Question 1

Which of the following best describes the concept of laissez-faire?

Accepted Answer

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.F) B) and E)
G) A) and E)

Question 2

Which of the following fiscal programs is least likely to increase aggregate demand?

Accepted Answer

A)   defense spending
B)   road construction
C)   grants for scientific research and development
D)   an increase in taxes
E)   government purchases of laborF) None of the above
G) C) and D)

Question 3

If policy makers estimate the natural rate of unemployment incorrectly, _____

Accepted Answer

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 in the long run.
D)   the economy will tend toward the level of unemployment the policy makers believe is correct.
E)   the policies that appear to be successful in the short run will lead to inflation in the long run.F) A) and D)
G) D) and E)

Question 4

Suppose the government increases unemployment benefits, which are paid for with higher taxes on earnings. If the marginal propensity to consume is the same for both the beneficiaries of the unemployment benefits and the workers paying taxes, _____

Accepted Answer

A)   GDP will first increase and then fall.
B)   there will be no change in real GDP.
C)   real GDP will increase substantially.
D)   real GDP will fall substantially.
E)   GDP will first fall and then increase.F) C) and E)
G) A) and E)

Question 5

Fiscal policy under the Reagan administration was intended to _____

Accepted Answer

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.F) C) and E)
G) B) and D)

Question 6

In which of the following ways does government affect the consumption component of planned aggregate expenditures?

Accepted Answer

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 reducing the interest rate to encourage firms to invest
E)   by producing public goodsF) A) and B)
G) A) and E)

Question 7

Contractionary fiscal policy _____

Accepted Answer

A)   is the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
B)   is a revenue and spending program in the federal budget that automatically adjusts with the ups and downs of the economy.
C)   is an emergency manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals.
D)   is used to close an expansionary gap.
E)   is a monetary policy change.F) A) and C)
G) A) and B)

Question 8

The goal of fiscal policy after the Great Depression was to _____

Accepted Answer

A)   balance the federal budget.
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.F) D) and E)
G) B) and C)

Question 9

Suppose the federal government increases the unemployment benefits financed by higher income taxes. In this case, which of the following is likely to occur?

Accepted Answer

A)   The supply of labor will decrease as a result of higher unemployment benefits.
B)   The supply of labor will increase as a result of higher unemployment benefits.
C)   Aggregate supply will increase.
D)   Aggregate demand will increase.
E)   Potential GDP will increase.F) A) and C)
G) B) and D)

Question 10

-Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Suppose the economy is currently at e'. If the government implements a contractionary fiscal policy, the economy would move to _____

Accepted Answer

A)   point e*.
B)   point e'.
C)   point e''.
D)   a point between e* and e'' on the potential output line.
E)   a point between e* and e' on the short-run aggregate supply line.F) A) and B)
G) A) and C)

Question 11

Which of the following macroeconomic variables would likely be affected by a fiscal policy?

Accepted Answer

A)   the nominal interest rate
B)   the exchange rate
C)   the discount rate
D)   employment
E)   money supplyF) A) and E)
G) A) and C)

Question 12

Which of the following is true of government purchases?

Accepted Answer

A)   Government purchases are independent of the price level.
B)   Government purchases are independent of the level of real GDP.
C)   Government purchases are independent of consumption.
D)   Government purchases are independent of investment.
E)   Government purchases are independent of the amount saved by households.F) A) and C)
G) A) and B)

Question 13

When the government closes an expansionary gap with a change in government spending, the _____ in government spending leads to _____.

Accepted Answer

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 levelF) B) and D)
G) A) and B)

Question 14

Which of the following is an automatic stabilizer?

Accepted Answer

A)   unemployment insurance
B)   government spending
C)   net taxes
D)   the interest rate
E)   the minimum wage set by the governmentF) A) and B)
G) A) and E)

Question 15

The tax cut of 1964 (proposed by President Kennedy)  _____

Accepted Answer

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 focusing exclusively on aggregate supply.F) A) and E)
G) C) and D)

Question 16

One lesson of the Great Depression was that potential GDP could _____

Accepted Answer

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.F) B) and C)
G) A) and D)

Question 17

If people base their spending decisions more on current income than on permanent income, then _____

Accepted Answer

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 more effective.F) D) and E)
G) A) and D)

Question 18

If the economy is already at its potential output, then the spending multiplier is _____

Accepted Answer

A)   equal to zero in the long run.
B)   infinite in the long run.
C)   equal to 1 in the long run.
D)   equal to zero in the short run.
E)   equal to 1 in the short run.F) B) and E)
G) All of the above

Question 19

A change in government purchases has the greatest effect on the economy in the short run when _____

Accepted Answer

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.F) B) and E)
G) A) and E)

Question 20

Recent studies on the effectiveness of fiscal policy tend to suggest that the government spending multiplier is less than 1.0.

Accepted Answer

A) True 
 B)False

Exam 11: Fiscal Policy.

The tax cut of 1964 (proposed by President Kennedy) _____

Correct AnswerverifiedShow Answer

The goal of fiscal policy after the Great Depression was to _____

Correct AnswerverifiedShow Answer

Contractionary fiscal policy _____

Correct AnswerverifiedShow Answer

When the government closes an expansionary gap with a change in government spending, the _____ in government spending leads to _____.

Correct AnswerverifiedShow Answer

If people base their spending decisions more on current income than on permanent income, then _____

Correct AnswerverifiedShow Answer

Fiscal policy under the Reagan administration was intended to _____

Correct AnswerverifiedShow Answer

One lesson of the Great Depression was that potential GDP could _____

Correct AnswerverifiedShow Answer

Suppose the government increases unemployment benefits, which are paid for with higher taxes on earnings. If the marginal propensity to consume is the same for both the beneficiaries of the unemployment benefits and the workers paying taxes, _____

Correct AnswerverifiedShow Answer

Which of the following macroeconomic variables would likely be affected by a fiscal policy?

Correct AnswerverifiedShow Answer

A change in government purchases has the greatest effect on the economy in the short run when _____

Correct AnswerverifiedShow Answer

In which of the following ways does government affect the consumption component of planned aggregate expenditures?

Correct AnswerverifiedShow Answer

-Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Suppose the economy is currently at e'. If the government implements a contractionary fiscal policy, the economy would move to _____

Correct AnswerverifiedShow Answer

Which of the following is true of government purchases?

Correct AnswerverifiedShow Answer

Suppose the federal government increases the unemployment benefits financed by higher income taxes. In this case, which of the following is likely to occur?

Correct AnswerverifiedShow Answer

Which of the following fiscal programs is least likely to increase aggregate demand?

Correct AnswerverifiedShow Answer

Which of the following best describes the concept of laissez-faire?

Correct AnswerverifiedShow Answer

If the economy is already at its potential output, then the spending multiplier is _____

Correct AnswerverifiedShow Answer

Recent studies on the effectiveness of fiscal policy tend to suggest that the government spending multiplier is less than 1.0.

Correct AnswerverifiedShow Answer

If policy makers estimate the natural rate of unemployment incorrectly, _____

Correct AnswerverifiedShow Answer

Which of the following is an automatic stabilizer?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

When the government closes an expansionary gap with a change in government spending, the _ in government spending leads to _.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified