Deck 12: The Fiscal Policy Approach to Stabilization  

Question 1

John Maynard Keynes argued that wages

A) should be set by the government.
B) do not reflect the value of labor's true contribution.
C) are inflexible downward.
D) are not related to consumption spending.

Answer 1

are inflexible downward.

Question 2

Saving is

A) the amount one does not consume in a given period of time, while savings is the accumulation of past periods of saving.
B) the accumulation of past periods of savings, while savings is the amount of disposable income that is not consumed in a given period of time.
C) the difference between real GDP and disposable income, while savings is the difference between disposable income and consumption spending.
D) the difference between disposable income and spending on goods and services, while savings is the difference between real GDP and disposable income.

Answer 2

the amount one does not consume in a given period of time, while savings is the accumulation of past periods of saving.

Question 3

Keynes argued that increasing aggregate demand will not raise the price level if

A) it is done by stimulating consumption.
B) it is done by stimulating investment.
C) there is already a budget deficit.
D) there is excess capacity in the economy.

Answer 3

there is excess capacity in the economy.

Question 4

Keynesian economics is

A) the use of government spending and taxation policies to achieve short-run stabilization.
B) the use of interest rate policies to promote long-term economic growth.
C) the use of interest rate policies to promote exports.
D) the use of job training to reduce unemployment.

Question 5

Which one of the following describes Keynes's view of investment spending?

A) The level of investment spending does not affect aggregate demand.
B) The level of investment spending does not affect the unemployment rate.
C) Investment spending fluctuates with expectations of profit.
D) The level of investment spending does not depend on interest rates.

Question 6

Which of the following statements is true?

A) consumption + savings =disposable income
B) consumption + savings =personal income
C) consumption + investment =disposable income
D) consumption - savings =personal income

Question 7

Consumption spending

A) does not affect aggregate demand.
B) is the largest component of aggregate demand.
C) is primarily determined by interest rates.
D) is primarily determined by the price level.

Question 8

Investment spending is

A) not dependent on taxation policies.
B) not dependent on interest rates.
C) part of aggregate demand.
D) stable from year to year.

Question 9

If a tax cut stimulates investment spending and the result is that output increases without an increase in the price level, we can conclude that

A) the economy originally was in a situation of operating with excess capacity.
B) there was no change in the employment rate when output increased.
C) there was no change in the distribution of income when output increased.
D) Keynesian economics is ineffective at short-run stabilization.

Question 10

Keynesian economics is based on the idea that

A) the economy does not always reach equilibrium on its own.
B) the equilibrium level of real output does not always correspond to full employment.
C) consumption spending is based on investment spending.
D) consumption spending is based on interest rates.

Question 11

Income set aside for a period of time so that it can be used later is known as

A) saving.
B) investment.
C) consumption.
D) inventory investment.

Question 12

Consumption spending is most strongly determined by

A) income.
B) investment spending.
C) interest rates.
D) the federal budget deficit.

Question 13

Discretionary fiscal policy is used to

A) create economic growth.
B) create income equality.
C) smooth out fluctuations in the overall level of economic activity.
D) reduce the level of frictional unemployment.

Question 14

Marginal propensity to consume

A) is the change in consumption divided by the change in income that produces it.
B) is the change in consumption divided by the change in investment that produces it.
C) is usually greater than 1.
D) is usually negative.

Question 15

Which one of the following is true, given that MPC represents the marginal propensity to consume and MPS represents the marginal propensity to save?

A) MPC + MPS = 1
B) MPC - MPS = 1
C) MPC/MPS = 1
D) MPC *MPS = 1

Question 16

As the prospects for profitable business conditions improve,

A) consumption spending falls.
B) investment spending falls.
C) investment spending increases.
D) aggregate demand decreases.

Question 17

Discretionary fiscal policy involves the use of

A) unemployment benefits.
B) welfare benefits.
C) interest rates.
D) taxes and government spending.

Question 18

An increase in the marginal propensity to consume will

A) decrease the multiplier.
B) increase the multiplier.
C) lower interest rates.
D) decrease investment.

Question 19

If a $20,000 increase in income boosts consumption spending by $16,000, then the marginal propensity to consume is

A) .16.
B) .20.
C) .75.
D) .80.

Question 20

If a $20,000 increase in income boosts consumption spending by $16,000, then the marginal propensity to save is

A) .16.
B) .20.
C) .75.
D) .80.

Question 21

If an $80,000 increase in income boosts consumption spending by $60,000, then the marginal propensity to consume is

A) .16.
B) .20.
C) .75.
D) .80.

Question 22

If an $80,000 increase in income boosts consumption spending by $60,000, then the marginal propensity to save is

A) .20.
B) .25.
C) .30.
D) .50.

Question 23

If a $5,000 increase in income boosts consumption spending by $4,500, then the marginal propensity to consume is

A) .20.
B) .25.
C) .75.
D) .90.

Question 24

If a $5,000 increase in income boosts consumption spending by $4,500, then the marginal propensity to save is

A) .10.
B) .20.
C) .30.
D) .40.

Question 25

If a $12,000 increase in income boosts consumption spending by $8,400, then the marginal propensity to consume is

A) .50.
B) .60.
C) .70.
D) .80.

Question 26

If a $12,000 increase in income boosts consumption spending by $8,400, then the marginal propensity to save is

A) .10.
B) .20.
C) .30.
D) .40.

Question 27

The equilibrium level of income is the one at which

A) there is no unemployment.
B) there is no frictional unemployment.
C) there is no federal budget deficit.
D) there is no difference between planned output and planned spending.

Question 28

In discretionary fiscal policy, tax cuts are used to

A) stimulate aggregate demand.
B) dampen aggregate demand.
C) stimulate aggregate supply.
D) dampen aggregate supply.

Question 29

Unless the economy is beginning from a position of excess capacity, an increase in aggregate demand will

A) increase the price level.
B) decrease the price level.
C) decrease output.
D) decrease aggregate supply.

Question 30

Changes in investment spending

A) do not affect aggregate demand.
B) do not affect the equilibrium level of real output.
C) affect aggregate supply, but not aggregate demand.
D) have a multiplier effect.

Question 31

In discretionary fiscal policy, an increase in government spending is used to

A) stimulate aggregate demand.
B) dampen aggregate demand.
C) stimulate aggregate supply.
D) dampen aggregate supply.

Question 32

The size of the multiplier is

A) determined by government policy.
B) determined by the marginal propensity to consume.
C) determined by the interest rate.
D) determined by the level of investment.

Question 33

Increases in the marginal propensity to consume will

A) increase the marginal propensity to save.
B) increase the multiplier.
C) shift the aggregate supply curve to the right.
D) shift the aggregate supply curve to the left.

Question 34

If investment spending increases by $1 billion when the marginal propensity to consume is .8, national income will increase by

A) $1 billion.
B) $2 billion.
C) $5 billion.
D) $8 billion.

Question 35

If investment spending increases by $1 billion when the marginal propensity to consume is .75, national income will increase by

A) $1 billion.
B) $2 billion.
C) $3 billion.
D) $4 billion.

Question 36

If the marginal propensity to consume is .9 and there is a $3 billion increase in planned investment, national income will increase by

A) $2.7 billion.
B) $3.0 billion.
C) $6.0 billion.
D) $30.0 billion.

Question 37

If the marginal propensity to consume is .8 and there is a $40 billion increase in planned investment, national income will increase by

A) $200 billion.
B) $100 billion.
C) $40 billion.
D) $32 billion.

Question 38

If the marginal propensity to consume is 0.8 and the fiscal policy goal is to increase real national income needs to by $500 billion, then

A) government spending needs to increase by $500 billion.
B) government spending needs to increase by $100 billion.
C) saving needs to increase by $500 billion.
D) saving needs to increase by $100 billion.

Question 39

If the marginal propensity to consume is 0.75 and the fiscal policy goal is to increase real national income by $100 billion, then

A) government spending needs to increase by $25 billion.
B) government spending needs to increase by $100 billion.
C) saving needs to increase by $25 billion.
D) saving needs to increase by $100 billion.

Question 40

If the marginal propensity to consume is 0.9 and the fiscal policy goal is to increase real national income needs to by $200 billion, then

A) taxes need to be increased by $20 billion.
B) government spending needs to increase by $200 billion.
C) government spending needs to increase by $20 billion.
D) saving needs to increase by $20 billion.

Question 41

What is the multiplier when the marginal propensity to save is 0.2?

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

Question 42

An increase in aggregate demand when aggregate supply is upward sloping leads to

A) an increase both in the price level and real output.
B) a decrease both in the price level and real output.
C) an increase in the price level and a decrease in real output.
D) a decrease in the price level and an increase in real output.

Question 43

Contractionary fiscal policy is used when

A) the goal is to reduce unemployment.
B) the goal is to increase aggregate demand.
C) the goal is to increase aggregate supply.
D) the economy is overheated.

Question 44

Expansionary fiscal policy is used when

A) the goal is to reduce unemployment.
B) the goal is to increase aggregate supply.
C) the goal is to decrease aggregate supply.
D) the goal is to decrease aggregate demand.

Question 45

Expansionary fiscal policy is implemented through

A) changes in interest rates.
B) changes in job training.
C) tax cuts or increases in government spending.
D) tax increases or cuts in government spending.

Question 46

Contractionary fiscal policy is implemented through

A) changes in interest rates.
B) changes in job training.
C) tax cuts or increases in government spending.
D) tax increases or cuts in government spending.

Question 47

Crowding out occurs when

A) the aggregate supply curve is horizontal.
B) contractionary fiscal policy results in a higher price level.
C) contractionary fiscal policy results in a lower price level.
D) expansionary fiscal policy dampens spending in the private sector.

Question 48

How is investment defined as an economic concept?

A) Investment is the market value of all shares of stock held by the public.
B) Investment is the market value of all equipment, buildings, and inventories held by corporations, partnerships, and proprietorships.
C) Investment is the sum of expenditures by businesses on new capital goods that will yield a future stream of income.
D) Investment is the portion of your savings held in an interest-earning account.

Question 49

Which of the following will decrease when the marginal propensity to consume increases?

A) The multiplier
B) The marginal propensity to save
C) Aggregate demand
D) Aggregate supply

Question 50

Which one of the following statements is TRUE?

A) Both consumption and investment spending are components of aggregate demand.
B) Increases in investment spending are not subject to the multiplier effect.
C) Increases in government spending are not subject to the multiplier effect.
D) If the crowding out effect is present, the impact of any expansionary fiscal policy is magnified.

Question 51

The demand for investment

A) is upward-sloping.
B) depicts a positive relationship between interest rates and the level of investment.
C) depicts a negative relationship between interest rates and the level of investment.
D) shifts in response to interest rate changes.

Question 52

What would likely happen to investment demand should business taxes increase?

A) It would shift to the right.
B) It would shift to the left.
C) It would remain unchanged.
D) It would become perfectly vertical.

Question 53

A decrease in interest rates will

A) shift the investment demand curve to the right.
B) shift the investment demand curve to the left.
C) increase planned investment spending.
D) affect consumption spending but leave investment spending unchanged.

Question 54

According to John Maynard Keynes, why does the economy sometimes reach equilibrium at a level of income below the full employment level?

A) Because the demand for investment is inelastic with respect to interest rates
B) Because prices and wages are inflexible downward
C) Because aggregate demand does not shift in response to changes in government spending
D) Because aggregate demand does not shift in response to changes in investment spending

Question 55

Investment spending is

A) equal to real income.
B) part of aggregate demand.
C) an automatic stabilizer.
D) not subject to the multiplier effect.

Question 56

What is the result when planned spending exceeds real national output?

A) The economy is in equilibrium.
B) There is unplanned accumulation of business inventories, and firms decrease output.
C) There is unplanned depletion of business inventories, and firms increase output.
D) Firms cut back on the number of workers in order to remain competitive.

Question 57

What is the result when planned spending falls short of real national output?

A) The economy is in equilibrium.
B) There is unplanned accumulation of business inventories, and firms decrease output.
C) There is unplanned depletion of business inventories, and firms increase output.
D) Firms cut back on the number of workers in order to remain competitive.

Question 58

If the marginal propensity to consume is ?.75 and investment spending increases by $100 billion, then real national income will increase by

A) $75 billion.
B) $100 billion.
C) $400 billion.
D) $250 billion.

Question 59

By saying that the size of the multiplier is determined by the marginal propensity to consume, we are asserting that

A) the crowding out effect is strong.
B) interest rates are the primary determinant of investment spending.
C) automatic stabilizers are not effective when the economy is overheated.
D) income is the primary determinant of consumption spending.

Question 60

An increase in the marginal propensity to save

A) increases the value of the multiplier.
B) decreases the value of the multiplier.
C) increases the marginal propensity to consume.
D) increases the crowding out effect.

Question 61

If government spending increases by $10 billion and the marginal propensity to consume is .75, then national income

A) increases by $10 billion.
B) increases by $40 billion.
C) decreases by $10 billion.
D) decreases by $40 billion.

Question 62

The flat portion of the aggregate supply curve represents

A) the crowding out effect.
B) the effect of automatic stabilizers.
C) the psychological factors influencing spending.
D) the existence of excess capacity in the economy.

Question 63

Which one of the following is NOT an automatic stabilizer?

A) A progressive income tax system
B) Unemployment compensation
C) Credit card interest
D) Welfare payments

Question 64

The time lags encountered in implementing fiscal policy

A) lessen its effectiveness.
B) are offset by the crowding out effect.
C) are offset by automatic stabilizers.
D) are so brief as to be unnoticeable.

Question 65

To the extent that the crowding out effect is present

A) the effectiveness of expansionary fiscal policy will be enhanced.
B) consumers will be more optimistic.
C) increased government spending will serve to dampen spending in the private sector.
D) there will be no time lags in implementing fiscal policy.

Question 66

What is the debt ceiling?

A) The total amount the federal government can borrow in any one year
B) The maximum size of the gross public debt
C) The maximum amount of debt a consumer may incur
D) The maximum amount of debt that stockholders authorize a corporation to incur

Question 67

Which one of the following is TRUE?

A) Over the past two decades, the share of U.S. public debt held by foreigners has declined.
B) The federal government typically borrows money by selling U.S. Treasury bonds.
C) The years in which the federal government runs a budget surplus are more frequent than the years in which it runs a budget deficit.
D) A budget surplus arises when government spending exceeds government revenues.

Question 68

The federal government budget deficit is

A) the total amount owed to the American people by the federal government.
B) the total amount owed to Americans and foreigners by the federal government.
C) the excess of government spending over government revenues in one year.
D) the excess of government revenues over government spending in one year.

Question 69

Which one of the following is TRUE?

A) To the extent that Congress relies on discretionary fiscal policy as a tool of stabilization, it must be willing to run budget deficits in some years.
B) To the extent that Congress relies on discretionary fiscal policy as a tool of stabilization, it will be able to offset fluctuations in business activity without any time lags.
C) Automatic stabilizers are used to stimulate aggregate supply, whereas discretionary fiscal policy is used to stimulate aggregate demand.
D) Automatic stabilizers are used to stimulate aggregate demand, whereas discretionary fiscal policy is used to stimulate aggregate supply.

Question 70

Which one of the following is TRUE?

A) The net public debt is equal to gross public debt plus all government interagency borrowing.
B) The net public debt is equal to gross public debt minus all government interagency borrowing.
C) Our federal income tax system is not an automatic stabilizer because it is not progressive.
D) The use of automatic stabilizers does not affect the size of the budget deficit.

Question 71

Which one of the following is FALSE?

A) The implementation of discretionary fiscal policy is subject to time lags.
B) Keynesian economics favors the use of discretionary fiscal policy.
C) Most of the U.S. public debt is held by foreigners.
D) The use of automatic stabilizers affects the size of the budget deficit.

Question 72

Which one of the following is FALSE?

A) Fiscal policy involves the use of changes in government spending and taxation policies.
B) The net public debt is equal to gross public debt minus all government interagency borrowing.
C) Increases in the marginal propensity to consume increase the size of the multiplier.
D) Increases in the marginal propensity to consume decrease the size of the multiplier.

Question 73

Discretionary _________ policy uses changes in taxes and spending to offset business cycle fluctuations.

Question 74

Increases in aggregate demand can boost real GDP without increasing the price level if the economy starts from a position of _________ _________ .

Question 75

Keynes argued that wages and prices are inflexible _________ .

Question 76

Expansionary fiscal policy is used to combat _________ .

Question 77

The progressive income tax is an _________ stabilizer.

Question 78

The effectiveness of fiscal policy is sometimes dampened due to the recognition lag, the _________ lag, and the effect lag.

Question 79

Investment demand is a schedule showing the relationship between investment spending and the _________ _________ .

Question 80

An increase in _________ typically results from improving prospects of business profitability.