Deck 11: Managing Aggregate Demand: Fiscal Policy

Question 1

Taxes constitute the difference between GDP and disposable income.

Answer 1

True

Question 2

Income taxes and transfer payments help prevent extreme macroeconomic fluctuations.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Transfer payments exactly replace the income lost because of taxes.

Question 5

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

Question 6

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

Question 7

In 2009,the U.S.economy was experiencing an inflationary gap.

Question 8

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

Question 9

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

Question 10

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

Question 11

A tax reduction shifts the consumption schedule downward.

Question 12

The personal income tax varies as GDP changes.

Question 13

The multiplier is increased when income taxes are included.

Question 14

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

Question 15

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

Question 16

Government spending influences spending indirectly.

Question 17

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

Question 18

If the MPC in the U.S.was low,it would increase the value of the multiplier.

Question 19

Most tax payments increase as GDP increases.

Question 20

The addition of imports reduces the value of the multiplier.

Question 21

If the Bush tax cuts were allowed to expire in 2010,the maximum personal income tax rate in the United States would have moved above 50 percent.

Question 22

The fiscal policy planner's job is made easier because full-employment GDP can be accurately measured.

Question 23

Increasing aggregate demand with fiscal policy may have undesirable inflationary consequences.

Question 24

An increase in income taxes was part of President George W.Bush's plan in 2001 and 2008 to increase aggregate demand.

Question 25

Raising taxes or increasing transfer payments would reduce total spending.

Question 26

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

Question 27

"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 28

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

Question 29

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 30

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

Question 31

Supply-side policy is based on the assumption that people's economic behavior is not affected by taxes.

Question 32

During the debate on the stimulus package in 2009 and 2010,Republicans argued in favor of increased government spending as opposed to tax cuts based in part on the impact government spending would have on aggregate supply.

Question 33

During the 2009-2010 stimulus debate,Republicans argued that increases in government spending would be more effective than decreases in taxes.

Question 34

In 2006 and 2007 the U.S.faced an inflationary gap which would suggest the use of restrictive fiscal policy.

Question 35

Critics of supply-side policies argue that the effects of tax cuts are too small to be effective policy.

Question 36

Fiscal policy consists of

A) taxes and interest rates.
B) government purchases and defense spending.
C) the money supply and taxes.
D) taxes and government spending.

Question 37

Reducing transfer payments is an appropriate way to counteract a recessionary gap.

Question 38

Supply-side tax cuts also tend to reduce aggregate demand and promote recession.

Question 39

President Obama would generally advocate increased spending when the economy needs stimulus and increased taxation when the economy needs to be restricted.

Question 40

Conservatives usually favor increasing government spending to increase aggregate demand.

Question 41

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 42

Appropriate fiscal policy in the U.S.in 2009 would attempt to

A) increase taxes.
B) decrease aggregate supply.
C) increase aggregate demand.
D) decrease aggregate demand.

Question 43

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 44

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.

Question 45

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 46

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 47

____ 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 48

If wealthy U.S.consumers save most of their tax cut,this means that,compared to government spending changes,

A) tax changes would have a higher multiplier effect.
B) tax changes would have a weaker multiplier effect.
C) government spending would have a weaker multiplier effect.
D) U.S. consumers would spend all of their tax cut.

Question 49

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 50

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

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

Question 51

In 20091,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 52

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 53

During the deliberations on fiscal stimulus in 2009,the debate over fiscal policy focused on

A) the multiplier effect of tax cuts versus higher government spending.
B) the multiplier effect of different types of tax cuts.
C) the incentive effects of tax cuts.
D) all of the above

Question 54

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

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

Question 55

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

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

Question 56

Once the expenditure schedule has been adjusted for tax levels,the determination of equilibrium GDP

A) is no longer possible.
B) becomes much more difficult.
C) proceeds exactly as before.
D) requires a higher multiplier value.

Question 57

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 58

Taxes reduce total spending

A) directly by increasing government purchases by an equal amount.
B) directly by substituting investment spending.
C) indirectly by reducing government spending.
D) indirectly by reducing disposable income.

Question 59

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 60

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 61

Which of the following observations is t?

A) Increase in taxes shifts the consumption schedule upward.
B) Tax reductions increase equilibrium GDP.
C) Taxes reduce total spending directly.
D) Taxes do not have a multiplier effect on equilibrium GDP.

Question 62

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 63

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 64

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 65

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 66

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 67

During the 2009-2010 debate on the stimulus package,democrats argued primarily for increased government spending.What effect would this have on the value of the multiplier?

A) It would decrease the value of the multiplier.
B) It would have no effect on the multiplier.
C) It would increase the value of the multiplier.
D) The effect is uncertain.

Question 68

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 69

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 70

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 71

For any given change in taxes,the multiplier

A) will work indirectly through consumption.
B) effect will occur in two steps.
C) effect will be smaller than for an equivalent dollar change in government spending.
D) All of the above are correct.

Question 72

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 73

Which of the following observations is t?

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 74

During the period from 2001 to 2006,there were several major cuts in personal income tax rates.What effect did these have on the value of the multiplier?

A) They decreased the value of the multiplier.
B) They had no effect on the multiplier.
C) They increased the value of the multiplier.
D) The effect was uncertain.

Question 75

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 76

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 77

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 78

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 79

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 80

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.