Macroeconomics Instructor: Jen Dinsmore Hanson Homework Assignment Chapter 12 Multiple Choice Questions 1. If we passed a constitutional amendment requiring a balanced budget every year, this would probably A. make our recessions into depressions. B. prevent recessions. C. create inflations. D. raise interest rates. 2. If full employment GDP is $1 trillion greater than equilibrium GDP, and there is a recessionary gap of $400 billion, the multiplier is A. 1. B. 2.5. C. 4. D. 5. E. This is impossible to find with the information given. 3. The national debt passed the $2 trillion mark in A. 1980. B. 1982. C. 1984. D. 1986. E. 1988. 4. Most economists would agree that the national debt should be reduced A. during both periods of recession and prosperity. B. just during periods of recession. C. just during periods of prosperity. D. never. 5. We have an inflationary gap when A. equilibrium GDP is greater than full employment GDP. B. full employment GDP is greater than equilibrium GDP. C. equilibrium GDP is equal to full employment GDP. D. None of the choices are correct. 6. Which statement is true? A. On occasion we have inflationary gaps and recessionary gaps at the same time. B. When we are at equilibrium GDP, we are generally at full employment. C. Fiscal policy and the automatic stabilizers are identical terms. D. None of the statements are true. 12-1
7. Which statement is false? A. Foreigners are holding an increasing percentage of the national debt. B. The national debt rises substantially during wartime. C. Over the next 50 years we will have to pay off most of the national debt. D. None of the statements are false. 8. Which statement is true? A. The public debt is greater than our GDP. B. The public debt has doubled over the past four years. C. Over 50 percent of the outstanding public debt is owed by foreigners. D. None of the statements are true. 9. In the 1930s, John Maynard Keynes said that our main economic problem was A. weak aggregate demand. B. too much government spending. C. big budget deficits. D. high interest rates. E. that taxes were too low. 10. Which statement is true? A. When there is a recessionary gap, we are spending too much and taxes should be raised. B. When there is a recessionary gap we are spending too little and taxes should be raised. C. When there is a recessionary gap, we are spending too much and taxes should be lowered. D. When there is a recessionary gap we are spending too little and taxes should be lowered. 11. The national debt is of the United States government and of the people who hold it. A. an asset; an asset B. a liability; a liability C. an asset; a liability D. a liability; an asset 12. Fiscal policy includes each of the following except A. the money supply. B. taxes. C. government spending. D. the automatic stabilizers. 13. Between fiscal years 2008 and 2010, our federal budget deficit as a percent of GDP A. rose substantially. B. rose slightly. C. fell slightly. D. fell substantially. 14. Two ways to lower the deficit are to A. raise taxes and raise government spending. B. lower taxes and lower government spending. C. raise taxes and lower government spending. D. lower taxes and raise government spending. 12-2
15. In the mid-1990s, the federal budget deficit A. fell substantially. B. fell slightly. C. stayed about the same. D. rose slightly. E. rose substantially. 16. Large budget deficits tend to A. raise interest rates. B. lower interest rates. C. have no effect on interest rates. 17. Interest rates in the United States would have been higher in recent years had it not been for A. the federal budget deficits. B. the large federal budget surpluses. C. the outflow of funds to foreigners. D. the inflow of funds from foreigners. 18. Even if the economy has considerable excess capacity, new government spending that creates new jobs involves opportunity costs because A. goods other than those purchased by government could have been produced and consumed. B. unemployed workers are unwilling to surrender leisure time to take paid jobs. C. excess capacity implies that the capital stock exceeds equilibrium. D. government employment is inefficient relative to jobs in the private sector. E. expansionary monetary policy stimulates employment without growth of national debt. 19. Which of the following would require reducing government expenditures and increasing tax rates during a recession? A. An annually balanced budget policy B. A countercyclical fiscal policy C. A cyclically balanced budget policy D. A policy employing built-in stability 20. Expansionary fiscal policy involves A. a decrease in government spending and/or an increase in taxes. B. only an increase in taxes. C. an increase in government spending and/or a decrease in taxes. D. only a decrease in government spending. 21. In the 20 th century, our federal budget deficits were, on average, largest in the A. 1960s. B. 1970s. C. 1980s. D. 1990s. 12-3
22. An illustration of the term "automatic stabilizer" is provided by A. The tendency of tax collections to rise as the economy moves into a recession. B. The tendency of tax collections to fall as the economy moves into a recession. C. Increases in tax rates as the economy moves into a recession. D. Decreases in tax rates as the economy moves into a recession. E. Public works designed to get the economy out of a depression. 23. Statement I: The federal budget deficit is the same thing as the national debt. Statement II: The national debt will continue to rise even if the federal budget deficit is lowered. 24. The multiplier effect occurs because A. as saving levels increase, a greater pool of loanable funds is available for investment spending by businesses. B. increases in income cause a chain reaction of spending by many businesses and individuals. C. increases in income cause tax revenues to increase, thereby stimulating increases in government spending levels. D. businesses copy the spending decisions of their competitors. E. households tend to spend any increase in income. 25. Statement I: The national debt passed the $1 trillion mark in 1981. Statement II: The national debt exceeded $12 trillion in 2010. 26. Statement I: To lower a recessionary gap we would raise the C + I + G + Xn line. Statement II: The best way to eliminate a recessionary gap is to balance the federal budget. 27. The public debt is the sum of all of the previous A. expenditures of the federal government. B. budget deficits of the federal government. C. budget deficits less the budget surpluses of the federal government. D. budget surpluses less the budget deficits of the federal government. 12-4
28. Because automatic stabilizers exist in the United States economy A. during a recession, transfer payments automatically rise and tax revenue drops; during a period of economic recovery, transfer payments fall and tax revenue rises. B. real wages automatically adjust to keep the labor force fully employed at all stages of the business cycle. C. monetary policy is designed to automatically respond to changes in money demand. D. during a recession, the government's budget deficit automatically becomes smaller. E. All of the choices/statements are true. 29. The reason the multiplier is greater than 1 is that A. income is re-spent. B. workers are capable of increasing their production when they have to. C. the marginal propensity to save is 1. D. none of the choices are correct. 30. John Maynard Keynes believed that A. the market forces would soon cure the Great Depression. B. the federal government should balance its budget every year. C. we could spend our way out of the Great Depression. D. we should scrap the capitalist system and have the government take over the ownership of the means of production. 31. How large will the total change in income be from a change in investment of $15 if the marginal propensity to consume is.8? A. $12 B. $20 C. $25 D. $75 E. $200 32. The paradox of thrift refers to the idea that A. people who save are usually those who cannot afford it. B. as people become more thrifty, incomes may fall. C. the thrift industry (banks and savings and loans) wants some people to save so that others may borrow. D. saving is necessary for economic development. E. equilibrium requires aggregate supply and total expenditures to be equal. 33. When government expenditures in a given year are less than tax receipts, there exists A. a budget deficit. B. public revenue. C. full-employment taxation. D. a budget surplus. 34. During the 1980s, A. both the national debt and the deficit increased. B. neither the national debt nor the deficit increased. C. the national debt increased while the deficit decreased. D. the national debt decreased while the deficit increased. E. the national debt was the same thing as the deficit and it increased. 12-5
35. During recessions, who would tend to call for more government spending? A. Liberals B. Conservatives C. Both liberals and conservatives D. Neither liberals nor conservatives 36. If the MPC is.75, the multiplier is A..25. B..75. C. 1. D. 4. E. 7.5. 37. If the MPC is.75, then a $50 billion increase in investment would result in an increase in GDP of A. $50 billion. B. $75 billion. C. $150 billion. D. $200 billion. E. $375 billion. 38. If the MPC is.8 and government spending falls by $20 billion, GDP will fall by A. $16 billion. B. $20 billion. C. $80 billion. D. $100 billion. E. $160 billion. 39. If the MPC were.75, what change in government spending (in billions of dollars) would be required to cause the equilibrium level of GDP to fall by 100? A. A decrease of 25. B. A decrease of 50. C. A decrease of 75. D. A decrease of 100. E. A decrease of 125. 40. According to the "paradox of thrift," an increase in the A. average propensity to save results in an increase in national output. B. average propensity to save results in a decrease in unemployment. C. saving function (upward shift) can result in a decrease in both national output and total saving. D. consumption function (upward shift) results in a decrease in national income. E. desire of the public to save causes national income and wealth to grow rapidly. 41. Contractionary fiscal policy could be carried out by A. an increase in government spending and/or a decrease in taxes. B. an increase in transfer payments. C. a decrease in government spending and/or an increase in taxes. D. All of the choices are correct. 12-6
42. Stabilization policies can best be described as policies that A. attempt to eliminate recession and/or inflation in the economy. B. use changes in government spending to promote an equitable income distribution. C. use changes in the money supply to lower income tax rates. D. eliminate poverty through the adoption of work incentives. 43. The Budget Act of 1990 A. did not change the top marginal tax rate. B. lowered the top marginal tax rate. C. raised the top marginal tax rate. 44. Statement I: Rapid economic growth would tend to raise the federal budget deficit. Statement II: The 1990-91 recession raised the budget deficit over the level it would have otherwise been. 45. Statement I: In the 1930s, the federal government built a few automatic stabilizers into the economy. Statement II: Automatic stabilizers protect the economy from the extremes of the business cycle. 46. A list of automatic stabilizers in the United States economy would NOT include A. income taxes. B. unemployment compensation. C. agricultural support payments. D. defense spending. 47. Suppose that we reduce the federal budget deficit (in billions of dollars) in year 1 from 300 to 150 and in year 2 from 150 to 50. During these two years the national debt will A. fall by 200. B. fall by 50. C. rise by 50. D. rise by 150. E. rise by 200. 48. If the multiplier is 5, the MPC is A..1. B..2. C..5. D..8. E. 1.0. 12-7
49. As the economy expands, tax revenues and transfer payments. A. fall; rise B. fall; fall C. rise; fall D. rise; rise 50. Nondiscretionary fiscal policy A. multiplies declines in aggregate demand. B. multiplies inflationary growth of aggregate demand. C. does not require any changes in legislation. D. includes government expenditures, taxes and monetary policy. E. is an executive power of the United States President. Short Answer Questions 1.) Given the following (in $ billions): tax receipts = 800, government borrowing = 150, and government spending = 950, how much is the deficit? 2.) Suppose that government spending fell by $20 billion with a multiplier of 7. What happened to GDP? 3.) If GDP were $4 trillion, I rose by $30 billion, and, the multiplier was 5, find the new level of GDP. 4.) If the MPC is.8, how much is the multiplier? 12-8