Deck 18: Debates in Macroeconomics Over the Role and Effects of Government

Question 1

All economists agree that some types of government spending are better for the economy than other types of spending.

Answer 1

False

Question 2

If wages are flexible, it is very likely that government intervention will be needed to push the economy out of a recessionary gap.

Answer 2

False

Question 3

Those economists who believe that the economy is self-regulating argue that wages are flexible, so they think that the economy can remove itself from a recessionary gap without government intervention.

Answer 3

True

Question 4

There are economists who believe that some types of government spending are better for the economy than other types of government spending.

Question 5

A theory must be capable of being proved wrong if, in fact, it is wrong.

Question 6

Those economists who view the AS curve as being vertical see more government tools capable of raising Real GDP than do the economists who view the AS curve as being upward-sloping.

Question 7

An economist who believes that increases in government spending will not increase aggregate demand, may cite crowding out as the reason for this belief.

Question 8

All economists agree that the aggregate supply (AS) curve is vertical.

Question 9

It is a fact that the government spending multiplier is always greater than the tax multiplier.

Question 10

If income tax rates are cut, the size of the budget deficit will necessarily increase.

Question 11

Some economists believe that government bailouts privatize the benefits of doing business and socialize the costs, leading to more companies needing to be bailed out.

Question 12

The Taylor rule is an example of a rule-based monetary policy system.

Question 13

Wage flexibility is one of the conditions necessary for an economy to be able to bring itself out of a recessionary gap.

Question 14

Economists who believe in complete crowding out are not likely to advocate for an increase in government spending to remove the economy from a recessionary gap.

Question 15

Tax revenues can rise as a result of a decrease in income tax rates, as long as the tax base increases sufficiently.

Question 16

The use of a monetary rule is one way to remove politics from monetary policy.

Question 17

It is possible for a decrease in tax rates to increase tax revenues and decrease the size of a budget deficit.

Question 18

If the (average) tax rate is cut by 10%, and as a result the tax base rises by 15%, tax revenues will rise.

Question 19

All economists agree that a monetary rule is preferable to a discretionary Fed.

Question 20

When income tax rates rise, tax revenues always rise.

Question 21

A $100 billion increase in government spending increases Real GDP by $900 billion. Assuming a constant price level, what does the government spending multiplier equal?

A)9
B)900
C)800
D)8
E)7

Question 22

Economists who view the AS curve as upward sloping believe that Real GDP can only rise as a result of a rightward shift of the AS curve.

Question 23

With respect to monetary policy, some economists argue in favor of a rules-based system, while other economists argue in favor of discretion for the Fed.

Question 24

Suppose that a $30 billion increase in government spending increases Real GDP by $150 billion, and that a $10 billion tax reduction increases Real GDP by $40 billion. In this situation, the tax multiplier is _______________ the government spending multiplier.

A)less than
B)greater than
C)equal to
D)none of the above

Question 25

Economists who view the AS curve as vertical believe that government cannot do anything to raise Real GDP from the demand side of the economy.

Question 26

Which of the following is true?

A)When income tax rates fall, it is possible for tax revenues to rise.
B)When income tax rates fall, it is possible for tax revenues to fall.
C)All economists agree that a monetary rule is preferred to discretionary Fed policy.
D)All economists agree that discretionary Fed policy is preferred to a monetary rule.
E)a and b

Question 27

In order for an increase in aggregate demand to raise Real GDP and the price level, the aggregate supply curve must be ____________________. If an increase in aggregate demand raises the price level but leaves Real GDP unchanged, the aggregate supply curve must be _____________________.

A)upward-sloping; vertical
B)upward-sloping; horizontal
C)downward sloping; vertical
D)vertical; upward-sloping
E)vertical; downward-sloping

Question 28

Which of the following is false?

A)Economists who believe that the AS curve is vertical assert that changes in Real GDP originate only on the supply side of the economy.
B)Economists who believe that the AS curve is upward-sloping assert that changes in Real GDP originate only on the supply side of the economy.
C)For economists who believe that the AS curve is upward-sloping, government policy that aims to impact either side of the economy (supply or demand) will change both prices and Real GDP.
D)Compared to the economists who believe that the AS curve is upward-sloping, the economists who believe that the AS curve is upward-sloping assert that the government has fewer tools with which to change Real GDP.

Question 29

Suppose that a $4 billion increase in government spending increases Real GDP by $60 billion, and that a $3 billion tax reduction increases Real GDP by $68 billion. In this situation, the tax multiplier is _______________ the government spending multiplier.

A)less than
B)greater than
C)equal to
D)none of the above

Question 30

Among the economists who believe that an increase in government spending is likely to remove the economy from a recessionary gap are those who believe in the existence of complete crowding out.

Question 31

A $90 billion reduction in taxes increases Real GDP by $378 billion. Assuming a constant price level, what does the tax multiplier equal?

A)4.2
B)3.2
C)42
D)0.42
E)0.32

Question 32

There is debate among economists over whether or not the government spending multiplier is greater than the tax multiplier.

Question 33

Which of the following is true?

A)All economists agree that the tax multiplier is greater than the government spending multiplier.
B)All economists agree that the tax multiplier is smaller than the government spending multiplier.
C)There is disagreement among economists regarding the size of the tax multiplier relative to the size of the government spending multiplier.
D)In the standard Keynesian textbook analysis, the tax multiplier is greater than the government spending multiplier.
E)c and d

Question 34

A $10 billion reduction in taxes increases Real GDP by $60 billion. Assuming a constant price level, what does the tax multiplier equal?

A)70
B)6
C)50
D)0.17
E)0.83

Question 35

The government spending multiplier is the number that, when multiplied by the

A)budget deficit, gives us the change in total spending.
B)budget deficit, gives us the change in the public debt.
C)change in taxes, gives us the change in total spending.
D)change in government spending, gives us the change in total spending.

Question 36

A $300 billion increase in government spending increases Real GDP by $1,800 billion. Assuming a constant price level, what does the government spending multiplier equal?

A)0.17
B)120
C)6
D)60
E)​0.83

Question 37

The U.S. Congress passed a stimulus bill in February 2009 to help remove the economy from a recessionary gap. This is an example of the use of

A)expansionary monetary policy.
B)contractionary monetary policy.
C)contractionary fiscal policy.
D)expansionary fiscal policy.

Question 38

The tax multiplier is the number that, when multiplied by the

A)budget deficit, gives us the change in total spending.
B)budget deficit, gives us the change in the public debt.
C)change in taxes, gives us the change in total spending.
D)change in government spending, gives us the change in total spending.

Question 39

Economists who view the AS curve as vertical believe that government ________________ to raise Real GDP (in the short run) from the demand side of the economy. Economists who view the AS curve as upward-sloping believe that changes in Real GDP (in the short run) _________ result from changes on the demand side.

A)can do many things; cannot
B)cannot do anything; may
C)can do many things; may
D)cannot do anything; cannot

Question 40

Elasticity of investment measures the responsiveness of

A)interest rates to changes in investment.
B)investment to changes in government spending.
C)investment to changes in the interest rate.
D)investment to changes in consumption.

Question 41

Economists who are in favor of smaller government tend to prefer ________________ when expansionary _______________ policy is needed to raise aggregate demand.

A)tax cuts; fiscal
B)tax cuts; monetary
C)more government spending; fiscal
D)more government spending; monetary

Question 42

Economists who are in favor of an increase in the size and scope of government tend to prefer ________________ when expansionary _______________ policy is needed to raise aggregate demand.

A)tax cuts; fiscal
B)tax cuts; monetary
C)more government spending; fiscal
D)more government spending; monetary

Question 43

Those economists who argue that a significant amount of crowding out exists believe that the impact of expansionary fiscal policy will be _________________ by the crowding out. Their reasoning is that if the government increases purchases, and finances that spending by borrowing money, spending in the private sector will _______________, leading ultimately to _____________ in aggregate demand.

A)strengthened; fall; little or no change
B)strengthened; rise; a significant rise
C)weakened; fall; little or no change
D)weakened; rise; a significant rise

Question 44

Some economists believe that corporate bailouts are bad for the economy because they ________________ gains and they _____________ the costs, which ultimately lead to _____________ companies needing to be bailed out.

A)privatize; socialize; fewer
B)socialize; privatize; fewer
C)privatize; socialize; more
D)socialize; privatize; more

Question 45

If the (average) tax rate falls by 10% and as a result the tax base rises by 20%, then tax revenues will

A)rise.
B)decline.
C)remain unchanged.
D)There is not enough information given to answer this question.

Question 46

Economist A says that the economy is self-regulating. This economist most likely believes that

A)the economy can get stuck in a recessionary gap.
B)wages and prices are inflexible downward.
C)wages and prices are flexible.
D)government should enact expansionary fiscal policy when the economy is in a recessionary gap.
E)none of the above

Question 47

If the (average) tax rate falls by 20% and as a result the tax base rises by 20%, tax revenues will

A)rise.
B)decline.
C)remain unchanged.
D)There is not enough information given to answer this question.

Question 48

Which of the following questions is most likely to bring forth the same answer from each of 100 economists:

A)What role should government play in the economy?
B)How does the Fed go about changing the money supply?
C)Is it better to use monetary or fiscal policy to stabilize the economy at the current time?
D)What are the effects on the economy of expansionary fiscal policy?
E)b and d

Question 49

Economist A believes that the expansionary fiscal policy --- in the form of increased government spending --- should be implemented to remove the economy from the recessionary gap it is currently in. This economist probably believes that

A)crowding out will not present much of a problem.
B)crowding out will be a big problem.
C)crowding out is irrelevant to the degree of effectiveness of fiscal policy.
D)zero crowding out is unlikely.
E)c and d

Question 50

Which U.S. president said, "Give me a one-handed economist. All my economists say 'On the one hand, and then on the other hand.'"?

A)Barack Obama
B)Bill Clinton
C)Ronald Reagan
D)Dwight D.Eisenhower
E)Harry S.Truman

Question 51

Economist B says all of the following: Expansionary fiscal policy is needed to raise aggregate demand and remove the economy from a recessionary gap. The choice of fiscal policy measures is between more government spending and a ___________ in taxes. Since I am in favor of smaller government, I choose a __________________ in __________________.

A)rise; decrease; government spending
B)rise; cut; taxes
C)decrease; rise; government spending
D)decrease; cut; taxes
E)none of the above

Question 52

According to many economists, if wages are _________________, the economy _____________ remove itself from a recessionary gap, and thus ____________ government intervention is needed.

A)flexible; can; no
B)inflexible; may not; some
C)flexible; may not; some
D)inflexible; can; no
E)a and b

Question 53

Economists who believe in complete crowding out would argue that

A)jobs created or saved because of increased government spending will be matched by an equal number of jobs created by an increase in private sector spending.
B)jobs created or saved because of increased government spending will be completely offset by jobs destroyed by a decline in private sector spending.
C)government policies intended to stimulate aggregate demand will be completely ineffective.
D)government policies intended to stimulate aggregate demand will tend to be effective.
E)a and c

Question 54

Which of the following is an empirical issue?

A)The degree to which investment will decline as the interest rate rises.
B)The assumptions of the simple quantity theory of money.
C)The predictions of the simple quantity theory of money.
D)The degree to which wages are flexible.
E)a and d

Question 55

Two economists, A and B, believe that the economy currently needs a strong dose of expansionary fiscal policy. Economist A wants to cut taxes while economist B wants to raise government spending. It is probably the case that

A)Economist A believes the tax multiplier is larger than the government spending multiplier.
B)Economist B believes the government spending multiplier is equal to the tax multiplier.
C)Economist A believes the tax multiplier is smaller than the government spending mutiplier.
D)Economist B believes the tax multiplier is larger than the government spending multiplier.
E)a and d

Question 56

The choice between increasing government spending and cutting taxes often is related to

A)what an economist believes the value of both the tax multiplier and the government spending multiplier are.
B)what an economist believes the right size and scope of government might be.
C)whether an economist believes that government spending leads to complete crowding out.
D)a and b
E)all of the above

Question 57

If the (average) tax rate falls by 10% and as a result the tax base rises by 8%, then tax revenues will

A)rise.
B)decline.
C)remain unchanged.
D)There is not enough information given to answer this question.

Question 58

Economists who asset that the AS curve is vertical believe that changes in Real GDP originate only on the _____________of the economy; so government policy that is intended to impact the ____________________ of the economy will change only ______________, not ________________.

A)demand side; supply side; Real GDP; prices
B)demand side; supply side; prices; Real GDP
C)supply side; demand side; Real GDP; prices
D)supply side; demand side; prices; Real GDP

Question 59

Suppose the government spending multiplier is 1.5. This means that

A)a $1 decline in government spending will raise Real GDP by $1.50.
B)a $1 rise in government spending will raise both total spending and Real GDP (assuming prices are constant) by $1.50.
C)a $1 rise in government spending will raise investment spending by $1.50.
D)a $1 rise in government spending will change interest rates by 1.50 times what it was before the $1 rise in government spending.
E)none of the above

Question 60

Economist B believes that the economy can get stuck in a recessionary gap. This economist most likely believes that

A)wages and prices are flexible.
B)wages and prices are inflexible downward.
C)government may need to enact contractionary fiscal policy to move the economy out of a recessionary gap.
D)the economy is self-regulating.
E)none of the above

Question 61

Economist B believes that if tax rates are cut, tax revenue is likely to fall. This economist most likely believes that the percentage decrease in tax rates will ______________________________ percentage rise in the tax base.

A)be larger than the resulting
B)be equal to the resulting
C)be smaller than the resulting
D)occur long after the
E)a and d

Question 62

"Politics is too often the thing that gets in the way of good economic policy being implemented." The economist who said this most likely

A)believes that fiscal policy is preferable to monetary policy when it comes to stabilizing the economy.
B)prefers discretionary monetary policy to rule-based monetary policy.
C)believes that there will be a lot of crowding out if government spending is increased.
D)prefers rule-based monetary policy to discretionary monetary policy.

Question 63

If the AS curve is vertical, then it follows that

A)Real GDP changes will always arise from the supply side of the economy.
B)Real GDP changes will always arise from the demand side of the economy.
C)Price level changes will always arise from the demand side of the economy.
D)Price level changes will always arise from the supply side of the economy.
E)a and c

Question 64

"Demand-side fiscal policy is capable of changing Real GDP." This statement would be most likely to be said by an economist who believes that

A)the AS curve is vertical.
B)the AS curve is upward sloping.
C)complete crowding out exists.
D)there is little, if any, crowding out.
E)b and d

Question 65

"The only thing that results from expansionary demand-side fiscal policy is that the price level will rise." The economist who said this most likely believes that

A)there is likely to be a lot of crowding out if government spending rises.
B)the AS curve is vertical.
C)there is unlikely to be much crowding out if government spending rises.
D)investment is interest inelastic.
E)b and c

Question 66

If tax rates are cut, tax revenues may rise, fall, or remain unchanged. What actually happens is considered a(n)

A)theoretical issue.
B)corrective issue.
C)empirical issue.
D)self-regulating issue.
E)multiplier issue.

Question 67

Economist C says all of the following: Expansionary fiscal policy is needed to raise aggregate demand and remove the economy from a recessionary gap. The choice of fiscal policy measures is between ________________ government spending and a _______________ in taxes. Since I am in favor of bigger government, I choose a(n) _________________ in _________________.

A)less; decrease; increase; government spending
B)more; decrease; increase; government spending
C)less; rise; decrease; government spending
D)less; reduction; increase; taxes
E)b or d

Question 68

"It matters how the government spends any extra dollars." The economist who said this most likely believes that

A)a dollar spent on one government project could raise Real GDP more than a dollar spent on some alternative government project.
B)the AS curve is upward-sloping.
C)the tax multiplier is larger than the government spending multiplier.
D)government should increase in both size and scope.
E)none of the above

Question 69

Economist A says all of the following: The economy needs expansionary fiscal policy to remove it from a recessionary gap. Government should either raise its _____________ or cut ___________________. I believe the government spending multiplier is ____________ than the tax multiplier, so I favor _____________________.

A)spending; taxes; larger; cutting taxes
B)taxes; spending; larger; raising; spending
C)spending; taxes; larger; raising; spending
D)b or c
E)a or c

Question 70

If the aggregate supply curve is vertical, it follows that a change in

A)Real GDP can originate on the demand side of the economy.
B)Real GDP can originate on the supply side of the economy.
C)Real GDP can originate on either the demand side or the supply side of the economy.
D)price level can originate on the demand side of the economy.
E)b and d

Question 71

"We lose more by letting the company fail than by having the government save it." This was most likely said by an economist who believes that

A)crowding out is complete.
B)bailouts are sometimes necessary.
C)the tax multiplier is larger than the government spending multiplier.
D)the AS curve is vertical.
E)the AS curve is upward-sloping.

Question 72

Economist B says all of the following: The economy needs expansionary fiscal policy to remove it from a recessionary gap. Government should either raise its __________ or cut _________________. I believe the tax multiplier is larger than the government spending multiplier, so I suggest government ___________________.

A)taxes; spending; cut taxes
B)spending; taxes; cut taxes
C)taxes; spending; raise spending
D)spending; taxes; raise spending
E)none of the above

Question 73

Economist A believes the economy is self-regulating. Economist B believes that wages and prices are inflexible downward. Economist C believes that the AS curve is vertical. Economist D believes that crowding out is likely to be complete. Which economist is most likely to advocate for expansionary fiscal policy in the in the form of greater government spending to remove an economy from a recessionary gap?

A)Economist A
B)Economist B
C)Economist C
D)Economist D

Question 74

"Expansionary fiscal policy is needed to increase Real GDP --- at least in the short run." The economist who said this most likely believes that

A)the tax multiplier is larger than the government spending multiplier.
B)the AS curve is vertical.
C)there will be a great deal of crowding out connected with a rise in government spending.
D)the AS curve is upward-sloping.
E)c and d

Question 75

Which of the following statements is false?

A)Not all economists are agreed as to whether government should bail out companies in financial trouble.
B)Not all economists prefer a rule-based monetary policy to discretionary monetary policy.
C)Rule-based monetary policy advocates often assert that discretionary monetary policy can be motivated by politics.
D)The tax multiplier is always larger than the government spending multiplier.

Question 76

"If we come to a company's rescue this time, they'll take more risks and we'll have to come to their rescue next time, too." The economist who said this most likely

A)believes that the AS curve is upward-sloping.
B)prefers monetary policy to fiscal policy when it comes to stabilizing the economy.
C)is against bailouts.
D)prefers increases in government spending to tax cuts when it comes to stimulating the economy from the demand side.
E)none of the above

Question 77

Which of the following statements is false?

A)Economists who advocate discretionary monetary policy argue that it is more likely to achieve the desired economic results because the monetary authority has the flexibility to shape the best monetary policy to the existing circumstances.
B)Here is an example of zero crowding out: The government spends $100 more and the private sector doesn't spend any less.
C)Here is an example of complete crowding out: The government spends $100 more and the private sector spends $100 less.
D)Not all economists believe that rule-based monetary policy is preferable to discretionary monetary policy.
E)none of the above

Question 78

Economist A argues that a "dollar spent is a dollar spent." This economist is most likely to agree with which of the following:

A)What matters is that government increase spending and what it spends the money on doesn't matter as much.
B)What matters is that government increase spending and what it spends the money on matters quite a bit.
C)What matters is that government cut taxes and what taxes it cuts matters little.
D)What matters is that government raise taxes and what taxes it raises matters little.
E)none of the above

Question 79

A rise in government spending could

A)decrease both the size and scope of government.
B)increase the size, but not the scope of government.
C)decrease the size, but increase the scope of government.
D)increase both the size and scope of government
E)none of the above

Question 80

The Taylor Rule is an example of

A)discretionary monetary policy.
B)rule-based monetary policy.
C)a monetary policy measure that always sets the money supply growth rate at 3 percent.
D)contractionary monetary policy.
E)none of the above