Deck 27: Managing Aggregate Demand: Fiscal Policy

Question 1

An increase or decrease in taxes will have a multiplier effect on equilibrium GDP on the demand side.

Answer 1

True

Question 2

Taxes, transfer payments, and government purchases are the components of automatic stabilizers.

Answer 2

False

Question 3

When taxes are decreased, disposable income increases even though GDP is unchanged.

Answer 3

True

Question 4

Fiscal policy is the use of taxes and spending by the government to affect aggregate demand.

Question 5

A tax reduction shifts the consumption schedule downward.

Question 6

Government purchases and income taxes have the same effect on the multiplier.

Question 7

The addition of imports reduces the value of the multiplier.

Question 8

When the government taxes and spends, each activity affects GDP in the same proportion.

Question 9

If increases in government spending lead to inflation, the value of the multiplier is reduced.

Question 10

If the MPC in the United States was low, it would increase the value of the multiplier.

Question 11

If the MPC in the United States was high, it would increase the value of the multiplier.

Question 12

Automatic stabilizers are features of the economy that reduces its sensitivity to shocks, such as sharp increases or decreases in spending.

Question 13

Any tax reduction shifts the consumption schedule upward.

Question 14

A one-dollar tax reduction has the same effect as a one-dollar increase in government purchases.

Question 15

Taxes constitute the difference between GDP and disposable income.

Question 16

Inflationary gaps can be cured by either cutting government expenditures or raising taxes.

Question 17

The personal income tax varies as GDP changes.

Question 18

Government purchases have the same multiplier effect as business investment spending.

Question 19

Transfer payments represent income that is not earned but received by individuals.

Question 20

Most tax payments increase as GDP increases.

Question 21

Contractionary fiscal policy tools can eliminate an inflationary gap arising from a continuation of current budget policies.

Question 22

A budget surplus occurs when tax revenues are greater than government expenditures.

Question 23

One of the objections to the supply-side economics is that it tends to ignore the effects of tax cuts on aggregate demand.

Question 24

Recessionary gaps can be cured by raising government expenditures.

Question 25

An income tax reduces the size of the multiplier

Question 26

Conservatives usually favor increasing government spending to increase aggregate demand.

Question 27

The hallmark of Clintonomics was first to reduce the budget deficit.

Question 28

The multiplier is reduced by an income tax because an income tax reduces the fraction of each dollar of GDP that consumers actually receive and spend.

Question 29

When an investor sells an asset for a profit, then that profit is called a capital gain.

Question 30

Reducing taxes on capital gains is an example of a supply-side tax cut.

Question 31

Supply-side tax cuts are likely to widen income inequalities.

Question 32

Marginal propensity to consume (MPC) is the fraction of extra income that a household spends on consumption.

Question 33

An increase in government expenditures is an example of expansionary fiscal policy.

Question 34

A budget deficit occurs when government expenditures are greater than tax revenues.

Question 35

During the 2008 presidential campaign, candidate Barack Obama argued in favor of repealing the majority of the Bush tax cuts in order to increase government revenue.

Question 36

Liberals tend to favor increasing taxes as the method of counteracting inflation.

Question 37

Productivity increases, brought about by increased education and training, may shift the aggregate supply curve outward.

Question 38

According to supply-siders, tax cuts should increase aggregate supply.

Question 39

The multiplier for changes in taxes is smaller than the multiplier for changes in government purchases because not every dollar of tax cut is spent.

Question 40

The aim of the supply-side tax cuts is to push the economy's aggregate supply curve outward to the right.

Question 41

In 2009, the U.S.economy was experiencing a(n)

A)recessionary gap.
B)inflationary gap.
C)balance of trade deficit.
D)hyperinflation.

Question 42

Income tax acts as a shock absorber because

A)it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP.
B)it makes disposable income, and thus consumer spending, more sensitive to fluctuations in GDP.
C)it makes disposable income, and thus consumer spending, independent of fluctuations in GDP.
D)none of these.

Question 43

____ is the income actually available to the consumers that determines aggregate demand.

A)Nominal income
B)Net domestic product
C)Income corrected for depreciation
D)Disposable income

Question 44

At any given price level, equilibrium GDP on the expenditure side occurs when ____.

A)Y = C + I + G − (X − IM)
B)Y = C + I - G
C)Y = C + I + G + (X − IM)
D)Y = C + X + G + (X − IM)

Question 45

Most of the taxes collected by governments tend to

A)remain fixed.
B)move in the opposite direction from GDP.
C)be sales taxes.
D)rise and fall with the level of GDP.

Question 46

One of the three reasons as to why the oversimplified multiplier formula overstates the multiplier is that it ignores price-level changes, which reduce the multiplier.

Question 47

Personal income taxes and corporate income taxes are examples of ____ taxes.

A)variable
B)sales
C)fixed
D)disposable

Question 48

The government's fiscal policy is its plan for managing ______________ through its spending and taxing programs

A)aggregate demand
B)aggregate supply
C)international trade
D)None of these

Question 49

The use of spending and taxes by the government to influence aggregate demand is known as

A)monetary policy.
B)governmental policy.
C)administrative policy.
D)fiscal policy.
E)federal policy.

Question 50

Which of the following is an example of contractionary fiscal policy?

A)Cutting spending
B)Reducing taxes
C)Increasing spending
D)None of these

Question 51

If the marginal propensity to consume ( MPC) is 0.5, the value of the multiplier is

A)4
B)3
C)2
D)5

Question 52

Transfer payments resemble

A)negative taxes.
B)positive taxes.
C)exports.
D)none of these.

Question 53

The government's fiscal policy is its plan to influence aggregate demand by changing

A)the money supply.
B)minimum wage levels.
C)sales taxes.
D)taxation and spending.

Question 54

"Fiscal policy" is the federal government's plan for

A)international trade, designed to balance exports and imports.
B)spending and taxes, designed to influence the level of aggregate demand.
C)manipulating the money supply and the control of interest rates.
D)All of the above are correct.

Question 55

In contrast to changes in government spending, tax changes affect spending

A)directly.
B)in the same proportion.
C)by a greater amount.
D)indirectly.

Question 56

Historically, the government has used fiscal policy to affect the economy through

A)central planning.
B)indicative planning.
C)aggregate demand.
D)aggregate supply.

Question 57

With regard to GDP, residential property taxes are an example of ____ taxes.

A)variable
B)sales
C)fixed
D)disposable

Question 58

In 2009, President Obama and Congress stimulated aggregate demand by

A)increasing taxes and government spending.
B)decreasing taxes and government spending.
C)increasing taxes and decreasing government spending.
D)decreasing taxes and increasing government spending.

Question 59

Taxes are the difference between

A)GDP and net exports.
B)GDP and consumer spending.
C)consumer spending and saving.
D)GDP and disposable income.

Question 60

When you compare the effects of government spending on aggregate demand with the effects of taxes on aggregate demand, the effects of government spending are

A)smaller.
B)larger.
C)the same.
D)impossible to predict.

Question 61

If personal income tax rates are decreased in an attempt to stimulate spending, we should expect to see

A)an increase in consumption and an increase in GDP.
B)an increase in consumption and a decrease in GDP.
C)a decrease in consumption and a decrease in GDP.
D)a decrease in consumption and an increase in GDP.

Question 62

If a state government reduces property taxes for residents at the same time that it increases the state income tax, what will happen to the expenditures schedule of the residents of this state?

A)It shifts upward.
B)It shifts downward.
C)It becomes less steep.
D)It becomes steeper.
E)It does not change.

Question 63

If personal income taxes are increased, disposable income and consumption

A)increase.
B)stay the same.
C)decrease.
D)change in an unpredictable direction.

Question 64

If all fixed taxes in the United States were removed and only variable taxes remained, what would be the effect on the expenditures schedule?

A)The expenditure schedule will shift upward.
B)The expenditure schedule will shift downward.
C)The expenditure schedule will become flatter.
D)The expenditure schedule will become steeper.

Question 65

If all variable taxes in the United States were removed and only fixed taxes remained, what would be the effect on the expenditures schedule?

A)The expenditure schedule will shift upward and become steeper.
B)The expenditure schedule will shift upward and become less steep.
C)The expenditure schedule will shift downward and become less steep.
D)The expenditure schedule will shift downward and become steeper.

Question 66

The reason that the multiplier is smaller if there are variable taxes is that

A)taxes add to government spending, which increases income.
B)people get angry about taxes and decide to work less.
C)tax increases shift the expenditure line upward.
D)part of an increase in income is taken away in taxes.

Question 67

Why does a tax change affect aggregate demand?

A)A tax change alters saving by an equal amount.
B)A tax change alters imports and net exports.
C)A tax change alters government spending by an equal amount.
D)A tax change alters disposable income and consumption spending.

Question 68

If the value of the multiplier is smaller, the economy

A)becomes less stable because automatic stabilizers have a larger impact.
B)becomes more stable because automatic stabilizers have a larger impact.
C)becomes more volatile because automatic stabilizers have a lesser impact.
D)is subject to larger fluctuations because automatic stabilizers have no impact.

Question 69

When income taxes are included in the basic macroeconomic model, the value of the

A)inflationary effect is increased.
B)multiplier is increased.
C)multiplier is decreased.
D)expenditure function is increased.

Question 70

The oversimplified formula for the multiplier yields a number that is too large due to the exclusion of

A)variable imports.
B)changes in the price-level.
C)income taxes.
D)all of the above.

Question 71

How does a tax cut affect the expenditure schedule?

A)It causes movement to the left along the schedule.
B)It causes the schedule to shift upward.
C)It causes movement to the right along the schedule.
D)It causes the schedule to shift downward.

Question 72

An increase in taxes shifts the

A)aggregate supply curve outward.
B)aggregate demand curve outward.
C)consumption schedule upward.
D)consumption schedule downward.

Question 73

If income tax rates are increased in an attempt to balance the federal budget, we should expect to see

A)an increase in consumption and a decrease in GDP.
B)an increase in consumption and an increase in GDP.
C)a decrease in consumption and a decrease in GDP.
D)a decrease in consumption and an increase in GDP.

Question 74

Which of the following observations is true?

A)Tax changes have no impact on the consumption schedule.
B)Tax reduction shifts the consumption schedule upward.
C)Changes in taxes have a multiplier effect on equilibrium GDP on the supply-side.
D)Tax increases increase equilibrium GDP.

Question 75

When government spending is added to the basic macroeconomic model, the multiplier for G would

A)be higher than the multiplier for autonomous spending.
B)be lower than the multiplier for autonomous spending.
C)be equal to the multiplier for autonomous spending.
D)have no relationship to the autonomous spending multiplier.

Question 76

Supply-siders ignore the effects of tax cuts on

A)aggregate demand.
B)aggregate supply.
C)aggregate demand and aggregate supply.
D)none of these.

Question 77

When we add a personal income tax to the macroeconomic model, the

A)multiplier becomes larger.
B)multiplier becomes smaller.
C)expenditures schedule shifts upward.
D)expenditures schedule becomes steeper.

Question 78

Expansionary fiscal policy can mitigate recessions, but it also

A)raises the budget deficit.
B)reduces the budget deficit.
C)has no impact on the budget deficit.
D)none of these.

Question 79

How does an increase in taxes affect the expenditure schedule?

A)It causes movement to the left along the schedule.
B)It causes the schedule to shift upward.
C)It causes movement to the right along the schedule.
D)It causes the schedule to shift downward.

Question 80

The difference between a fixed tax and a variable tax is that

A)fixed taxes can never be changed, but variable taxes can be changed.
B)a change in fixed taxes has no effect on aggregate demand, but a change in variable taxes has an impact.
C)a variable tax changes when GDP changes, but a fixed tax does not change with GDP.
D)a variable tax can be changed easily, whereas changing fixed taxes requires a constitutional amendment.