Question 1

Which of the following would help a government reduce an inflationary output gap?

Accepted Answer

Raising taxes; Decreasing government spending

Question 2

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

Accepted Answer

a mediocre and contradictory combination of tax and expenditure changes.

Question 3

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?

Accepted Answer

There is a crowding-out effect of $20 billion.

Question 4

The group of three economists appointed by the president to provide fiscal policy recommendations is the

Accepted Answer

Council of Economic Advisers

Question 5

Discretionary fiscal policy refers to

Accepted Answer

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Question 6

Fiscal policy refers to the

Accepted Answer

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

Question 7

Expansionary fiscal policy is so named because it

Accepted Answer

is designed to expand real GDP

Question 8

Discretionary fiscal policy will stabilize the economy most when

Accepted Answer

deficits are incurred during recessions and surpluses during inflations.

Question 9

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

Accepted Answer

increase tax rates and/or reduce government spending.

Question 10

Which of the following represents the most expansionary fiscal policy?

Accepted Answer

a $10 billion increase in government spending

Question 11

A contractionary fiscal policy is shown as a

Accepted Answer

leftward shift in the economy's aggregate demand curve.

Question 12

An expansionary fiscal policy is shown as a

Accepted Answer

rightward shift in the economy's aggregate demand curve.

Question 13

A tax reduction of a specific amount will be more expansionary the

Accepted Answer

larger is the economy's MPC.

Question 14

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

Accepted Answer

a negative GDP gap

Question 15

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing

Accepted Answer

a positive GDP gap

Question 16

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to

Accepted Answer

do nothing since the economy appears to be achieving full-employment real output.

Question 17

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with

Accepted Answer

a contractionary fiscal policy.

Question 18

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

Accepted Answer

reduce taxes by $80 billion

Question 19

When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting

Accepted Answer

fiscal policy.

Question 20

Discretionary fiscal policy is often initiated on the advice of the

Accepted Answer

Council of Economic Advisers

Question 21

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n)

Accepted Answer

contractionary fiscal policy.

Question 22

The set of fiscal policies that would be most contractionary would be a(n)

Accepted Answer

decrease in government spending and an increase in taxes

Question 23

If the government wishes to increase the level of real GDP, it might reduce

Accepted Answer

taxes

Question 24

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD2?

Accepted Answer

a decrease in taxes and an increase in government spending

Question 25

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD3?

Accepted Answer

an increase in taxes and a decrease in government spending

Question 26

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be

Accepted Answer

increased government spending or decreased taxation, or a combination of the two actions.

Question 27

Built-in stability means that

Accepted Answer

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus.

Question 28

A major advantage of the built-in or automatic stabilizers is that they

Accepted Answer

require no legislative action by Congress to be made effective

Question 29

Which of the following best describes the built-in stabilizers as they function in the United States?

Accepted Answer

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Question 30

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system serves

Accepted Answer

serves as an automatic stabilizer for the economy

Question 31

Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues

Accepted Answer

decrease and transfer payments increase.

Question 32

The so-called negative taxes are better known as

Accepted Answer

transfer payments

Question 33

The political business cycle refers to the possibility that

Accepted Answer

politicians will manipulate the economy to enhance their chances of being reelected

Question 34

The crowding-out effect of expansionary fiscal policy suggests that

Accepted Answer

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment

Question 35

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes

Accepted Answer

the crowding-out effect

Question 36

Which of the following fiscal policy actions is most likely to increase aggregate supply?

Accepted Answer

an increase in government spending on infrastructure that increases private sector productivity

Question 37

The crowding-out effect suggests that

Accepted Answer

increases in government spending may reduce private investment.

Question 38

The crowding-out effect arises when

Accepted Answer

Government borrows in the money market, thus causing an increase in interest rates

Question 39

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending will

Accepted Answer

decrease, thus partially offsetting the fiscal policy.

2019 S EC231 Ch13 Test B

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