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Macro Chapter 11 study guide questions
Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. The expenditure multiplier is used to calculate the change in
a. spending caused by a change in income.
b. equilibrium income resulting from a change in interest rates.
c. equilibrium income resulting from an independent change in spending.
d. investment caused by a change in consumption.
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2. Which of the following is a major insight of the Keynesian model?
a. Changes in output, as well as changes in prices, play a role in the macroeconomic
adjustment process, particularly in the long run.
b. A general overproduction of goods relative to total demand is impossible because
production creates its own demand.
c. The responsiveness of aggregate demand to changes in supply will be directly related to
the availability of unemployed resources.
d. Fluctuations in aggregate demand are an important potential source of business instability.
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3. If the federal government runs a budget deficit in order to finance an increase in spending, where do the funds
to finance the spending come from?
a. increased personal income taxes
b. additional money printed by the Federal Reserve
c. additional bonds issued by the U.S. Treasury
d. the financial assets of the members of Congress who are legally responsible for the deficit
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4. When the federal government is running a budget surplus,
a. government revenues exceed government expenditures.
b. government expenditures exceed government revenues.
c. the economy must be in a recession.
d. additional government borrowing will decrease the size of the national debt.
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5. If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
a. be expansionary.
b. be restrictive.
c. be timed correctly.
d. keep the federal budget in balance.
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6. Automatic stabilizers are government programs that tend to
a. reduce the ups and downs in aggregate demand without legislative action.
b. bring expenditures and revenues automatically into balance without legislative action.
c. signal Congress that legislative changes are needed.
d. increase tax collections automatically during a recession.
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7. When the economy enters a recession, automatic stabilizers create
a. higher taxes.
b. more discretionary spending.
c. larger budget deficits.
d. larger budget surpluses.
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8. In the Keynesian model, the primary determinant of consumer spending is
a. the interest rate.
b. disposable income.
c. expectations of inflation.
d. the stage of the business cycle.
____
9. Which of the following is most likely to lead to an increase in current consumption?
a. an increase in personal income tax rates
b. an increase in one's expected future income
c. a decrease in one's marginal propensity to consume
d. an increase in the interest rate
____ 10. In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
a. the employment rate equals approximately 96 percent.
b. actual saving equals actual investment.
c. planned aggregate expenditures exceed actual output.
d. actual output equals planned aggregate expenditures.
____ 11. Keynesian countercyclical budget policy suggests that
a. a budget deficit is needed if the economy is operating at less than full employment.
b. a budget deficit should be planned during an inflationary boom.
c. the budget must be balanced if the national debt is growing more rapidly than the
economy.
d. the budget should always be in balance
____ 12. According to Keynesian theory, which of the following would most likely stimulate an expansion in real
output if the economy were in a recession?
a. an increase in tax rates
b. a balanced budget
c. a budget deficit
d. a budget surplus
____ 13. The Keynesian macroeconomic model was highly popular for several decades following World War II
because it provided an explanation for
a. the strong economic recovery following the end of the war.
b. the high inflation rates of the 1950s.
c. the prolonged unemployment of the 1930s.
d. the high rate of investment during the Great Depression.
____ 14. John Maynard Keynes and his followers argued that the Great Depression was primarily the result of
a. excessive government spending.
b. large budget deficits.
c. the perverse monetary policies of the Fed.
d. insufficient aggregate spending on goods and services.
____ 15. If output is less than full employment in the Keynesian model, what is needed to restore full employment?
a. an increase in the price level
b. an increase in aggregate demand
c. a reduction in government expenditures
d. an increase in aggregate supply
____ 16. According to the Keynesian view, if policy makers thought the economy was about to fall into a recession,
which of the following would be most appropriate?
a. a reduction in government expenditures
b. an increase in government expenditures or reduction in taxes, financed by borrowing
c. a balanced federal budget
d. an increase in taxes
____ 17. In the Keynesian model, equilibrium occurs when
a. the real and nominal interest rates are equal.
b. total spending is equal to current output.
c. the general price level is constant.
d. the money supply is growing at a constant rate.
Critical Thinking and Application
18. What is fiscal policy? What is the relationship between fiscal policy and the federal budget?
19. How does Keynesian economic theory recommend that fiscal policy be conducted?
20. According to the Keynesian model, in what ways will expansionary fiscal policy stimulate aggregate demand?
21. What three types of timing problems might policy makers experience when conducting discretionary fiscal
policy?
22. Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?
Macro Chapter 11 study guide questions
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