Question 1

Economists and policy makers questioned the effectiveness of discretionary fiscal policy during the 1970s for all the following reasons except

Accepted Answer

A)  the difficulty of estimating the natural rate of unemployment
B)  the time lags involved in implementing fiscal policy
C)  the existence of possible feedback effects of fiscal policy on aggregate supply
D)  the distinction between current and permanent income
E)  the problems of inflation and unemployment were basically solved

Question 2

Discretionary fiscal policy works by shifting the aggregate demand curve.

Accepted Answer

A) True 
 B)False

Question 3

To close a contractionary gap using fiscal policy, the government can

Accepted Answer

A)  increase government spending by the size of the gap
B)  decrease government spending by the size of the gap
C)  increase government spending by more than the size of the gap
D)  increase government spending by less than the size of the gap
E)  decrease government spending by more than the size of the gap

Question 4

If the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier

Accepted Answer

A)  equals -4
B)  equals -3
C)  always equals 1
D)  is the same as the original multiplier
E)  is invariably equal to 5

Question 5

Most government transfer programs are

Accepted Answer

A)  also government spending programs
B)  examples of monetary policy rather than fiscal policy
C)  designed mainly to offset macroeconomic instability
D)  discretionary fiscal policies
E)  automatic stabilizers

Question 6

Either an increase in autonomous net taxes or a decrease in government purchases can close an expansionary gap.

Accepted Answer

A) True 
 B)False

Question 7

Government transfer payments are a good example of an automatic stabilizer.

Accepted Answer

A) True 
 B)False

Question 8

Fiscal policy

Accepted Answer

A)  uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP
B)  uses the federal government's powers over the money supply and interest rates to affect employment, the price level, and GDP
C)  can affect employment and prices, but not the level of GDP
D)  can affect employment and the level of GDP, but not the price level
E)  is most effective when employed by state governments rather than by the federal government

Question 9

Government purchases are assumed to be autonomous because they are

Accepted Answer

A)  independent of the price level
B)  independent of the level of real GDP
C)  independent of consumption
D)  independent of investment
E)  determined by the government independent of the desires of the households in the economy

Question 10

The Golden Age of fiscal policy was

Accepted Answer

A)  the years before the Great Depression
B)  during the Great Depression
C)  during World War II
D)  during the Kennedy administration
E)  during the Reagan administration

Question 11

If government purchases increase and net taxes decrease,

Accepted Answer

A)  the price level will fall
B)  the money supply must rise
C)  the aggregate demand curve shifts leftward
D)  aggregate supply shifts rightward
E)  output and employment will increase

Question 12

Exhibit 12-3
 50 in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level? A) $300 and 20 B) $500 and 20 C) $300 and 40 D) $500 and 50 E) $300 and 50" class="answers-bank-image d-inline" rel="preload" >
-In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

Accepted Answer

A)  $300 and 20
B)  $500 and 20
C)  $300 and 40
D)  $500 and 50
E)  $300 and 50

Question 13

Which of the following is not a weakness of fiscal policy?

Accepted Answer

A)  Implementation of policy is difficult.
B)  Time lags in fiscal policy are long and variable.
C)  Fiscal policy works only during periods of stagflation.
D)  Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.
E)  Fiscal policy might have undesirable long-term effects on short-run aggregate supply.

Question 14

The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.8 will, at each level of real GDP,

Accepted Answer

A)  increase equilibrium real GDP demanded by $100
B)  decrease equilibrium real GDP demanded by $100
C)  increase equilibrium real GDP demanded by more than $100
D)  decrease equilibrium real GDP demanded by less than $100
E)  decrease equilibrium real GDP demanded by more than $100

Question 15

The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.

Accepted Answer

A) True 
 B)False

Question 16

To close a contractionary gap using fiscal policy, the government can

Accepted Answer

A)  increase taxes by the size of the gap
B)  decrease taxes by the size of the gap
C)  increase taxes by more than the size of the gap
D)  decrease taxes by less than the size of the gap
E)  decrease taxes by more than the size of the gap

Question 17

A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in taxes.

Accepted Answer

A) True 
 B)False

Question 18

The supply side effect of higher tax rates would include a fall in the economy's potential GDP.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following government policies would increase aggregate demand?

Accepted Answer

A)  a deficit in the government budget
B)  a stimulation of investment through an increase in taxes
C)  a stimulation of consumption through an increase in taxes
D)  a surplus in the government budget
E)  a decrease in government spending

Question 20

Which of the following best describes the concept of laissez-faire?

Accepted Answer

A)  Government should not intervene in the economy.
B)  Government should actively intervene in the economy whenever it judges the action to be beneficial.
C)  Government should intervene in the economy only to promote short-term economic stability.
D)  Government should intervene in the economy only to maximize long-term growth rates.
E)  Government should intervene in the economy only when the economy is not at full employment or there is substantial inflation.

Exam 13: Fiscal Policy

Fiscal policy

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The Golden Age of fiscal policy was

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Economists and policy makers questioned the effectiveness of discretionary fiscal policy during the 1970s for all the following reasons except

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Government transfer payments are a good example of an automatic stabilizer.

Correct AnswerverifiedShow Answer

Which of the following government policies would increase aggregate demand?

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Either an increase in autonomous net taxes or a decrease in government purchases can close an expansionary gap.

Correct AnswerverifiedShow Answer

The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.

Correct AnswerverifiedShow Answer

Which of the following is not a weakness of fiscal policy?

Correct AnswerverifiedShow Answer

Most government transfer programs are

Correct AnswerverifiedShow Answer

Government purchases are assumed to be autonomous because they are

Correct AnswerverifiedShow Answer

If government purchases increase and net taxes decrease,

Correct AnswerverifiedShow Answer

Discretionary fiscal policy works by shifting the aggregate demand curve.

Correct AnswerverifiedShow Answer

A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in taxes.

Correct AnswerverifiedShow Answer

To close a contractionary gap using fiscal policy, the government can

Correct AnswerverifiedShow Answer

Which of the following best describes the concept of laissez-faire?

Correct AnswerverifiedShow Answer

To close a contractionary gap using fiscal policy, the government can

Correct AnswerverifiedShow Answer

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

Correct AnswerverifiedShow Answer

If the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier

Correct AnswerverifiedShow Answer

The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.8 will, at each level of real GDP,

Correct AnswerverifiedShow Answer

The supply side effect of higher tax rates would include a fall in the economy's potential GDP.

Correct AnswerverifiedShow Answer

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Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

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