Question 1

Automatic stabilizers stabilize the level of real GDP because:

Accepted Answer

A)  Congress quickly changes spending and tax revenue.
B)  federal expenditures and tax revenues change as the level of real GDP changes.
C)  the spending and tax multiplier are constant.
D)  wages are controlled by the minimum wage law.E) None of the above
F) B) and C)

Question 2

"Lower marginal tax rates encourage people to work, save, and invest, resulting in more output and a larger tax base." This statement most closely reflects which of the following schools of economic thought?

Accepted Answer

A)  Keynesian.
B)  Adam Smithian.
C)  Aggregate demandian.
D)  Supply-side economics.E) B) and C)
F) None of the above

Question 3

Which of the following is an example of expansionary fiscal policy?

Accepted Answer

A)  Increase taxes.
B)  Decrease government spending.
C)  Increase government spending.
D)  Increase taxes and decrease government spending equally.E) C) and D)
F) A) and B)

Question 4

The relationship between MPC and MPS is:

Accepted Answer

A)  1 + MPC = MPS.
B)  1 - MPC = MPS.
C)  1 + MPS = MPC.
D)  MPC - MPS = 1.E) A) and D)
F) B) and C)

Question 5

Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:

Accepted Answer

A)  right by $1,000 billion.
B)  right by $750 billion.
C)  left by $1,000 billion.
D)  left by $750 billion.E) All of the above
F) C) and D)

Question 6

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

Accepted Answer

A)  $120 billion increase in government spending and $50 billion increase in tax revenue.
B)  $140 billion increase in government spending and $70 billion increase in tax revenue.
C)  $160 billion increase in government spending and $120 billion increase in tax revenue.
D)  $220 billion increase in government spending and $100 billion increase in tax revenue.
E)  $400 billion increase in government spending and $300 billion increase in tax revenue.F) A) and B)
G) A) and E)

Question 7

According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:

Accepted Answer

A)  0.
B)  at the maximum value.
C)  the same as it would be at a 50 percent tax rate.
D)  greater than it would be at a 50 percent tax rate.
E)  the same as it would be at a 20 percent tax rate.F) B) and C)
G) A) and D)

Question 8

The government can reduce unemployment or reduce inflation by:

Accepted Answer

A)  manipulating aggregate demand.
B)  manipulating the availability of natural resources.
C)  manipulating the availability of capital goods.
D)  manipulating the availability of qualified workers.
E)  curbing the level of immigration.F) B) and E)
G) C) and D)

Question 9

Mathematically, the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula:

Accepted Answer

A)  MPC - 1.
B)  (MPC - 1) \ MPC.
C)  1 \ MPC.
D)  1 \ (1 - MP
C)  .E) B) and C)
F) None of the above

Question 10

The greater the marginal propensity to consume (MPC)in the economy, the greater the spending multiplier.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 11-5 Aggregate demand and supply model 1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by: A) increasing government tax revenue by $6 billion. B) decreasing government tax revenue by $6.1 billion. C) decreasing government tax revenue by $200 billion. D) increasing government tax revenue by approximately $66 billion. E) decreasing government tax revenue by approximately $66 billion." class="answers-bank-image d-inline" rel="preload" > Suppose the economy in Exhibit 11-5 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by:

Accepted Answer

A)  increasing government tax revenue by $6 billion.
B)  decreasing government tax revenue by $6.1 billion.
C)  decreasing government tax revenue by $200 billion.
D)  increasing government tax revenue by approximately $66 billion.
E)  decreasing government tax revenue by approximately $66 billion.F) A) and C)
G) A) and E)

Question 12

If the economy is experiencing inflation, then the most appropriate government policy would be to:

Accepted Answer

A)  shift the aggregate demand curve by using a tax increase coupled with spending cuts.
B)  shift the aggregate demand curve by using a tax increase coupled with more spending.
C)  shift the aggregate demand curve by using a tax cut coupled with spending cuts.
D)  shift the aggregate demand curve by using a tax cut coupled with more spending.
E)  shift the aggregate supply curve by using a tax cut coupled with spending cuts.F) A) and B)
G) B) and C)

Question 13

Which of the following is emphasized by supply-side economics?

Accepted Answer

A)  The impact of budget deficits on interest rates and aggregate demand.
B)  The impact of government spending on aggregate demand, output, and employment.
C)  The impact of marginal tax rates on aggregate supply.
D)  The impact of budget deficits on the rate of taxation in the future.E) A) and B)
F) A) and D)

Question 14

The marginal propensity to consume (MPC) is computed as the change in consumption divided by the change in:

Accepted Answer

A)  GDP.
B)  income.
C)  saving.
D)  none of these.E) B) and D)
F) A) and D)

Question 15

If your income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

Accepted Answer

A)  0.2.
B)  0.4.
C)  0.5.
D)  0.8.
E)  1.0.F) A) and B)
G) B) and E)

Question 16

Unemployment insurance payments act as automatic stabilizers by:

Accepted Answer

A)  allowing for more consumer spending during prosperity.
B)  making the unemployment rate worse during a recession.
C)  allowing for more consumer spending during a recession.
D)  changing the Phillips curve to a Laffer curve.E) All of the above
F) B) and C)

Question 17

The Laffer curve belongs to which of the following schools of economic thought?

Accepted Answer

A)  Keynesian.
B)  Supply-side.
C)  Demand management.
D)  Classical.E) A) and C)
F) A) and B)

Question 18

The school of economic thought which argues that through tax reductions, and deregulation, government creates the proper incentives for the private sector to increase aggregate supply is known as the:

Accepted Answer

A)  rational expectations school.
B)  neo-Keynesian school.
C)  supply-side school.
D)  new classical school.
E)  classical school.F) D) and E)
G) B) and E)

Question 19

Which of the following favors government policies to stimulate the economy by creating incentives for individuals and businesses to increase their productive efforts?

Accepted Answer

A)  supply-side economics.
B)  Keynesian economics.
C)  monetarist economics.
D)  Marxian economics.E) A) and B)
F) A) and C)

Question 20

If consumption is $800 when income is $1,000, the marginal propensity to consume (MPC)must be 0.80.

Accepted Answer

A) True 
 B)False

Exam 11: Fiscal Policy

Mathematically, the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula:

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Which of the following is emphasized by supply-side economics?

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"Lower marginal tax rates encourage people to work, save, and invest, resulting in more output and a larger tax base." This statement most closely reflects which of the following schools of economic thought?

Correct AnswerverifiedShow Answer

The school of economic thought which argues that through tax reductions, and deregulation, government creates the proper incentives for the private sector to increase aggregate supply is known as the:

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The government can reduce unemployment or reduce inflation by:

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The marginal propensity to consume (MPC) is computed as the change in consumption divided by the change in:

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Automatic stabilizers stabilize the level of real GDP because:

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The Laffer curve belongs to which of the following schools of economic thought?

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If the economy is experiencing inflation, then the most appropriate government policy would be to:

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If your income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

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Exhibit 11-5 Aggregate demand and supply model Suppose the economy in Exhibit 11-5 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E2 and reduce inflation by:

Correct AnswerverifiedShow Answer

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

Correct AnswerverifiedShow Answer

Which of the following is an example of expansionary fiscal policy?

Correct AnswerverifiedShow Answer

Which of the following favors government policies to stimulate the economy by creating incentives for individuals and businesses to increase their productive efforts?

Correct AnswerverifiedShow Answer

Unemployment insurance payments act as automatic stabilizers by:

Correct AnswerverifiedShow Answer

If consumption is $800 when income is $1,000, the marginal propensity to consume (MPC)must be 0.80.

Correct AnswerverifiedShow Answer

Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:

Correct AnswerverifiedShow Answer

According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:

Correct AnswerverifiedShow Answer

The relationship between MPC and MPS is:

Correct AnswerverifiedShow Answer

The greater the marginal propensity to consume (MPC)in the economy, the greater the spending multiplier.

Correct AnswerverifiedShow Answer

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Exhibit 11-5 Aggregate demand and supply model Suppose the economy in Exhibit 11-5 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E₂ and reduce inflation by:

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