Download 1. When the government intentionally uses taxes and government

1. When the government intentionally uses taxes and government spending as a means to
influence the level of output, employment, and general prices in the economy, it is engaging in
fiscal policy.
a. T
b. F
2. Income taxes affect aggregate demand
a.
b.
c.
d.
e.
indirectly by changing net exports.
directly by changing disposable income.
directly through government spending.
indirectly by changing investment spending.
indirectly by changing consumption.
3. If the government wants to close a GDP gap, it should
a.
b.
c.
d.
raise government spending, thereby shifting the aggregate demand curve to the left.
lower government spending, thereby shifting the aggregate supply curve to the left.
lower taxes, thereby shifting the aggregate demand curve to the right.
raise both government spending and taxes by the same amount, thereby shifting the
aggregate demand curve to the left.
e. raise taxes, thereby shifting the aggregate supply curve to the right.
4.
Refer to the figure above. If the economy is in equilibrium at point C, then, other things equal,
an increase in government spending will
a.
b.
c.
d.
decrease the price level.
increase the price level and leave real GDP unchanged.
lower real GDP and leave the price level unchanged.
lower real GDP and increase the price level.
e. have no effect on real GDP or the price level.
5. Suppose the equilibrium level of income exceeds the full employment level of income and
there is high inflation. Hence, the government decides to implement a fiscal policy that will act
to reduce national output and prices. This can be accomplished by
a. raising taxes and government spending by the same amount such that aggregate supply is
decreased and aggregate demand is increased.
b. increasing transfer payments such that aggregate expenditures decline.
c. lowering average tax rates such that aggregate supply is increased.
d. increasing government spending such that aggregate expenditures are increased.
e. decreasing government spending such that aggregate demand is reduced.
6. If the price level rises as real GDP increases, the multiplier effects of any given change in
aggregate expenditures are smaller than they would be if the price level remains constant.
a. T
b. F
7. If the government decreases spending by $10 billion and, at the same time, increases taxes by
the same amount, what is the total effect?
a.
b.
c.
d.
e.
8.
Equilibrium real GDP decreases by more than $20 billion.
Equilibrium real GDP is unchanged.
Equilibrium real GDP increases.
Equilibrium real GDP decreases by more than $10 billion and less than $20 billion.
Equilibrium real GDP decreases by $20 billion.
Refer to the figure above. If you were a member of Congress who wanted to increase the
amount of taxes collected, what would you recommend if the current tax rate were 80 percent?
a.
b.
c.
d.
e.
Increasing the tax rate to 100 percent
Decreasing the tax rate to zero percent
Decreasing the tax rate to 30 percent
Decreasing the tax rate to 70 percent
Increasing the tax rate to 90 percent
9. The fact that government borrowing could function like increased current taxes, reducing
current household and businesses expenditures is known as
a.
b.
c.
d.
e.
Ricardian equivalence.
crowding out equivalence.
intertemporal function.
Ricardian function.
intertemporal equivalence.
10. Crowding out refers to
a.
b.
c.
d.
e.
a decrease in exports because of higher government spending.
an increase in the consumption of imports at the expense of domestic goods and services.
a decrease in government spending caused by higher private sector spending.
an increase in the consumption of domestic goods and services at the expense of imports.
a decrease in consumption or investment spending caused by government spending.
11. Discretionary fiscal policy is best defined as
a.
b.
c.
d.
e.
the policy action taken by Congress to reduce the federal budget deficit.
the arbitrary fluctuation in tax laws and budget requirements.
the deliberate manipulation of the money supply to expand the economy.
the automatic change in certain fiscal instruments when real GDP changes.
the deliberate change in tax laws and government spending to change equilibrium
income.
12. A progressive tax is
a.
b.
c.
d.
e.
a tax used by progressive governments around the world.
a tax that is a flat dollar amount regardless of income.
a tax whose rate falls as income rises.
an automatic stabilizer.
a tax that a business pays.
13. Assume an economy has automatic stabilizers in place that include a progressive tax
structure and a transfer payment system. Then in a period of high economic growth and high
inflation, we would expect
a.
b.
c.
d.
e.
average tax rates and government revenues to rise.
the national debt to become larger.
tax revenues to fall and unemployment compensation to rise.
government spending on social security benefits to rise.
average tax rates and welfare payments to decline.
14. An increase in government spending of $100 million that results in a decrease of private
investment by $100 million is an example of
a.
b.
c.
d.
e.
discretionary monetary policy and will increase equilibrium income by $100.
the principle of Ricardian equivalence and will reduce equilibrium income by $100.
a balanced-budget change in fiscal policy.
the crowding-out effect and will increase equilibrium income by $100.
the crowding-out effect and will leave equilibrium income unchanged.
15. Economists define two components of fiscal policy. These are:
a.
b.
c.
d.
e.
Discretionary fiscal policy and reflexive fiscal policy.
Obligatory and reflexive fiscal policies.
Obligatory fiscal policy and automatic fiscal actions.
Automatic stabilizers and reflexive fiscal policy.
Discretionary fiscal policy and automatic stabilizers.
16. If your boss makes $55,000 a year and she pays $8,500 in taxes, while you make $25,000 a
year and pay $7,500 in taxes, then we can conclude that the tax system is progressive.
a. T
b. F
17. If the government reduces taxes by $600 to increase GDP by $1,800, the tax multiplier must
equal
a.
b.
c.
d.
e.
–3.
–1.
–6.
–5.
–0.33.
18. Other things equal, an increase in government spending financed by higher taxes reduces real
GDP because it causes both aggregate demand and aggregate supply to decline.
a. T
b. F
Reference: [23.1.5]
[1] [A]
Reference: [23.2.8]
[2] [E]
Reference: [23.2.11]
[3] [C]
Reference: [23.2.14]
[4] [B]
Reference: [23.2.17]
[5] [E]
Reference: [23.2.29]
[6] [A]
Reference: [23.2.35]
[7] [E]
Reference: [23.2.36]
[8] [D]
Reference: [23.2.46]
[9] [A]
Reference: [23.2.57]
[10] [E]
Reference: [23.3.78]
[11] [E]
Reference: [23.3.108]
[12] [D]
Reference: [23.3.115]
[13] [A]
Reference: [23.2.59]
[14] [E]
Reference: [23.3.74]
[15] [E]
Reference: [23.3.122]
[16] [B]
Reference: [23.6.148]
[17] [A]
Reference: [23.2.43]
[18] [B]