Deck 16: The Markets for Labor, Capital, and Land

Question 1

Supply-side economists encourage government to reduce taxes, deregulate, and increase spending on research and development because they think that these types of policies lead to greater long-run economic growth.

Answer 1

True

Question 2

In general, the multiplier effect applies to changes in government spending but not to changes in taxation.

Answer 2

False

Question 3

Fiscal policy is the use of government purchases and taxes to alter RGDP and the price level.

Answer 3

True

Question 4

The crowding-out effect occurs when household consumption and investment spending decrease as a result of financing a budget deficit.

Question 5

Many economists believe that tax cuts increase incentives to work and invest but current U.S. tax levels do not appear to be on the downward side of the Laffer curve.

Question 6

A policy of a tax cut combined with increases in government purchases would shift the aggregate demand curve to the left.

Question 7

Supply-siders are generally critical of government intervention and regulation, since they believe regulations can be costly impediments to economic growth.

Question 8

Contractionary fiscal policy may have a larger effect in reducing aggregate demand in an open economy than a closed economy.

Question 9

An investment tax credit, which would lower taxes for firms that invested in new capital equipment, would shift the long-run aggregate supply curve to the right over time.

Question 10

Expansionary fiscal policy may have an even smaller effect on aggregate demand in the open economy than a closed economy.

Question 11

If government purchases exceed tax revenue, there is a budget deficit.

Question 12

Typically, the budget deficit is financed by simply printing money.

Question 13

The larger the marginal propensity to consume, the larger the multiplier effect.

Question 14

When the economy is at the full employment level of real GDP, expansionary fiscal policy will not increase the economy's total output in the long run.

Question 15

If the MPC is 2/3, then 2/3 of the effect of an increase in government purchases on aggregate demand will come from increased consumption.

Question 16

If inflation is the most significant issue in the economy, an appropriate fiscal policy response would be to decrease taxation.

Question 17

If the government cuts taxes, total spending will fall and AD will shift to the left, ceteris paribus.

Question 18

Robert lost his job during the last recession and his yearly income fell by 15 percent. As a result of the action of automatic stabilizers, his disposable income would likely have fallen by less than 15 percent.

Question 19

In the short run, fiscal policy has its primary affect on aggregate demand but in the long run fiscal policy can influence saving, investment and economic growth.

Question 20

The effect of a tax multiplier on aggregate demand is larger than that of the government spending multiplier.

Question 21

Budget surpluses exist when:

A)​government spending exceeds its tax revenues.
B)​government tax revenues exceed its spending.
C)​government spending equals its tax revenues.
D)​expansionary fiscal policies increase real GDP and the price level.

Question 22

How does a change in taxes primarily affect aggregate demand?

A)​A tax change alters exports and net exports.
B)​A tax change alters investment by an equal and opposite amount.
C)​A tax change alters disposable income and consumption spending.
D)​A tax change alters government purchases by an equal amount.

Question 23

Other things equal, contractionary fiscal policy will lead to:

A)​an increased budget deficit (assuming an initial budget deficit).
B)​a reduced budget surplus (assuming an initial budget surplus).
C)​an expanded budget surplus (assuming an initial budget surplus).
D)​increased government purchases.

Question 24

If the marginal propensity to consume is 4/5, the multiplier is:

A)​20.
B)​5.
C)​1.
D)​1/5.

Question 25

The issuance of debt involves some intergenerational transfer of income; long after the debt is issued, a new generation of taxpayers must make interest payments on the debt.

Question 26

Among the following MPC values, which one would have the highest multiplier effect?

A)​1/3
B)​2/3
C)​3/4
D)​2/5

Question 27

The extent of the multiplier effect visible within a short time will be ____ the total effect indicated by the multiplier formula.

A)​significantly higher than
B)​equal to
C)​less than
D)​slightly higher than

Question 28

Expansionary fiscal policy consists of:

A)​increased government purchases and increased taxes.
B)​decreased government purchases and decreased taxes.
C)​decreased government purchases and increased taxes.
D)​increased government purchases and decreased taxes.

Question 29

The main components of spending, which can cause changes in aggregate demand, are:

A)​consumption, investment, government purchases, and net exports.
B)​consumption, investment, government purchases, and imports.
C)​investment, savings, replacement of depreciated equipment, and spending.
D)​consumption, savings, government purchases, and exports.

Question 30

Which of the following measures is associated with an expansionary fiscal policy?

A)​lowering consumption
B)​lowering taxes
C)​lowering government purchases
D)​decreasing investments

Question 31

Proponents of a balanced budget amendment argue that the private advantages that each of us realizes from spending on our government programs are paid for almost entirely by other taxpayers.

Question 32

Which of the following would be an example or result of expansionary fiscal policy in action?

A)​an increase in taxation
B)​a decrease in government purchases
C)​a budget deficit
D)​a budget surplus

Question 33

Historically, the largest budget deficits and growing government debt occur during war years.

Question 34

Which of the following is an appropriate fiscal policy response to high inflation?

A)​increase interest rates
B)​increase government purchases
C)​decrease taxes
D)​none of the above

Question 35

Contractionary fiscal policy consists of:

A)​increased government purchases and increased taxes.
B)​decreased government purchases and decreased taxes.
C)​decreased government purchases and increased taxes.
D)​increased government purchases and decreased taxes.

Question 36

The federal government buys $10 million worth of aircraft engines from General Motors. If the MPC is .80 what will be the impact on aggregate demand, other things being equal?

A)​Aggregate demand will increase $8 million.
B)​Aggregate demand will increase $12.5 million.
C)​Aggregate demand will increase $18 million.
D)​Aggregate demand will increase $50 million.

Question 37

To achieve a $500 billion decrease in AD, if the MPC is 0.8, what decrease in government purchases would be called for?

A)​$100 billion
B)​$400 billion
C)​$500 billion
D)​$625 billion

Question 38

To achieve a $500 billion increase in AD, if the MPC is 0.8, what increase in government purchases would be called for?

A)​$625 billion
B)​$500 billion
C)​$400 billion
D)​$100 billion

Question 39

If unemployment is the most significant problem in the economy, which of the following actions would be an appropriate fiscal policy response?

A)​decrease taxes
B)​decrease government purchases
C)​decrease the federal deficit
D)​all of the above

Question 40

The government's fiscal policy is its plan to regulate aggregate demand by manipulating:

A)​the money supply.
B)​taxation and government purchases.
C)​the treasury.
D)​the energy department.

Question 41

A $100 billion increase in government purchases would:

A)​increase AD by $500 billion if MPC = 0.8.
B)​decrease AD by $300 billion if MPC = 2/3.
C)​decrease AD by $200 billion if MPC = 0.9.
D)​decrease AD by $40 billion if MPC = 0.4.

Question 42

If MPC = 2/3, a decrease in government purchases of $10 billion will ultimately lead to:

A)​a $30 billion increase in aggregate demand.
B)​a $10 billion increase in aggregate demand.
C)​a $10 billion decrease in aggregate demand.
D)​a $30 billion decrease in aggregate demand.

Question 43

If government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change?

A)​Decrease consumption taxes.
B)​Decrease government purchases of goods and services.
C)​Increase government purchases.
D)​None of the above.

Question 44

If net exports increase by $10 billion and the MPC = 0.6, the resulting increase in the consumption component of AD is:

A)​$25 billion.
B)​$15 billion.
C)​$6 billion.
D)​$4 billion.

Question 45

If investment decreases by $20 billion and the MPC = 0.8, the resulting decrease in the consumption component of AD is:

A)​$16 billion.
B)​$4 billion.
C)​$100 billion.
D)​$80 billion.

Question 46

A $100 billion decrease in government purchases would:

A)​increase AD by $500 billion if MPC = 0.8.
B)​decrease AD by $300 billion if MPC = 2/3.
C)​increase AD by $200 billion if MPC = 0.5.
D)​decrease AD by $40 billion if MPC = 0.4.

Question 47

If MPC = 0.75, a $40 billion decrease in government purchases would have what size effect on the "first round" of changed consumption, and what effect on AD?

A)​reduce "first round" consumption by $160 billion; reduce AD by $640 billion
B)​reduce consumption by $120 billion; reduce AD by $480 billion
C)​reduce consumption by $40 billion; reduce AD by $160 billion
D)​reduce consumption by $30 billion; reduce AD by $160 billion

Question 48

In order for the economy pictured to get back to RGDP_NR, the government could use:

A)​decreased taxes and increased government purchases.
B)​increased taxes and increased government purchases.
C)​decreased taxes and decreased government purchases.
D)​increased taxes and decreased government purchases.

Question 49

If the government decides to spend an extra $5 billion on fighter jets that they would otherwise have spent on road construction, and the MPC = 0.75, what is the effect on AD?

A)​It has no effect.
B)​It increases by $5 billion.
C)​It increases by $15 billion.
D)​It increases by $20 billion.

Question 50

Assume that there is a $20 billion increase in government purchases. If MPC = 0.8, the sum of the indirect effect on aggregate demand through induced additional consumption purchases is equal to:

A)​$16 billion.
B)​$20 billion.
C)​$80 billion.
D)​$100 billion.

Question 51

If government policy makers were worried about the inflationary potential of the economy, which of the following would not be a correct fiscal policy change?

A)​Increase consumption taxes.
B)​Increase government purchases of goods and services.
C)​Decrease government purchases.
D)​None of the above.

Question 52

If MPC = 0.8, a $200 billion increase in government purchases would have what size effect on the "first round" of induced added consumption, and what total effect on AD?

A)​increase "first round" consumption by $80 billion; increase AD by $400 billion
B)​increase "first round" consumption by $160 billion; increase AD by $1 trillion
C)​increase "first round" consumption by $200 billion; increase AD by $1 trillion
D)​increase "first round" consumption by $800 billion; increase AD by $4 trillion

Question 53

If the government decides to spend an extra $4 billion on fighter jets that they would otherwise have spent on computers, and the MPC = 0.75, what is the effect on AD?

A)​AD increases by $20 billion.
B)​AD increases by $16 billion.
C)​AD increases by $4 billion.
D)​AD does not change.

Question 54

If the marginal propensity to consume is 0.8, the marginal propensity to save is:

A)​0.8
B)​0.4
C)​0.2
D)​0.3

Question 55

If government increases its purchases by $20 billion and the MPC = 0.9, the resulting increase in the consumption component of AD is:

A)​$2 billion.
B)​$18 billion.
C)​$180 billion.
D)​$200 billion.

Question 56

If the MPC = 3/4, an increase in government purchases of $40 billion will ultimately lead to:

A)​a $160 billion increase in aggregate demand.
B)​a $40 billion increase in aggregate demand.
C)​a $30 billion increase in aggregate demand.
D)​a $30 billion decrease in aggregate demand.

Question 57

If MPC = 0.75, a $40 billion decrease in government purchases would have what size effect on the "first round" of induced added consumption?

A)​It would increase first round consumption by $30 billion.
B)​It would increase first round consumption by $40 billion.
C)​It would increase first round consumption by $120 billion.
D)​None of the above; the first round effect would be a decrease in consumption.

Question 58

If MPC = 0.75, a $40 billion decrease in government purchases would have what size effect on the "first round" of induced added consumption?

A)​$30 billion
B)​$40 billion
C)​$120 billion
D)​$160 billion

Question 59

Which of the following is true?

A)​The tax multiplier is smaller than the government spending multiplier.
B)​The government cannot stimulate consumer spending through tax cuts.
C)​The government spending multiplier is smaller than the tax multiplier.
D)​The government can stimulate consumer spending through decreases in transfer payments.

Question 60

If MPC = 0.8, a $200 billion increase in government purchases would have what size effect on the "first round" of induced added consumption?

A)​$80 billion
B)​$160 billion
C)​$200 billion
D)​$800 billion

Question 61

Other things equal, an increase in government purchases combined with an equal increase in taxes would:

A)​increase AD.
B)​decrease AD dramatically.
C)​decrease AD slightly.
D)​leave AD unchanged.

Question 62

The greater the MPC:

A)​the greater the fraction of an increase in AD due to an increase in government purchases that is consumption.
B)​the smaller the fraction of an increase in AD due to an increase in government purchases that is consumption.
C)​the greater the change in government purchases required to achieve a given change in AD.
D)​none of the above

Question 63

The primary benefit of the automatic stabilizers is:

A)​they provide public assistance through legislative decision making.
B)​they require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle.
C)​they require legislative action, so there is a lag in response to these tools to fluctuations in the business cycle, and there is time to identify the spillover effects.
D)​none of the above.

Question 64

If there is initially a federal budget deficit, and taxes rise, while transfer payments fall:

A)​AD increases and the budget deficit increases.
B)​AD increases and the budget deficit decreases.
C)​AD decreases and the budget deficit increases.
D)​AD decreases and the budget deficit decreases.

Question 65

A cut in taxes, combined with an increase in government purchases, would:

A)​increase AD.
B)​decrease AD.
C)​leave AD unchanged.
D)​have an indeterminate effect on AD.

Question 66

During a boom expansionary economy, public assistance payments and unemployment compensation payments automatically decrease while income taxes automatically increase. Which of the following best describes the effect of these changes on aggregate demand?

A)​Aggregate demand will be less than it would be without these automatic stabilizers.
B)​Aggregate demand will be the same as it was before the expansion.
C)​Aggregate demand will be less than it was before the expansion.
D)​none of the above

Question 67

An increase in government purchases or a decrease in taxes, other things being equal, will tend to:

A)​increase interest rates and decrease investment.
B)​increase interest rates and increase investment.
C)​decrease interest rates and decrease investment.
D)​decrease interest rates and increase investment.

Question 68

The multiplier will be greater, other things being equal:

A)​the smaller the fraction of each dollar earned that goes to taxes.
B)​the larger the MPC.
C)​the smaller the fraction of each dollar of disposable income that goes to saving.
D)​all of the above are true.

Question 69

The smaller the MPC:

A)​the smaller the fraction of an increase in AD due to an increase in government purchases that is consumption.
B)​the greater the fraction of an increase in AD due to an increase in government purchases that is consumption.
C)​the greater the change in government purchases required to achieve a given change in AD.
D)​(a) and (c)

Question 70

To offset the effect of a steep rise in net exports on the economy, the government might:

A)​increase government purchases.
B)​decrease government purchases.
C)​increase taxes.
D)​both (b) and (c) above

Question 71

If the government sought to end a recession, which of the following would be an appropriate policy?

A)​Increase taxes.
B)​Decrease government purchases.
C)​Decrease taxes and increase government purchases.
D)​None of the above

Question 72

If there is initially a federal budget deficit, and government purchases and transfer payments both rise:

A)​AD increases and the budget deficit increases.
B)​AD increases and the budget deficit decreases.
C)​AD decreases and the budget deficit increases.
D)​AD decreases and the budget deficit decreases.

Question 73

Contractionary fiscal policy, other things being equal, will tend to:

A)​increase interest rates.
B)​increase investment.
C)​increase net exports.
D)​do both (b) and (c).

Question 74

A decrease in government purchases or an increase in taxes, other things being equal, will tend to:

A)​increase interest rates and decrease investment as a result.
B)​increase interest rates and increase investment as a result.
C)​decrease interest rates and decrease investment as a result.
D)​decrease interest rates and increase investment as a result.

Question 75

The multiplier will be smaller, other things being equal:

A)​the smaller the fraction of each dollar earned that goes to taxes.
B)​the larger the MPC.
C)​the smaller the fraction of each dollar of disposable income that goes to saving.
D)​None of the above are true.

Question 76

During a recession, total public assistance payments and unemployment compensation payments automatically increase while income taxes automatically decrease. Which of the following best describes the effect of these changes on aggregate demand?

A)​Aggregate demand will be less than it would be without these automatic stabilizers.
B)​Aggregate demand will be the same as it was before the recession.
C)​Aggregate demand will be more than it would be without these automatic stabilizers.
D)​Aggregate demand will be greater than it was before the recession.

Question 77

To offset the effect of a steep fall in net exports on the economy, the government might:

A)​increase government purchases.
B)​decrease government purchases.
C)​increase taxes.
D)​none of the above.

Question 78

If there is initially a federal budget deficit, and taxes fall while transfer payments rise:

A)​there is an indeterminate effect on both AD and the budget deficit.
B)​AD increases and the budget deficit increases.
C)​AD increases and the budget deficit decreases.
D)​AD decreases and the budget deficit increases.

Question 79

What is the impact of a $10 billion tax cut on consumer spending, if MPC is equal to 0.8?

A)​$50 billion
B)​$40 billion
C)​$10 billion
D)​$20 billion

Question 80

An decrease in taxes combined with a decrease in government purchases would:

A)​increase AD.
B)​decrease AD.
C)​leave AD unchanged.
D)​have an indeterminate effect on AD.