ECON 201
Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD3?
an increasein taxes and an increasein government spending
a decrease in taxes and an increasein government spending
C. an increasein taxes and a decrease in government spending
D. a decrease in taxes and a decreasein government spending
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
Type: Graph
214. Which combination of fiscal policy actionswould most likely offset each other?
A. increase both taxes and government spending
decrease taxes and increasegovernment spending
increase taxes but make no change in government spending
decrease government spending but make no change in taxes
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
215.
Refer to the figure.The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pullinflation?
A. shift aggregate demand by increasing taxes
shift aggregate demand by decreasing taxes
shift aggregate supply by increasing taxes
shift aggregate demand by increasing government spending
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
Type: Graph
216.
Refer to the figure. The economy is at equilibrium at point B. What would expansionary fiscal policy do?
A. move theeconomy from point B towards point A
move the economy from point B towards point C
move the economy from point B downward along AD2
move the economyfrom point B upwardalong AD2
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
Type: Graph
217.
Refer to the figure.The economy is at equilibrium at point C, which is below potential output. What fiscal policy would increasereal GDP?
shift aggregate demand by increasing taxes
shift aggregate demand by decreasing transfer payments
shift aggregate demand by decreasing government spending
D. shift aggregate demand by increasing transfer payments
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
Type: Graph
If the economy is in a recession and pricesare relatively stable,then the discretionary fiscal policy or policiesthat would most likely be recommended to correct this macroeconomic problemwould be
A. increased government spending or increased taxation,or a combination of the two actions.
B. increased government spending or decreased taxation, or a combination of the two actions.
increased government spending or increasedtaxation, but not a combination of the two actions.
decreased government spending or decreased taxation, or a combination of the two actions.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
The economy starts out with a balanced Federalbudget. If the government then implements expansionary fiscal policy, then there will be a
trade deficit.
trade surplus.
C. budget deficit.
D. budget surplus.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
Contractionary fiscal policy would tend to make a budget deficit become
A. bigger.
B. smaller.
a trade deficit.
a trade surplus.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
221.
Refer to the graph. Assume that the economy is in a recession with a price level of P1 and output levelQ1. The government then adopts an appropriate discretionary fiscal policy. What willbethe most likelynew equilibrium price level and output?
P2 and Q4
P1 and Q1
C. P2 and Q2
D. P1 and Q3
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
Type: Graph
222.
Refer to the graph. Assumethat the economy initiallyhas a price level of P1 and outputlevel Q1. If the government implements expansionary fiscal policy, and the full multipliereffect is felt, it will bring the economy to
P2 and Q4.
P1 and Q1.
P2 and Q2.
D. P1 and Q3.
AACSB: Knowledge Application
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
Type: Graph
You are given the followinginformation about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4)net export = $20 billion. If the full-employment levelof GDP for this economyis $620 billion, then what
combination of actionswould be most consistentwith closing the GDP gap here?
increase government spending and taxes
decrease government spending and taxes
C. decreasegovernment spending and increase taxes
D. increase government spending and decreasetaxes
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment= $40 billion, (3) government purchases = $90 billion, and (4) netexport = $25 billion. If the full-employment level of GDP for this economy is $600 billion,then what
combination of actions would be most consistent with closingthe GDP gap here?
increase government spending and taxes
decrease government spending and taxes
decrease government spending and increase taxes
D. increase government spending and decreasetaxes
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
When government spending is increased, the amount of the increasein aggregate demand primarily depends on
A. the averagepropensity to consume.
B. the size of the multiplier.
income taxes.
exchange rates.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certainsize will be more expansionary when the
A. economy's MPS is small.
economy's MPS is large.
economy's MPC is small.
unemployment rate is low.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
A given reductionin government spending will dampen demand-pull inflation by a greater amount when the
economy's MPS is large.
economy's aggregate supply curve is flat.
C. economy'saggregate supply curve is steep.
D. unemployment rate is high.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
Which of the followingfiscal policy changes would be the most expansionary?
A. a $40 billion increase in government spending
a $20 billiontax cut and $20 billionincrease in government spending
a $10 billiontax cut and $30 billionincrease in government spending
a $40 billion tax cut
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
Which of the followingexpansionary fiscal policy changes would be most favoredby those economists who think that the government is too large and inefficient?
a $40 billion increase in government spending
a $20 billiontax cut and $20 billionincrease in government spending
a $10 billiontax cut and $30 billionincrease in government spending
D. a $40 billion tax cut
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
Which of the followingfiscal policy changeswould be the most contractionary?
A. a $40 billion increase in taxes
B. a $10 billionincrease in taxes and a $30 billioncut in government spending
a $20 billionincrease in taxes and a $20 billion cut in government spending
a $30 billion increase in taxes and a $10 billion cut in government spending
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?
$6 billion
$9 billion
C. $12 billion
D. $16 billion
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
The economy is in a recession. The government enacts a policy to increasespending by $2 billion. The MPS is 0.2. What would be the full increasein real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?
$6 billion
$8 billion
C. $10 billion
D. $16 billion
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
In an economy,the government wants to increase aggregate demand by $50 billionat each pricelevel to increasereal GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by
A. $10 billion.
B. $20 billion.
$31.25 billion.
$40.50 billion.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscal policy.
Test Bank: II Topic: Fiscal Policy and the AD-AS Model
In an economy,the government wants to decreaseaggregate demand by $48 billion at each price levelto decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could
A. increase taxes by $16 billion.
increase taxes by $24 billion.
decrease government spending by $10 billion.
decrease government spending by $16 billion.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 Identify and explain the purposes, tools, and limitations of fiscalpolicy.
Test Bank: II Topic: Fiscal Policy and the AD-ASModel
As the economy declinesinto recession, the collection of personalincome tax revenues automatically falls.This phenomenon best illustrates how a progressive income-tax system
increases crowdingout in the economy.
decreases real interest rates in the economy.
offsets the timing problem for fiscal policy.
D. servesas an automatic stabilizer for the economy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Which of the followingis an exampleof built-in stability? As real GDP decreases, income tax revenues
A. increase and transferpayments decrease.
B. decreaseand transfer payments increase.
and transfer payments both decrease.
and transfer payments both increase.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
The so-called negative taxes are better known as
A. government spending.
B. transfer payments.
built-in stabilizers.
fiscal multipliers.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role ofbuilt-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Due to automaticstabilizers, when the nation's total income rises, government transfer spending
A. increases and tax revenues decrease.
B. decreases and tax revenuesincrease.
and tax revenues decrease.
and tax revenues increase.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Automatic stabilizers smooth fluctuations in the economy because they producechanges in the government's budget that
A. reinforce changes in GDP.
B. help offset changes in GDP.
produce a cyclically adjusted budget.
produce a standardized budget.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
One advantage of automaticfiscal policy over discretionary fiscal policy is that automatic fiscal policy
makes the actual budget a better reflection of the conditionof the economy than the standardized budget.
does not producea cyclical deficit,as discretionary policy does.
C. is not subjectto the timing problems of discretionary policy.
D. has a greater multiplier effect than discretionary policy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should
fall proportionately more than the change in GDP.
fall proportionately less than the change in GDP.
C. riseproportionately more than the change in GDP.
D. rise proportionately less than the changein GDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
242.
Refer to the graph.A budget surplus would be associated with GDP level
H.
J.
K.
D. L.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role ofbuilt-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
243.
In the graph, tax revenues vary
A. directlywith the level of GDP.
inversely with the level of GDP.
directly with the level of government spending.
inversely with the level ofgovernment spending.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Type: Graph
244.
Refer to the graph. Automatic stabilityin this economy could be enhanced by
A. changing the tax system so that the tax line has a steeper slope.
changing the tax system so that the tax line is shifted upwardbut parallel to its present position.
changing the government expenditures line sothat it has a positive slope.
changing the tax system so that the tax line has a flatter slope.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role ofbuilt-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Type: Graph
The more progressive the tax system,the
A. less is the built-in stability for the economy.
B. greateris the built-in stability fortheeconomy.
less isthe effect of crowding out on the economy.
greater is the severityof business fluctuations on the economy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Actions by the federal government that decrease the progressivity of the tax system
decrease the amount of government spending.
increase the effectof automatic stabilizers.
C. decreasethe effect of automatic stabilizers.
D. increase the multiplier effect.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role of built-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
The built-instabilizers in the economytend to
fully offset irregular swingsin real GDP.
magnify somewhat the irregular swings in real GDP.
C. dampen the irregular swings in real GDP.
D. overcompensate for the irregular swings in real GDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role ofbuilt-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
Which of the followingserves as an automaticstabilizer in the economy?
interest rates
exchange rates
the inflation rate
D. the progressive income tax
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain the role ofbuilt-in stabilizers in moderating business cycles.
Test Bank: II Topic: Built-In Stability
The cyclically adjusted budget estimates the Federalbudget deficit or surplusif
A. the rate of inflationwere zero.
B. the economy were at full employment.
the MPC were zero.
the government had a balancedbudget.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
The cyclically adjusted budget deficitin an economyis zero. If this economy goes into recession, then the actualgovernment budget will be
A. balanced.
B. in deficit.
in surplus.
expanding.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
If the cyclically adjusted budgetshows a deficit of zero and the actual budget shows a deficitof about $150 billion, it can be concluded that there is
A. built-in stability.
B. a cyclical deficit.
an expansionary fiscal policy.
a contractionary fiscal policy.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
In Year 1, the actual budget deficitwas $200 billion and the cyclically adjusted deficitwas $150 billion.In Year 2, the actual budget deficitwas $225 billion and the cyclically adjusted deficitwas $175 billion. It can be concludedthat fiscal policy from Year 1 to Year 2 became more
proportional.
progressive.
contractionary.
D. expansionary.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03 Describe how the cyclically adjusted budget reveals the statusof U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
In Year 1, the actual budget deficitwas $150 billion and the cyclically adjusted deficitwas $125 billion.In Year 2, the actual budget deficitwas $130 billion and the cyclically adjusted deficitwas $125 billion. It can be concluded that from Year 1 to Year 2,
A. real GDP decreased.
B. real GDP increased.
full employment was attained.
fiscal policy became less expansionary.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
The cyclically adjusted deficitas a percentage of GDP is 2 percent in Year 1. This cyclically adjusted deficitbecomes 1 percent of GDP in Year 2. It can be concluded that from Year 1 to Year 2,
A. fiscal policy was more expansionary.
B. fiscal policy was more contractionary.
the Federalgovernment is decreasing taxes.
the Federalgovernment is increasing spending.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
The cyclically adjusted surplus as a percentage of GDP is 1 percent in Year 1. This surplusbecomes a deficitof 2 percent of GDP in Year 2. It can be concluded that from Year 1 to Year 2,
A. fiscal policy turned more expansionary.
fiscal policy turned more contractionary.
GDP increased.
GDP decreased.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
If you were told that the government had an actual budget deficit of $50 billion, then you would
know that fiscal policy was expansionary.
know that fiscal policy was contractionary.
know that fiscal policy was producing a cyclical deficit.
D. not be able to determine the directionof fiscal policy from the information given.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03Describe how the cyclicallyadjusted budget reveals the status of U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
Assume that the economyis in a recession and there is a budget deficit.A strict balanced-budget rule that would require the Federal government to balance its budget duringa recession would be
A. expansionary and worsen the effectsof the recession.
B. contractionary and worsen the effects of the recession.
contractionary and counterthe effects of the recession.
expansionary and counterthe effects of the recession.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-03 Describe how the cyclically adjusted budget reveals the statusof U.S. fiscal policy.
Test Bank: II Topic: Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
YearDeficit it as a % ofGDP11.5%21.432.041.851.5 258.
The accompanying table shows the cyclically adjusted budget deficitas a percentage of GDP over a five-year period.In which year was fiscal policy turningmore expansionary?
A. Year 2
B. Year 3
Year 4