Download File

AP Economics Chapter 12 Study Guide – TB
1. Which are contractionary fiscal policies?
A) increased taxation and increased government
spending
B) increased taxation and decreased government
spending
C) decreased taxation and no change in government
spending
D) no change in taxation and increased government
spending
6. You are given the following information 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 level of GDP for this economy is
$620 billion, then what combination of actions would
be most consistent with the goal of achieving price
level stability?
A) increase government spending and taxes
B) decrease government spending and taxes
C) decrease government spending and increase
taxes
D) increase government spending and decrease
taxes
2. If the Congress passes legislation to decrease
government spending to control demand-pull
inflation, then this would be an example of a(n):
A) supply-side fiscal policy.
B) expansionary fiscal policy.
C) contractionary fiscal policy.
D) nondiscretionary fiscal policy.
7. If a government wants to pursue an expansionary
fiscal policy, then a tax cut of a certain size will be
more expansionary the:
A) smaller is the economy's MPS.
B) larger is the economy's MPS.
C) smaller is the economy's MPC.
D) larger is the unemployment rate.
3. In an aggregate demand and aggregate supply graph,
an expansionary fiscal policy can be illustrated by a:
A) leftward shift in the aggregate demand curve.
B) rightward shift in the aggregate demand curve.
C) leftward shift in the aggregate supply curve.
D) change in the price level.
8. In an economy, the government wants to increase
aggregate demand by $50 billion at each price level
to increase real GDP and reduce unemployment. If
the MPS is .4, then it could increase government
spending by:
A) $10 billion. B) $20 billion.
C) $31.25 billion. D) $40.50 billion.
9. In an economy, the government wants to decrease
aggregate demand by $24 billion at each price level
to decrease real GDP and control demand-pull
inflation. If the MPC is .75, then it could increase
taxes by:
A) $6 billion. B) $8 billion. C) $10 billion.
D) $12 billion.
4. Refer to the above diagram. The economy is at
equilibrium at point A. What fiscal policy would be
most appropriate to improve the condition of the
economy?
A) decrease aggregate demand by increasing taxes
B) increase aggregate demand by decreasing taxes
C) decrease aggregate supply by increasing taxes
D) increase aggregate demand by increasing
government spending
10. Which policy to finance the public debt might crowdout private spending?
A) borrowing money from the public in the money
market
B) decreasing government spending
C) creating new money
D) decreasing taxes
5. Which combination of fiscal policy actions would be
most stimulative for an economy in a deep recession?
A) increase taxes and government spending
B) decrease taxes and government spending
C) increase taxes and decrease government
spending
D) decrease taxes and increase government
spending
11. Due to automatic stabilizers, when income rises,
government transfer spending:
A) increases and tax revenues decrease.
B) decreases and tax revenues increase.
C) and tax revenues decrease.
D) and tax revenues increase.
Page 1
12. A new member of Congress notes that: "Personal
income tax collections automatically fall and
transfers and subsidies automatically rise as national
income declines." This observation best describes
how the personal income tax, and transfers and
subsidies:
A) serve as built-in stabilizers.
B) produce the full-employment budget.
C) cause crowding-out and reduce equilibrium
GDP.
D) contribute to the recognition lag with fiscal
policy.
18. The United States is experiencing a recession and
Congress decides to adopt an expansionary fiscal
policy to stimulate the economy. In this case, the net
export effect suggests that net exports would:
A) increase, thus decreasing aggregate demand and
partially offsetting the fiscal policy.
B) increase, thus increasing aggregate demand and
partially reinforcing the fiscal policy.
C) decrease, thus decreasing aggregate demand and
partially offsetting the fiscal policy.
D) decrease, thus increasing aggregate demand and
partially offsetting the fiscal policy.
13. Actions by the Federal government that decrease the
progressivity of the tax system:
A) decrease the amount of government spending.
B) increase the effects of automatic stabilizers.
C) decrease the effects of automatic stabilizers.
D) increase the amount of taxation.
19. The United States is experiencing inflation, so
Congress adopts a contractionary fiscal policy to
reduce inflation. The net export effect suggests that
net exports would:
A) decrease, thus decreasing aggregate demand and
partially reinforcing the fiscal policy.
B) decrease, thus increasing aggregate demand and
partially offsetting the fiscal policy.
C) increase, thus decreasing aggregate demand and
partially reinforcing the fiscal policy.
D) increase, thus increasing aggregate demand and
partially offsetting the fiscal policy.
14. In Year 1, the actual budget deficit was $200 billion
and the full-employment deficit was $150 billion. In
Year 2, the actual budget deficit was $225 billion and
the full-employment deficit was $175 billion. GDP
was $1000 billion in Year 1 and $1005 billion in
Year 2. It can be concluded that fiscal policy from
Year 1 to Year 2 was:
A) proportional. B) inflationary.
C) contractionary. D) expansionary.
20. If the government adopts a fiscal policy that is:
A) expansionary, then net exports are likely to
expand and reinforce the effects of the fiscal
policy.
B) contractionary, then net exports are likely to
decline and partially offset the effects of the
fiscal policy.
C) contractionary, then net exports are likely to rise
and reinforce the effects of the fiscal policy.
D) expansionary, then net exports are likely to
decline and partially offset the effects of the
fiscal policy.
15. If the full-employment budget deficit increases from
$200 billion to $250 billion and GDP remains
constant over the two years,:
A) fiscal policy is expansionary.
B) fiscal policy is contractionary.
C) fiscal policy is neutral.
D) the tax system is progressive.
16. Crowding-out is the notion that:
A) since tax revenues vary directly with GDP, a rise
in the level of GDP will increase the budget
surplus and limit expansion.
B) deficit financing will increase the demand for
money, increase the interest rate, and reduce the
level of investment spending in the economy.
C) the full-employment budget is the best indicator
of whether a budget deficit crowds out
investment.
D) the actual budget is the best indicator of whether
a budget deficit crowds out saving.
21. Which cause-and-effect chain would best explain the
reason for a decline in net exports? An expansionary
fiscal policy:
A) increases domestic interest rates and leads to an
appreciation of the dollar that reduces net
exports.
B) decreases interest rates and leads to a
depreciation of the dollar that reduces net
exports.
C) increases domestic interest rates and leads to a
depreciation of the dollar that reduces net
exports.
D) decreases interest rates and leads to an
appreciation of the dollar that reduces net
exports.
17. An expansionary fiscal policy in the upsloping
portion of the aggregate supply curve is:
A) increased by the net export effect.
B) decreased by the creation of new money.
C) increased by the crowding-out effect.
D) decreased by a rise in the price level.
Page 2
22. Suppose the United States pursued a contractionary
fiscal policy to reduce the level of inflation. The net
export effect suggests that:
A) private investment would decrease, thus
decreasing aggregate demand and partially
reinforcing the fiscal policy.
B) private investment would decrease, thus
increasing aggregate demand and partially
offsetting the fiscal policy.
C) net exports would increase, thus decreasing
aggregate demand and partially reinforcing the
fiscal policy.
D) net exports would increase, thus increasing
aggregate demand and partially offsetting the
fiscal policy.
23. Supply-side economics can be described in terms of
the aggregate demand and aggregate supply model as
an attempt to shift:
A) the aggregate supply curve to the left.
B) the aggregate supply curve to the right.
C) both the aggregate supply curve and the
aggregate demand curve to the right.
D) the aggregate supply curve to the right and the
aggregate demand curve to the left.
24. A Congressional representative who calls for a
decrease in tax rates to increase saving, investment,
and economic growth would most likely be
advocating a:
A) contractionary fiscal policy.
B) nondiscretionary fiscal policy.
C) supply-side fiscal policy.
D) proportional fiscal policy.
25. Refer to the above graph. If the economy is in initial
equilibrium at AD1 and AS1 , then from a strict
supply-side perspective a cut in taxes or tax rates
would produce an equilibrium price and quantity of:
A) P1 and Q1. B) P2 and Q2. C) P3 and Q3.
D) P4 and Q4.
Page 3