Practice Problems: Chapter 13 Fiscal Policy

Transcription

1 Practice Problems: Chapter 13 Fiscal Policy 1. In the basic equation of national income accounting, the government directly controls and influences. A) G ; C and I B) T ; G and C C) C ; X and M D) I ; G and T 2. Expansionary fiscal policy: A) increases long-run aggregate supply. B) decreases long-run aggregate supply. C) increases aggregate demand. D) decreases aggregate demand. 3. A change in taxes or a change in government transfers affects consumption through a change in: A) autonomous consumption. B) the marginal propensity to save. C) disposable income. D) government spending. 4. An increase in government transfers is considered to be an example of because it. A) expansionary fiscal policy; shifts the aggregate demand curve to the left, increasing aggregate output B) contractionary fiscal policy; shifts the aggregate demand curve to the left, decreasing aggregate output C) expansionary fiscal policy; shifts the aggregate demand curve to the right, increasing aggregate output D) contractionary fiscal policy; shifts the aggregate demand curve to the right, decreasing aggregate output

2 Use the following to answer questions 5-11: Figure: Inflationary and Recessionary Gaps 5. (Figure: Inflationary and Recessionary Gaps) At E 1, the economy: A) is in equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is booming. 6. (Figure: Inflationary and Recessionary Gaps) At E 2, the economy: A) is in equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is booming. 7. (Figure: Inflationary and Recessionary Gaps) At E 3, the economy: A) is in equilibrium. B) has an inflationary gap. C) has a recessionary gap. D) is stagnating. 8. (Figure: Inflationary and Recessionary Gaps) The movement from AD 1 to AD 3 could be caused by: A) increased government purchases. B) increased government transfers. C) decreased taxes. D) all of the above.

3 9. (Figure: Inflationary and Recessionary Gaps) The movement from AD 3 to AD 1 would be caused by: A) increased government purchases. B) increased government transfers. C) increased taxes. D) all of the above. 10. (Figure: Inflationary and Recessionary Gaps) An inflationary gap would be: A) Y 3 -Y 1. B) Y 3 -Y 2. C) Y 2 -Y 1. D) Y 3 -Y (Figure: Inflationary and Recessionary Gaps) An recessionary gap would be: A) Y 3 -Y 1. B) Y 3 -Y 2. C) Y 2 -Y 1. D) Y 3 -Y To close an inflationary gap employing fiscal policy, the government could: A) reduce budget allocations to interstate highway maintenance. B) increase federal subsidies to state universities. C) lower the corporate income tax rate. D) raise the average amount awarded for a disability pension. 13. To close a recessionary gap employing fiscal policy, the government could: A) increase national savings so that the interest rate falls. B) raise the annual income exempt from paying the personal income tax. C) lower the corporate income tax rate. D) lower the amount awarded for unemployment insurance.

4 14. Using the accompanying figure, which of the following would be the appropriate response on the part of the North Placid government? A) Increase government spending to close the recessionary gap. B) Decrease government spending to close the recessionary gap. C) Decrease taxes to close the inflationary gap. D) Increase taxes to close the inflationary gap. 15. The marginal propensity to consume is: A) increasing if the marginal propensity to save is increasing. B) the proportion of total disposable income that the average family consumes. C) the change in consumer spending divided by the change in aggregate disposable income. D) the change in consumer spending less the change in aggregate disposable income. 16. The MPS plus the MPC must equal: A) zero. B) one. C) income. D) saving. 17. The marginal propensity to save is: A) savings divided by aggregate income. B) the fraction of an additional dollar of disposable income that is saved. C) 1 + MPC. D) all of the above.

5 18. A $100 million increase in government spending increases equilibrium GDP by: A) $100 million. B) more than $100 million. C) less than $100 million. D) zero. 19. Suppose the MPC = 0.8 and the government cuts taxes by $40 billion. Which of the following will be the likely effect? A) Real GDP will expand by $200. B) Real GDP will contract by $200. C) Real GDP will expand by $160. D) Real GDP will contract by $ The multiplier effect of changes in government transfers is equal to: A) 1/(1 MPS). B) 1/(1 MPC). C) MPC/(1 MPC). D) MPS/(1 MPC). Use the following to answer questions 21-24: Exhibit: Multiplier The marginal propensity to consume is 0.8, and potential output is $800 billion. 21. (Exhibit: Multiplier) If current real GDP is $700 billion: A) there is an inflationary gap. B) there is a recessionary gap. C) the economy is in long-run equilibrium. D) government transfers should be decreased. 22. (Exhibit: Multiplier) 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.

6 23. (Exhibit: Multiplier) If current GDP is $850 billion: A) there is an inflationary gap. B) there is a recessionary gap. C) the economy is in long-run equilibrium. D) taxes should be decreased. 24. (Exhibit: Multiplier) If current real GDP is $850, which of the following policies would bring the economy to potential output? A) Decrease government spending by $50 billion. B) Increase government spending by $50 billion. C) Decrease government transfers by $50 billion. D) Decrease government spending by $10 billion. 25. Discretionary fiscal policy involves: A) changing the money supply to change interest rates and investment spending. B) using government spending or tax policy to affect aggregate demand. C) lifting trade barriers on imports. D) policy to raise the natural rate of unemployment. 26. The government budget balance equals: A) Taxes + Government purchases + Government transfers. B) Taxes Government purchases Government transfers. C) Taxes Government purchases + Government transfers. D) Taxes + Government purchases Government transfers. 27. The effect of a government deficit on the economy is: A) contractionary. B) expansionary. C) neutral. D) biased. 28. An example of an automatic stabilizer that works when the economy contracts is: A) a rise in tax receipts. B) a fall in government purchases. C) a discretionary decrease in government purchases. D) a rise in government transfers, as more people receive unemployment insurance benefits.

7 29. Suppose that the budget deficit of a country remains level for five years. Which of the following would be true concerning the fiscal stance of this government? A) The federal debt will remain constant. B) The federal debt will fall. C) The federal debt will rise. D) The federal debt will either remain constant or fall. 30. Implicit liabilities refers to the promises made by the government, such as: A) aid to foreign countries. B) unemployment benefits. C) Social Security and Medicare. D) all of the above.

8 Answer Key 1. A 2. C 3. C 4. C 5. C 6. A 7. B 8. D 9. C 10. B 11. C 12. A 13. C 14. D 15. C 16. B 17. B 18. B 19. C 20. C 21. B 22. C 23. A 24. D 25. B 26. B 27. B 28. D 29. C 30. D