net taxes affects the equilibrium quantity of GDP demanded A. in the same way as a change in autonomous government purchases B. in the same way as a change in autonomous planned investment C. in the same way as a change in autonomous net exports D. only indirectly, by first changing the level of disposable income E. in an unpredictable manner 51. A decrease in autonomous net taxes A. increases GDP as much as an equal decrease in government purchases B. increases GDP less than an equal increase in government purchases C. decreases GDP more than an equal decrease in government purchases D. changes GDP in an unpredictable manner E. has no effect on GDP 52. Which component of aggregate expenditure is affected when net taxes are cut? A. net exports; they increase B. government purchases; they fall C. government purchases; they rise D. consumption; it falls E. consumption; it rises 53. An increase in net taxes A. raises aggregate expenditure by raising disposable income, thereby increasing consumption B. raises aggregate expenditure by raising disposable income, thereby decreasing consumption C. lowers aggregate expenditure by lowering disposable income, thereby increasing consumption D. lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption E. has no effect on aggregate expenditure 54. The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.7 will, at each level of real GDP, A. increase consumption by $100 B. decrease consumption by $100 C. increase consumption by $70 D. decrease consumption by $70 E. decrease consumption by $30 55. If autonomous net taxes equal $1 trillion at all levels of real GDP, then we can safely assume that net taxes A. are too burdensome B. are autonomous C. equal transfer payments D. depend on the level of real GDP E. equal zero when GDP equals zero 56. The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.8 will, at each level of real GDP, A. increase equilibrium real GDP demanded by $100 B. decrease equilibrium real GDP demanded by $100 C. increase equilibrium real GDP demanded by more than $100 D. decrease equilibrium real GDP demanded by less than $100 E. decrease equilibrium real GDP demanded by more than $100 57. The simple tax multiplier is A. 1/MPC B. 1 C. 1/(1 - MPC) D. MPC/(1 - MPC) E. -MPC/(1 - MPC) 58. The formula for the multiplier that results from a change in autonomous net taxes is A. -MPC/(1 - MPC) B. 1 C. MPC/(1 - MPC) D. 1/(1 - MPC) E. -1/(1 - MPC) 59. If the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier A. equals -4 B. equals -3 C. always equals 1 D. is the same as the original multiplier E. is invariably equal to 5 60. Of the following fiscal programs, which has the biggest effect, per dollar, on aggregate demand? A. unemployment compensation during depressions B. unemployment compensation during near-full employment C. Aid to Families with Dependent Children D. the space shuttle program E. milk subsidies 61. Of the following fiscal programs, which has the smallest effect, per dollar, on aggregate demand? A. defense spending B. road construction C. grants for scientific research and development D. Social Security E. government purchases of labor 62. If transfer payments and autonomous taxes both increase by identical amounts, A. equilibrium income will increase by the amount of the increase B. equilibrium income will increase by more than the increase C. equilibrium income will increase by less than the increase D. the change in equilibrium income will depend on the value of the MPC E. there will be no change in equilibrium income 63. Suppose both autonomous taxes and transfer payments increase by $50 billion. If the MPC = 0.75, by how much does equilibrium real GDP demanded change? A. $0 B. $50 billion C. -$50 billion D. $200 billion E. -$200 billion 64. If autonomous net taxes increase by $200 billion and the MPC equals 0.75, equilibrium income will A. decrease by $200 billion B. decrease by $150 billion C. decrease by $600 billion D. decrease by $267 billion E. decrease, but it is impossible to calculate the exact amount of the change 65. If autonomous net taxes decline by $40 billion and the MPC = 0.75, then equilibrium real GDP demanded A. declines by $120 billion B. increases by $120 billion C. declines by $160 billion D. increases by $160 billion E. increases by $40 billion 66. If the MPC = 0.8, then the simple tax multiplier equals A. 0.8 B. 4 C. 5 D. -4 E. -5 67. If the government decreases net autonomous taxes by $100 billion and the MPC = 0.75, then equilibrium real GDP demanded will A. remain the same B. increase by $300 billion C. decrease by $300 billion D. increase by $400 billion E. decrease by $400 billion 68. Assume autonomous net taxes rise by $500; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially A. remain unchanged B. fall by $500 C. fall by $375 D. fall by $2,000 E. rise by $500 69. Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially A. fall by $400 B. rise by $400 C. fall by $300 D. rise by $300 E. remain unchanged 70. Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially A. fall by $400 B. rise by $300 C. remain unchanged D. fall by $100 E. rise by $100 71. Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will A. rise by $500 B. fall by $500 C. rise by $1,500 D. fall by $1,500 E. rise by $2,000 72. Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially A. remain unchanged B. rise by $300 C. rise by $200 D. rise by $900 E. fall by $300 73. Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially A. remain unchanged B. rise by $300 C. fall by $300 D. rise by $200 E. fall by $200 74. Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially A. fall by $100 B. rise by $100 C. fall by $300 D. remain unchanged E. be indeterminate 75. Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will A. rise by $300 B. rise by $900 C. fall by $300 D. fall by $600 E. rise by $600 76. Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. The value of the spending multiplier equals A. 1 B. 10 C. 3 D. 0 E. an indeterminate value Chapter 11—Fiscal Policy 1. The only way in which government can affect aggregate demand is through changes in its own purchases. A. True B. False 2. An increase in government purchases must always be accompanied by an increase in autonomous net taxes. A. True B. False 3. Discretionary fiscal policy works by shifting the aggregate demand curve. A. True B. False 4. Discretionary fiscal policy works by shifting the short-run aggregate supply curve. A. True B. False 5. Most government purchases are made at the federal, not the state, level of government. A. True B. False 6. Fiscal policy is concerned with A. government spending and taxation only B. government spending and money only C. money and taxation only D. government spending, taxation, and money E. money only 7. Which of the following is not a tool of fiscal policy? A. money supply B. government purchases C. taxes D. Social Security program E. unemployment benefits 8. Which of the following is not a goal of fiscal policy? A. full employment B. price stability C. economic growth D. job creation E. balanced budget 9. All of the following are tools of fiscal policy except one. Which is the exception? A. taxes B. transfer payments C. interest rates D. government purchases of goods E. government purchases of services 10. Which of the following are used in fiscal policy? A. transfer payments only B. taxes and government purchases C. government purchases only D. government purchases, transfer payments, and taxes E. taxes and transfer payments 11. Which of the following best illustrates the use of discretionary fiscal policy? A. Congress provides $1 billion in relief aid for hurricane victims. B. Congress appropriates $500 million to help the needy, and the appropriation is financed by a tax on wealth. C. Income tax receipts are smaller because of a decline in real GDP during a recession. D. The Federal Reserve tightens credit when it receives news of accelerating inflation. E. Congress passes a bill authorizing $2 billion in additional spending when it receives news of a deepening recession. 12. The distinction between discretionary fiscal policy and the use of automatic stabilizers is that A. only discretionary fiscal policy can stimulate the economy B. only automatic stabilizers can stimulate the economy C. discretionary fiscal policy, once adopted, is built into the structure of the economy D. automatic stabilizers, once adopted, are built into the structure of the economy E. only discretionary fiscal policy can be used by the federal government 13. Discretionary fiscal policy is policy that A. is developed in secret B. applies to some states but not others C. applies to some industries but not others D. works automatically without public announcement or plan E. is an intentional change in taxation or government spending 14. Fiscal policy focuses on manipulating A. aggregate demand to smooth out business fluctuations B. aggregate supply to smooth out business fluctuations C. both aggregate supply and aggregate demand to smooth out business fluctuations D. aggregate demand to stimulate the economy and aggregate supply to contract it E. short-run aggregate supply to stimulate the economy and aggregate demand to contract it 15. Fiscal policy A. uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP B. uses the federal government's powers over the money supply and interest rates to affect employment, the price level, and GDP C. can affect employment and prices, but not the level of GDP D. can affect employment and the level of GDP, but not the price level E. is most effective when employed by state governments rather than by the federal government 16. All of the following are variables that can be manipulated to affect fiscal policy except one. Which is the exception? A. personal income taxes B. government expenditures on goods and services C. government expenditures on unemployment benefits D. the interest rate E. corporate income taxes 17. If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will A. only reduce the price level B. only reduce real GDP C. only increase the price level D. only increase real GDP E. reduce both the price level and real GDP 18. A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level. A. True B. False 19. By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9? A. $100 B. $900 C. $1,000 D. $10,000/9 E. $10,000 20. Exhibit 11-1 In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 11-1, what would be the short-run equilibrium level of real GDP and the price level? A. $300 and 20 B. $500 and 20 C. $300 and 40 D. $500 and 50 E. $300 and 50 21. Exhibit 11-1 The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 11-1 is facing an expansionary gap. A. True B. False 22. Exhibit 11-1 In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 11-1, what would be the size of the recessionary gap? A. $500 B. $400 C. $300 D. $200 E. $100 23. Exhibit 11-1 In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 11-1, the government could decrease government spending to shift the aggregate demand curve to AD’ in order to eliminate the recessionary gap. A. True B. False 24. If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could __________ autonomous net taxes by __________. A. increase; $100 billion B. decrease; $100 billion C. decrease; $100 billion × MPC/(1 - MPC) D. increase; $100 billion × MPC/(1 - MPC) E. decrease; $100 billion × (1 - MPC)/MPC 25. If the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8, it should decrease autonomous net taxes by A. $100 B. $25 C. $20 D. $300 E. $400 26. To close a contractionary gap using fiscal policy, the government can A. increase government spending by the size of the gap B. decrease government spending by the size of the gap C. increase government spending by more than the size of the gap D. increase government spending by less than the size of the gap E. decrease government spending by more than the size of the gap 27. To close a contractionary gap using fiscal policy, the government can A. increase taxes by the size of the gap B. decrease taxes by the size of the gap C. increase taxes by more than the size of the gap D. decrease taxes by less than the size of the gap E. decrease taxes by more than the size of the gap 28. Which of the following might be considered the most expansionary set of fiscal policies? A. increase in government purchases, increase in taxes, and decrease in transfer payments B. decrease in government purchases, increase in taxes, and decrease in transfer payments C. increase in government purchases, decrease in taxes, and increase in transfer payments D. increase in government purchases, increase in taxes, and increase in transfer payments E. decrease in government purchases, decrease in taxes, and decrease in transfer payments 29. Exhibit 11-2 If the government wants the economy illustrated in Exhibit 11-2 to be at full employment, it should A. increase taxes B. decrease transfer payments C. decrease government purchases D. wait for the SRAS curve to shift to the left E. do none of the above 30. Exhibit 11-2 Which of the following sets of policies would unquestionably move the economy illustrated in Exhibit 11-2 to full employment? A. increase in government purchases, increase in taxes, and decrease in transfer payments B. decrease in government purchases, increase in taxes, and decrease in transfer payments C. increase in government purchases, decrease in taxes, and increase in transfer payments D. increase in government purchases, increase in taxes, and increase in transfer payments E. decrease in government purchases, decrease in taxes, and decrease in transfer payments 31. Exhibit 11-2 What happens in the economy illustrated in Exhibit 11-2 if government purchases increase by the amount necessary to achieve full employment? A. The AD curve shifts to the right, the SRAS curve shifts to the left, and long-run equilibrium is achieved. B. The AD curve shifts to the right, the price level increases, and long-run equilibrium is achieved. C. The AD curve shifts to the right, the price level increases, and the expansionary gap worsens. D. The AD curve shifts to the left, the price level increases, and the contractionary gap worsens. E. The SRAS curve shifts to the left, the price level decreases, and long-run equilibrium is achieved. 32. When spending by the federal government exceeds net taxes, A. the price level tends to fall B. the money supply must fall C. the aggregate demand curve shifts rightward D. aggregate supply moves rightward E. there is a federal budget surplus 33. When spending by the federal government exceeds net taxes, A. the price level tends to rise B. the money supply must fall C. the aggregate demand curve shifts leftward D. aggregate supply moves leftward E. there is a federal budget surplus 34. If government purchases increase and net taxes decrease, A. the price level will fall B. the money supply must rise C. the aggregate demand curve shifts leftward D. aggregate supply shifts rightward E. output and employment will increase 35. When net taxes increase and government purchases decrease, A. the price level will rise B. the money supply must rise C. the aggregate demand curve shifts leftward D. output and employment both rise E. the aggregate supply curve shifts leftward 36. A federal budget deficit occurs when A. there is deflation B. federal government purchases exceed net taxes C. there is inflation D. aggregate demand is greater than aggregate supply E. aggregate supply is greater than aggregate demand 37. An increase in the federal budget deficit A. only occurs when there is a deficit in the balance of trade B. creates deflation C. decreases aggregate demand D. decreases aggregate quantity demanded along a stationary aggregate demand curve E. raises the equilibrium level of output and employment 38. An increase in federal budget deficit A. only occurs when there is a surplus in the balance of trade B. may create inflation C. decreases aggregate supply D. decreases aggregate quantity demanded along a stationary curve E. may reduce the equilibrium level of output and employment 39. Which of the following government policies would increase aggregate demand? A. a deficit in the government budget B. a stimulation of investment through an increase in taxes C. a stimulation of consumption through an increase in taxes D. a surplus in the government budget E. a decrease in government spending 40. All of the following might be effective in eliminating a contractionary gap except one. Which is the exception? A. reducing Social Security payments to beneficiaries B. reducing personal income taxes C. increasing expenditures for the interstate highway system D. increasing farm subsidies E. reducing corporate income taxes 41. The government can close an expansionary gap by increasing the price level. A. True B. False 42. Either an increase in autonomous net taxes or a decrease in government purchases can close an expansionary gap. A. True B. False 43. A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve. A. True B. False 44. A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve. A. True B. False 45. Expansionary and contractionary gaps are automatically eliminated by shifts in aggregate demand. A. True B. False 46. One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output but at the cost of increasing the price level. A. True B. False 47. Reducing net taxes and reducing government purchases are both effective ways of eliminating an expansionary gap. A. True B. False 48. To close an expansionary gap using fiscal policy, the government can A. increase government spending B. increase government spending and decrease taxes at the same time C. decrease taxes D. decrease government spending or increase taxes E. decrease government spending by the size of the gap 49. When the government closes an expansionary gap with a change in government spending, the __________ in government spending leads to __________. A. decrease; a decrease in both real GDP and the price level B. decrease; a decrease in real GDP and an increase in the price level C. decrease; an increase in both real GDP and the price level D. decrease; an increase in real GDP and a decrease in the price level E. increase; a decrease in both real GDP and the price level 50. To close an expansionary gap, the government can A. increase government spending, which will increase aggregate demand B. increase government spending, which will decrease aggregate demand C. decrease government spending, which will increase aggregate demand D. decrease government spending, which will decrease aggregate demand E. increase government spending, which will increase aggregate supply 51. Which of the following might be considered the most contractionary set of fiscal policies? A. increase in government purchases, increase in taxes, and decrease in transfer payments B. decrease in government purchases, increase in taxes, and decrease in transfer payments C. increase in government purchases, decrease in taxes, and increase in transfer payments D. increase in government purchases, increase in taxes, and increase in transfer payments E. decrease in government purchases, decrease in taxes, and decrease in transfer payments 52. If fiscal policy is used to close an expansionary gap, the A. SRAS curve shifts leftward and the price level falls B. SRAS curve shifts rightward and the price level increases C. SRAS curve shifts rightward and the price level falls D. AD curve shifts leftward and the price level decreases E. AD curve shifts rightward and the price level decreases 53. What set of policies could the government use to close an expansionary gap? A. decrease taxes, increase government purchases and transfer payments B. increase taxes, government purchases, and transfer payments C. increase taxes and transfer payments and decrease government purchases D. increase taxes, decrease transfer payments and government purchases E. decrease taxes, transfer payments, and government purchases 54. Suppose that instead of using discretionary fiscal policy to close an expansionary gap, policy makers left the economy alone. What would probably happen? A. depression would result B. the economy would be stuck in an expansionary gap C. the aggregate demand curve would shift, eliminating the problem D. the gap would close after a spurt of inflation E. the short-run aggregate supply curve would shift to the right 55. Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP? A. Decrease taxes to protect consumers from the effects of inflation. B. Increase taxes to reduce aggregate demand. C. Increase government spending to provide some of the goods consumers can no longer afford at the higher prices. D. Decrease government spending so that the demand for money will fall. E. Increase transfer payments to poor people, who are hurt the most by the inflation. 56. If net taxes exceed government purchases, A. the price level will rise B. the money supply must fall C. the aggregate demand curve will shift rightward D. the short-run aggregate supply curve will leftward E. there will be a federal budget surplus 57. If net taxes increase and government purchases decrease, A. the price level will rise B. the money supply must increase C. the aggregate demand will shift rightward D. output and employment will fall E. there will be a federal budget deficit 58. A federal budget surplus occurs when A. there is deflation B. federal government net taxes exceed purchases C. there is inflation D. aggregate demand is greater than aggregate supply E. aggregate supply is greater than aggregate demand 59. Suppose the government reduces its budget deficit at the same time that energy prices rise sharply. Which of the following will happen? A. The price level will rise, since higher energy prices increase the cost of production. B. real GDP will fall, since both events will tend to cause an economic contraction. C. The price level will fall, because the aggregate demand curve has shifted leftward. D. real GDP will rise; with less government spending, there are more opportunities for the private sector. E. Both the price level and real GDP will fall. 60. A $100 billion increase in government purchases has a greater effect on real GDP than a $100 billion reduction in net taxes because A. some of the income consumers gain from the tax reduction will be saved rather than spent B. some of the income consumers gain from the tax reduction will be spent on services rather than products C. some of the income consumers gain from the tax reduction will be spent on goods made in foreign countries D. the consumers' MPC is higher than the government's E. the consumers' MPC is 1 61. If the economy is already at its potential output, then the spending multiplier is A. zero in the long run B. infinite in the long run C. 1 in the long run D. zero in the short run E. 1 in the short run 62. Suppose that the economy is experiencing an expansionary gap of $1,000 and the MPC equals 0.8. With an upward-sloping short-run aggregate supply curve, the government can close the gap if it decreases purchases by A. $1,000 B. $800 C. $200 D. more than $200 E. less than $200 63. Suppose that the economy has an expansionary gap of $1,000 and the MPC equals 0.8. With an upward-sloping short-run aggregate supply curve, the government can close the gap if it increases autonomous net taxes by A. $1,000 B. $800 C. $250 D. more than $250 E. less than $250 64. The steeper the short-run aggregate supply curve, A. the smaller the impact of a shift in aggregate demand on equilibrium output B. the larger the value of the spending multiplier C. the larger the impact of a shift in aggregate demand on equilibrium output D. the smaller the change in government spending needed to achieve the desired change in equilibrium output E. the flatter the aggregate demand curve 65. If the economy is already producing at its potential, A. the spending multiplier equals 1/(1 - MPC) in the long run B. the spending multiplier is less than 1/(1 - MPC) in the long run C. the spending multiplier is more than 1/(1 - MPC) in the long run D. the spending multiplier equals zero in the long run E. the aggregate demand curve is horizontal 66. Under which of the following conditions will a change in government purchases have the greatest effect on the economy in the short run? A. The aggregate demand curve is relatively flat. B. The aggregate demand curve is relatively steep. C. The short-run aggregate supply curve is relatively flat. D. The aggregate demand curve is vertical. E. The short-run aggregate supply curve is vertical. 67. The steeper the short-run aggregate supply curve, A. the steeper the aggregate demand curve B. the larger the value of the spending multiplier C. the smaller the value of the spending multiplier D. the larger the impact of a shift in aggregate demand on the equilibrium price level E. the larger the impact of a shift in aggregate demand on the equilibrium output level 68. The flatter the short-run aggregate supply curve, A. the flatter the aggregate demand curve B. the larger the value of the spending multiplier C. the smaller the value of the spending multiplier D. the larger the impact of a shift in aggregate demand on the equilibrium price level E. the larger the impact of a shift in aggregate demand on the equilibrium output level 69. The classical economists believed that the economy automatically move toward equilibrium at full employment. A. True B. False 70. Who argued that the economy should be left to itself to close a contractionary gap? A. John F. Kennedy B. John Maynard Keynes C. the mercantilists D. the classical economists E. the socialists 71. Which of the following is not true about classical economists? A. They criticized mercantilism as an economic system. B. They advocated laissez-faire policies to promote economic growth. C. They believed the economy would naturally tend toward full employment. D. They believed prices and wages were flexible. E. They sought government intervention in markets to promote fairness. 72. Which of the following is not true about classical economists? A. They criticized mercantilism as an economic system. B. They advocated laissez-faire policies to promote economic growth. C. They believed the economy would naturally tend toward full employment. D. They believed prices and wages react slowly to market changes. E. They discouraged government intervention in markets. 73. Which of the following best describes the concept of laissez-faire? A. Government should not intervene in the economy. B. Government should actively intervene in the economy whenever it judges the action to be beneficial. C. Government should intervene in the economy only to promote short-term economic stability. D. Government should intervene in the economy only to maximize long-term growth rates. E. Government should intervene in the economy only when the economy is not at full employment or there is substantial inflation. 74. The opposite of a laissez-faire economic policy is A. active government intervention B. a reliance on prices to adjust to changing market conditions C. classical economics D. neoclassical economics E. quantity supplied creates its own quantity demanded 75. According to classical economists, government intervention is A. necessary to maintain a stable price level in the long run B. necessary to maintain a stable price level in the short run C. necessary to maintain full employment in the long run D. necessary to maintain full employment in the short run E. not necessary to maintain full employment 76. Classical economists believed that if saving were greater than investment, the interest rate would __________, causing saving to __________ and investment to __________ until the two were equal. A. rise; decrease; increase B. fall; decrease; increase C. fall; increase; decrease D. rise; increase; decrease E. fall; increase; increase 77. Classical economists believed that if investment were greater than saving, the interest rate would __________, causing saving to __________ and investment to __________ until the two were equal. A. rise; decrease; increase B. fall; decrease; increase C. fall; increase; decrease D. rise; increase; decrease E. fall; increase; increase 78. John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that A. balancing the national budget at all times was sound economic policy B. natural economic forces were not necessarily adequate to move the economy toward its potential output level C. the government did not need to stimulate output in order for the economy to achieve its potential output level D. increases in taxes and increases in government purchases are equally effective in closing an expansionary gap E. increases in taxes and increases in government purchases are equally effective in closing a contractionary gap 79. According to Keynesian theory, the natural forces in the economy may not quickly move the economy toward potential real GDP. A. True B. False 80. Keynes believed that the economy does not automatically move toward an equilibrium at full employment. A. True B. False 81. The unemployment problem becomes more severe if prices are sticky downward. A. True B. False 82. Keynes thought that one macroeconomic problem is that A. the potential and equilibrium levels of output can be the same B. the equilibrium level of output can never be equal to the potential level C. over time, the potential level of output may be pulled down to the equilibrium level D. the potential level of output can fall below the equilibrium level E. the equilibrium level of output can fall below the potential level 83. Keynes thought that one macroeconomic problem is that the economy A. can tend toward an equilibrium level of output that is below the potential level B. tends toward a potential level of output that is below the equilibrium level C. makes the potential and equilibrium levels of output equal D. can be pushed below the equilibrium level of output by fiscal policy E. can be pushed below the potential level of output by fiscal policy 84. According to Keynes, A. fiscal policy should not be used to influence the economy B. the economy eventually tends toward the potential output C. to get the economy to potential output, the SRAS curve must shift to the right D. the economy could be stuck at equilibrium below the potential output for a prolonged period E. deviations from potential output are short-lived 85. One lesson of the Great Depression was that potential GDP could A. be too low to ensure full employment if the population was growing B. be too low to ensure full employment in a capitalist economy C. be too low to ensure full employment in a market economy D. fall short of full-employment GDP E. exceed equilibrium GDP 86. Which of the following had the greatest impact in pulling the U.S. economy out of the Great Depression? A. the economy's natural tendency to contract toward potential output B. the federal government's aggressive policy of tax cuts C. the federal government's aggressive policy of monetary stimulus D. a precipitous drop in aggregate demand E. the increased spending brought on by World War II 87. The goal of fiscal policy after the Great Depression was to A. manipulate aggregate demand and supply toward equilibrium B. manipulate aggregate demand and supply to fight unemployment C. influence aggregate demand D. influence aggregate supply E. push the aggregate demand and supply curves to the right 88. After the Great Depression, the role of fiscal policy in the U.S. economy was changed as a result of A. the influence of Keynes's General Theory B. the economic impact of World War II C. the Employment Act of 1946 D. both a and c E. all of the above 89. The difference between the classical approach and the Keynesian approach to fiscal policy is A. Keynesians believe that natural forces in the economy would tend toward full employment B. Keynesians believe that natural forces in the economy would not tend toward full employment, but they were distrustful of government's ability to stimulate the economy C. classical economists believe that the economy would not achieve its potential GDP but that any action of the government would make matters worse D. Keynesians believe that it may be necessary that government increase aggregate demand so as to stimulate output and employment, if the economy is to achieve its potential output E. both the classical economists and Keynesians were equally distrustful of government intervention in the economy 90. During World War II, A. aggregate demand, income, and employment increased in the United States B. aggregate demand, income, and employment declined in the United States C. short-run aggregate supply, income, and employment declined in the United States D. short-run aggregate supply fell and income and employment increased in the United States E. potential output fell in the United States 91. Which of the following is a difference between John Maynard Keynes and the classical economists? A. Keynes did not believe that unemployment was a serious long-term problem; the classical economists did. B. Keynes did not believe that the economy was always in equilibrium; the classical economists did. C. Keynes did not believe that the economy necessarily settled at full employment; the classical economists did. D. Keynes believed that the economy was always in equilibrium; the classical economists did not. E. Keynes believed that a general glut of output was a good thing for the economy; the classical economists believed a glut created an unemployment problem for the economy. 92. Keynesian theory and policies were developed to show why A. prolonged periods of unemployment were impossible B. prolonged periods of inflation were impossible C. unemployment could persist for long periods D. the interest rate ensures that saving equals investment E. flexible prices and wages ensure that a modern economy will enjoy prolonged periods of low unemployment and low inflation 93. The Classical economists believed in the self-correcting nature of the economic system. They believed that the major adjustment A. mechanisms was government assistance B. mechanisms were inflexible wages and prices and flexible interest rates C. mechanisms were flexible wages, prices and interest rates D. mechanisms were sticky wages, prices and interest rates E. mechanisms were inflexible interest rates and flexible wages and prices 94. A leading Classical economist and author of The Wealth Of Nations was A. David Ricardo B. François Quesnay C. Simon Kuznets D. John Maynard Keynes E. Adam Smith 95. John Maynard Keynes believed that A. wages and prices were flexible B. wages, prices and interest rates were flexible C. wages and prices were relatively inflexible and interest rates would not fall fast enough to restore full employment D. market forces pushed the economy toward full employment and full production E. investment was always sufficient to bring about full employment 96. Military spending is a good example of an automatic stabilizer. A. True B. False 97. Government transfer payments are a good example of an automatic stabilizer. A. True B. False 98. Unemployment insurance is an example of governmental discretionary fiscal policy. A. True B. False 99. Because of automatic stabilizers, disposable income varies proportionately less than real GDP during periods of economic fluctuations. A. True B. False 100. Most government transfer programs are A. also government spending programs B. examples of monetary policy rather than fiscal policy C. designed mainly to offset macroeconomic instability D. discretionary fiscal policies E. automatic stabilizers 101. During economic contractions, transfer payments such as welfare benefits A. automatically increase, reducing incomes further B. automatically increase, reducing the impact of the contraction on disposable income C. automatically decrease, because tax revenues fall and welfare benefits are no longer affordable D. are decreased, as a discretionary move on the part of Congress to stimulate expansion E. are increased, as a discretionary move on the part of Congress to cushion recipients against the negative effects of economic contraction 102. Which of the following is not an automatic stabilizer? A. a progressive income-tax system B. unemployment compensation C. new legislation to increase tax rates D. unemployment insurance E. welfare programs 103. The effect of automatic stabilizers on the business cycle is to A. make upswings larger and downswings smaller B. make upswings smaller and downswings larger C. make both upswings and downswings smaller D. eliminate fiscal drag E. make both upswings and downswings larger 104. Which of the following is an example of an automatic stabilizer? A. tax reductions passed by Congress in times of unemployment B. tax reductions passed by Congress in times of inflation C. government defense spending D. unemployment compensation E. welfare programs 105. Which of the following is true of automatic stabilizers? A. They require ongoing decisions about government purchases and taxation to promote full employment and price stability. B. They include the unemployment compensation program. C. They tend to stimulate aggregate demand when the economy is experiencing an expansionary gap. D. They include tax cuts passed by Congress to ease a current recession in an economy that has a proportional income tax. E. They include government purchases of goods and services requiring Congressional approval. 106. An automatic stabilizer A. keeps taxes and government spending in a constant ratio to each other throughout the business cycle B. increases taxes relative to government spending during contractions and decreases it in expansions C. decreases taxes relative to government spending during contractions and increases it in expansions D. increases taxes relative to government spending throughout the business cycle E. decreases taxes relative to government spending throughout the business cycle 107. The U.S. federal income tax is progressive, which means that A. tax receipts grow at the same rate that income does B. tax receipts grow at the same rate that government spending does C. middle income individuals pay more total taxes than either high or low-income individuals D. high-income individuals are generally able to pay fewer taxes E. high-income individuals are taxed at a higher rate than low-income individuals 108. Because the income tax is progressive, the amount of taxes paid is a A. constant fraction of income throughout the business cycle (i.e., as the economy experiences considerable fluctuation) B. larger fraction of income in expansions than in contractions C. smaller fraction of income in expansions than in contractions D. decreasing function of income in both expansions and contractions E. constant amount 109. A progressive income tax ensures that during expansionary periods, A. consumption will increase by more than the increase in disposable income B. consumption will increase by more than the decrease in disposable income C. disposable income will increase by more than the increase in GDP D. disposable income will increase by less than the increase in GDP E. disposable income will increase by more than the decrease in GDP 110. During a recession, unemployment insurance ensures that A. the disposable income of those who are unemployed will increase above the usual level B. disposable income does not fall by as much as GDP decreases C. disposable income increases as GDP falls D. the marginal propensity to consume increases E. the marginal propensity to consume decreases 111. The existence of stagflation in the 1970s undermined the credibility of (aggregate) demand-management policies. A. True B. False 112. The Golden Age of fiscal policy was during A. the 1920s B. World War II C. the Eisenhower years D. the 1960s E. the Reagan administration 113. The Golden Age of fiscal policy was A. the years before the Great Depression B. during the Great Depression C. during World War II D. during the Kennedy administration E. during the Reagan administration 114. The tax cut of 1964 (proposed by President Kennedy) A. was the last time fiscal policy was used B. was the greatest failure as a demand-management tool C. actually increased investment, consumption, and employment D. shifted the aggregate demand curve leftward E. was the first time the focus moved away from managing aggregate demand to focus exclusively on aggregate supply 115. During the 1970s, demand-management policy A. continued to be highly successful in curing the economy's economic problems B. was found to be highly unsuitable in periods of stagflation such as the decade of the 1970s C. was so unsuccessful that economists advised a return to the pre-World War II philosophy of fiscal policy D. was unsuccessful because the automatic stabilizers no longer influenced the economy E. was unsuitable because it affected aggregate supply more than aggregate demand 116. Economists and policy makers questioned the effectiveness of discretionary fiscal policy during the 1970s for all the following reasons except A. the difficulty of estimating the natural rate of unemployment B. the time lags involved in implementing fiscal policy C. the existence of possible feedback effects of fiscal policy on aggregate supply D. the distinction between current and permanent income E. the problems of inflation and unemployment were basically solved 117. Which of the following best describes stagflation? A. rising unemployment together with economic growth B. deflation coupled with a decline of the money supply C. deficits coupled with rising unemployment D. rising unemployment and inflation rates E. inflation coupled with balance of trade deficits 118. The reason that fiscal policy was not helpful in the 1970s was that such policy is aimed at A. both aggregate demand and aggregate supply, but the problem was only with demand B. both aggregate demand and aggregate supply, but the problem was only with supply C. aggregate demand only, but the problem was in aggregate supply D. aggregate supply only, but the problem was in aggregate demand E. either aggregate demand or aggregate supply, but the problem was with both of them at once 119. Which of the following was a successful application of fiscal policy in the United States? A. Roosevelt's strategy in combating the Great Depression B. the tax cut of 1964 C. the temporary tax surcharge of 1968 D. the battle against stagflation during the 1970s E. the large tax cut of 1981 120. The "Golden Age" of fiscal policy—the decade in which it was most in political favor and in which it seemed to work best—was A. the 1930s B. the 1940s C. the 1950s D. the 1960s E. the 1970s 121. The natural rate of unemployment is that rate at which the economy achieves its potential real GDP. A. True B. False 122. The natural rate of unemployment is A. seasonal unemployment only B. 3 percent C. the unemployment rate when none of the work force is unemployed longer than six weeks D. the unemployment rate at which the economy is producing its potential GDP E. defined by the government 123. If policy makers estimate the natural rate of unemployment incorrectly, A. their policies will cause deflation in the long run B. their policies will cause even more unemployment in the long run C. the economy will stay below its potential GDP level in the long run D. the economy will tend toward that level of unemployment the policy makers believe is correct E. policies that appear to be successful in the short run will lead to further economic problems 124. If policy makers think the natural rate of unemployment is lower than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will A. cause continuing inflation B. shift the long-run aggregate supply curve to the right C. shift the supply curve of labor to the right D. reduce unemployment more than they had intended E. keep the economy below its potential GDP level 125. If policy makers think the natural rate of unemployment is higher than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will A. cause continuing inflation B. shift the long-run aggregate supply curve to the left C. shift the supply curve of labor to the left D. reduce unemployment more than they had intended E. keep the economy below its potential GDP level 126. If fiscal policy makers increase aggregate demand in an attempt to decrease the unemployment rate below the natural rate of unemployment, then A. the potential GDP level will decrease B. the potential GDP level will increase C. the only lasting impact of the policy is a higher price level D. the only lasting impact of the policy is greater real GDP E. the only lasting impact of the policy is lower real GDP 127. The rate of unemployment that occurs when the economy is producing its potential GDP A. is called the natural rate of unemployment B. is zero C. is thought to be approximately 10% D. can be kept at zero through fiscal policy E. is equal to the rate of stagflation in most years 128. One of the difficulties in using discretionary fiscal policy effectively is that the legislative decision making process is sometimes very long and drawn out. A. True B. False 129. Lags in the approval and implementation of fiscal policy A. weaken fiscal policy as a tool of economic stabilization B. increase the effectiveness of fiscal policy as a tool of economic stabilization C. help legislators to better assess what policies are most appropriate to adopt D. make fiscal policy more responsive to the current economic environment E. cause fiscal policy to be more effective in changing the level of real GDP than changing the price level 130. There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time. A. True B. False 131. Which of the following is not a weakness of fiscal policy as a tool of economic stabilization? A. It is ineffective in dealing with stagflation. B. Its correct implementation depends on an accurate estimate of potential output. C. It is subject to lags. D. Households may not respond to changes they perceive as temporary. E. Households may not respond to changes they perceive as permanent. 132. A temporary tax cut would not be effective in stimulating aggregate demand if A. the tax cut were large B. the MPC were relatively high C. the economy were in a contractionary gap D. the short-run aggregate supply curve were relatively flat E. people based consumption decisions on their level of permanent income 133. If people base their spending decision more on permanent income than current income, then A. consumption spending will be more responsive to a temporary change in income than a change in permanent income B. shifts in aggregate supply will be less predictable than if spending was based on current income C. consumption spending will fluctuate more widely than if such spending was determined by current income D. shifts in short-run aggregate supply will be more predictable than if spending was based on current income E. attempts to fine-tune the economy with temporary tax rate adjustments will be less effective 134. Which of the following does not limit the effectiveness of discretionary fiscal policy? A. the difficulty of estimating the natural rate of unemployment B. time lags involved in enacting appropriate legislation C. the difficulty of getting an accurate measure of the rate of inflation D. time lags involved in recognizing the need for fiscal policy E. the tendency for people to distinguish between temporary and permanent changes in their income 135. People will be likely to spend a higher percentage of any additional income when A. they believe that the increase is permanent B. they believe that the increase is temporary C. the increase is large D. the increase is small E. interest rates on savings accounts are rising 136. Although discretionary fiscal policy worked fairly well in the U.S. in the 1960s, it worked even better during the stagflation years of the 1970s. A. True B. False 137. Which of the following is not a weakness of fiscal policy? A. Implementation of policy is difficult. B. Time lags in fiscal policy are long and variable. C. Fiscal policy works only during periods of stagflation. D. Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income. E. Fiscal policy might have undesirable long-term effects on short-run aggregate supply. 138. One thing that policy makers often overlook is A. how quickly fiscal policy can respond to changes in economic conditions B. how fiscal policies unintentionally affect individual incentive to work, spend, save and invest C. how fiscal policy affects the price level D. how fiscal policy affects the economy's output E. how voters might respond to a policy that increases taxes 139. Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if A. the higher taxes lead workers to seek out a second job B. the higher taxes cause workers to work less C. the government purchases goods with the additional revenue D. the government uses the additional revenue to retire some of the federal debt E. the higher taxes cause people to save less 140. Fiscal policy under the Reagan administration was intended to A. stimulate the economy by decreasing taxes in order to increase consumption B. increase tax revenues by increasing the tax rate C. balance the budget by increasing defense spending and increasing taxes D. stimulate the economy by decreasing taxes in order to increase aggregate supply E. stimulate the economy by increasing government spending in order to increase aggregate supply 141. Supply-side economics emphasized government policies to A. stimulate aggregate demand B. increase minimum wage to improve labor productivity C. stimulate real GDP by improving incentives to work D. lower interest rates E. increase tax revenues of government in order to increase government purchases 142. Large federal budget deficits A. can best be reduced by automatic stabilizers B. make it difficult to use discretionary fiscal policy C. in the mid to late 1980s were the result of a severe recession D. still constitute only about 1 percent of GDP E. have little to do with the growth of the federal debt 143. On June 24, 2009, President Obama signed into law the Consumer Assistance to Recycle and Save (CARS) Act, better known as A. the Lightning McQueen program B. the Save General Motors program C. the Save the US Auto Industry program D. the Cash for Clunkers program E. the Loot for Lemons program 144. In a study by Edmunds.com, the Cash for Clunkers program was shown to cost the government _____ per additional car sale. A. $6,000 B. $10,000 C. $16,000 D. $20,000 E. $24,000 145. The Cash for Clunkers program provided motorists with a cash incentive to trade-in vehicles that got fewer than 18 miles per gallon for more fuel efficient vehicles. A. True B. False 146. The Cash for Clunkers program was intended to help the US auto industry and help the environment. Which of the following is often cited as a unintended consequence of the program? A. it contributed to an increase in the US trade deficit B. it helped Toyota surpass GM as the #1 auto maker in the world C. it helped the Japanese auto industry more than the US industry D. it helped used car dealers more than new car dealers E. it led to an acceleration of inflation in the USeconomy 147. The Cash for Clunkers program was intended to help the US auto industry and help the environment. Which of the following is often cited as a unintended consequence of the program? A. it contributed to an increase in the US trade deficit B. it helped Toyota surpass GM as the #1 auto maker in the world C. it helped used car dealers more than new car dealers D. it increased the federal deficit E. it led to an acceleration of inflation in the USeconomy 148. The Cash for Clunkers program was intended to help the US auto industry and help the environment. Which of the following is often cited as a unintended consequence of the program? A. it contributed to an increase in the US trade deficit B. it helped Toyota surpass GM as the #1 auto maker in the world C. it helped used car dealers more than new car dealers D. it led to an acceleration of inflation in the US economy E. it neglected to help other hard hit sectors of the economy 149. The Cash for Clunkers program was intended to help the US auto industry and help the environment. Which of the following is often cited as a unintended consequence of the program? A. it removed used cars and recyclable used car parts from the market B. it helped Toyota surpass GM as the #1 auto maker in the world C. it helped used car dealers more than new car dealers D. it led to an acceleration of inflation in the US economy E. it contributed to an increase in the US trade deficit 150. Christopher Knittel, an economist at the University of California, Davis, estimated that the government could have gotten 10 times more carbon reduction by spending the $3 billion in used in the Cash for Clunkers program in the market for carbon offsets. A. True B. False 151. Other things constant, a decrease in real GDP demanded is caused by a(n) A. increase in government purchases B. increase in transfer payments C. decrease in government purchases D. decrease in net taxes E. All of the answers are correct 152. Because natural market forces may take a long time to close a contractionary gap, governments often turn to discretionary fiscal policy. A. True B. False 153. The steepness of the short-run aggregate supply curve depends on A. the price level B. a larger than expected simple multiplier C. a smaller than expected simple multiplier D. the increase only in labor costs as output expands E. how sharply production costs increase as output expands 154. Which of the following did classical economists believe caused depressions and high unemployment? A. wars B. tax increases C. poor crop growing seasons D. changing tastes E. All of the answers are correct 155. Given the desire of politicians to get reelected, they might try in the short run to use the economic tool of A. monetary policy B. fiscal policy C. dirty tricks D. tax increases E. increases in the price level 156. Discretionary fiscal policy is an extremely precise tool of macroeconomic stabilization. A. True B. False 157. __________ unemployment benefits __________ the opportunity cost of not working, so some job seekers may decide to __________ their job searches. A. Higher, reduce, increase B. Lower, reduce, decrease C. Higher, raise, decrease D. Lower, reduce, increase E. Higher, reduce, decrease 158. Which of the following factors did not contribute to the federal budget surpluses in the 1990s? A. higher taxes on the rich B. more federal government spending discipline C. market globalization D. slower consumer spending E. rising business optimism based on technological innovation 159. The one-time tax cuts used by the Bush administration to stimulate the economy in 2008 proved to be very successful. A. True B. False 160. It has been estimated that the marginal propensity to consume out of tax rebate money is around 1/3. A. True B. False 161. It has been estimated that the marginal propensity to consume out of tax rebate money is around 1/3 which means the multiplier from just tax rebate programs will b about 3. A. True B. False 162. Recent studies of the effectiveness of fiscal policy tend to suggest that increases in government spending are more effective than tax cuts in stimulating real GDP. A. True B. False 163. Recent studies of the effectiveness of fiscal policy tend to suggest that the government spending multiplier is less than 1. A. True B. False 164. Exhibit 11-3 In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS110 in Exhibit 11-3, what would be the short-run equilibrium level of real GDP and the price level? A. $14 trillion and 110 B. $14 trillion and 105 C. $12 trillion and 105 D. $12 trillion and 110 E. the short-run equilibrium of real gdp and the price level cannot be determined from the exhibit 165. Exhibit 11-3 The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS110 in Exhibit 11-3 is facing an expansionary gap. A. True B. False 166. Exhibit 11-3 In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS110 in Exhibit 11-3, what would be the size of the recessionary gap? A. $.5 trillion B. $1 trillion C. $1.5 trillion D. $2 trillion E. $2.5 trillion 167. Exhibit 11-3 In an economy characterized by Exhibit 11-3, there is a recessionary gap. A. True B. False 168. Exhibit 11-3 In Exhibit 11-3, if the government wants to eliminate the recessionary gap it should _______ government spending by _______. A. increase; $2 trillion B. decrease; $2 trillion C. decrease; $2 trillion x (1 - MPC) D. increase; $2 trillion x (1 - MPC) E. decrease; $2 trillion x 1/(1-MPC) 169. Exhibit 11-3 In Exhibit 11-3, if the government wants to eliminate the recessionary gap it should _______ net taxes by _______. A. increase; $2 trillion B. decrease; $2 trillion C. decrease; $2 trillion x [(1 - MPC)/MPC] D. increase; $2 trillion x [(1 - MPC)/MPC] E. decrease; $2 trillion x MPC/(1-MPC) Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776
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