Unit 3: Fiscal Policy!!

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Automatic stabilizers act like:A. automatic expansionary fiscal policy

when the economy is in an inflation.B. automatic expansionary fiscal policy

when the economy is in a recession.C. an additional multiplier effect.D. automatic contractionary policy when the

economy is in a recession.E. automatic budget balancing policies

when the economy is in a recession.

– 10 Points

Which of the following is an automatic stabilizer?A. Military spending on the war in Iraq.B. Unemployment compensation payment

to the unemployed auto workerC. Disability payments to the war veteransD. Medicare payments to the elderly.E. Social Security payments to retired

workers.

– 20 Points

Suppose the economy is currently experiencing a recessionary gap. Which of the following fiscal policy options is most likely to increase real GDP by the largest amount?A. a decrease in taxesB. an increase in government spendingC. an decrease in transfer paymentsD. an increase in government purchases, paid for by an increase in taxes.E. an increase in taxes.

– 30 Points

A budget surplus would exist when which of the following occurs?A. Taxes are greater than government

spending.B. Taxes are less than government spending.

C. Taxes are less than government spending plus investment.

D. Investment is less than government spending less taxes.

E. Consumption spending is greater than savings.

– 40 Points

Congress increases the personal income tax in order to balance the budget. Which of the following is likely to result?

A. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand.

B. Automatic stabilizers will have no impact on the increase in taxes and aggregate demand.

C. Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand.

D. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

E. Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand.

– 50 Points

If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by:A. $40 million.B. $50 million.C. $200 million.D. $250 million.E. $100 million.

– 10 Points

If the government increases taxes and its

spending by equal amounts, what will

happen to aggregate demand—stay the same, increase, or decrease?

Increase– 20 Points

Crowding out—1. What causes crowding out?

Gov. deficit spending to stimulate the economy.

2. What is the result of crowding out?

Higher interest rates decreasing interest-sensitive purchases

– 30 Points

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $700 billion, which of the following policies would bring the economy to potential output?

A. Increase government spending by $25 billion.B. Increase government spending by $100 billion.C. Increase government spending by $20 billion.D. Decrease government spending by $100 billion.E. Increase government spending by $800 billion.

– 40 Points1/.2= 55 x 20= 100

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $850 billion, which of the following policies would bring the economy to potential output?A. Increase taxes by $50 billion.B. Increase taxes by $10 billion.C. Increase taxes by $12.5 billion.D. Increase transfers by $12.5 billion.E. Increase government spending by $10 billion.

– 50 Points

A shift left in AD may have been the result of :A. an increase in investment demand due to

optimistic GDP forecasts.B. a decrease in investment due to higher interest

rates.C. decreases in the taxes paid by businesses.D. lower interest rates.

E. a higher aggregate price level.– 10 Points

– 20 Points

Changes in aggregate demand can be caused by changes in:A. production technology.B. business costs.C. raw materials costs.D. worker productivity.E. government spending.

Which of the following is an expansionary fiscal policy?A. an increase in the money supply which

decreases interest ratesB. an increase in taxes which reduces the

budget deficit and decreases consumption

C. a decrease in government spending on the space program

D. an increase in unemployment benefitE. a decrease in welfare and veteran’s

benefits.

– 30 Points

To close an inflationary gap employing fiscal policy, the government could:A. reduce budget allocations to interstate

highway construction.B. increase federal subsidies to state

universities.C. lower the corporate income tax rate.

D. raise the average amount awarded for veterans’ benefits.

E. decrease the money supply.

– 40 Points

The aggregate demand curve:A. slopes downward for the same reasons that an

ordinary demand curve does.B. slopes downward in part because when the price

level falls the real wealth of the public falls, and this induces people to change their consumption.

C. slopes downward in part because as the price level falls the ability of households and firms to borrow cheaply increases.

D. slopes upward, unlike an ordinary demand curve.E. is vertical, unlike an ordinary demand cure.

– 50 Points

Economists say that long-run economic growth is almost entirely due to:A. rising productivity. (best answer)B. population growth. (this could

be true if the labor force grows)C. a democratically elected

government.D. a balanced budget.E. perfectly competitive markets.

– 10 Points

A general decrease in wages will result in the:A. aggregate demand shifting to the

right.B. aggregate demand shifting to the left.

C. short-run aggregate supply shifting to the right.

D. short-run aggregate supply shifting to the left.

E. long-run aggregate supply shifting to the right.

– 20 Points

The short run in macroeconomic analysis is a period:A. in which many production costs can be

assumed to be fixed.B. in which wages become fully flexible.C. of 2 months, and the long run is a period

greater than 12 months.D. in which interest rates are fixed.E. in which the unemployment rate is

assumed constant.

– 30 Points

Stagflation is a combination of:A. increasing unemployment and increasing inflation.B. decreasing unemployment and decreasing inflation.C. increasing unemployment and decreasing inflation.D. decreasing unemployment and increasing inflation.E. increasing unemployment and deflation.

– 40 Points

Roads, telephone lines, power facilities, and schools are examples of a nation's:A. technostructure.B. infrastructure.C. physiostructure.D. sociostructure.E. political structure.

– 50 Points

In the long run, the aggregate price level has:A. no effect on the quantity of aggregate

output.B. a positive effect on the quantity of

aggregate output.C. a negative effect on the quantity of

aggregate output.D. A positive impact on aggregate output,

but no impact on employment.E. a positive impact on employment, but no

impact on aggregate output.

– 10 Points

A nation’s potential output is:A. the level of real GDP that exists when the

economy is experiencing only cyclical unemployment.

B. the level of real GDP that the economy would produce if there was no inflation.

C. the level of real GDP that exists when the actual rate of unemployment is zero.

D. the level of real GDP that the economy would produce if all prices, including nominal wages, were sticky.

E. the level of real GDP that the economy would produce if all prices, including nominal wages, were fully flexible.

– 20 Points

See Mrs. Powell for the drawing:

If the economy is at point E, which of the following describes the likely adjustment process? (Point E shows an inflationary period)

A. Nominal wages decrease, and the short-run aggregate supply curve shifts left until potential output is equal to actual output.

B. Nominal wages increase, and the short-run aggregate supply curve shifts right until potential output is greater than actual output

C. Nominal wages decrease, and the short-run aggregate supply curve shifts right until actual and potential output are equal.

D. Nominal wages decrease, and the short-run aggregate supply curve shifts right until potential output is less than actual output.

E. Nominal wages increase, and the short-run aggregate supply curve shifts left until actual and potential output are equal.

30 Points

Starting from its potential output, an economy's government decides to increase spending. In the long run, an economy will find:

A. that it is producing at an output level which is greater than its potential output.

B. it is producing at its potential output, but at a higher aggregate price level.

C. it is producing at an output level which is below its potential output.

D. it is producing at its potential output level, but at a lower aggregate price level.

E. it is producing at its potential output, with no change in the aggregate price level.

– 40 Points

Keynesian economics propagates the economic ideas:A. that argue that the government intervention in

the economy can be destabilizing.B. that argue that the government can help a

depressed economy through fiscal and monetary policies.

C. that argue that the private sector is perfectly capable to regulate itself.

D. that argue that the free market system will always prevail.

E. that economic recessions will self-correct without active government intervention.

– 50 Points