Question 1

All of the following make the use of fiscal policy less attractive except
A)expansionary fiscal policy tends to cause inflation and offsets some of the increased consumer spending.
B)that it cannot be effective,unless it is accommodated with expansionary monetary policy.
C)the substantial margin of error in the value of the multiplier.
D)the legislative lag,which is the time it takes for Congress and the President to pass and implement the measure.
E)the crowding out effect,which is the decrease in private spending that occurs due to increased government spending.

Accepted Answer

This statement suggests that fiscal policy can be effective, but it requires the cooperation of monetary policy. The other statements provide reasons for why fiscal policy may be less attractive or effective in certain circumstances, such as inflation, a margin of error in the multiplier effect, legislative lag, or crowding out effects.

Question 2

Taxes,savings,and imports tend to magnify the effect of any spending change in the economy;that is,if investment spending initially increases,then spending will grow even more as taxes,savings,and imports increase,so the economic growth will accelerate.

Accepted Answer

Taxes, savings, and imports tend to have a dampening effect on overall spending in the economy. If investment spending initially increases, these factors may reduce the overall impact and may even lead to a decrease in economic growth.

Question 3

Which of the following is TRUE?
A)Points along the aggregate supply curve show the equilibrium levels of output and prices that are consistent on the demand side of the economy.
B)Points along the aggregate demand curve show the equilibrium levels of output and prices that are consistent on the supply side of the economy.
C)Aggregate demand shows the levels of GDP and prices where expenditure decisions and production decisions match.
D)Aggregate supply shows the levels of GDP and prices where expenditure decisions and production decisions match.

Accepted Answer

Aggregate demand shows the levels of GDP and prices where expenditure decisions and production decisions match. Points along the aggregate demand curve show the equilibrium levels of output and prices that are consistent on the supply side of the economy. Therefore, option C is the correct choice. Option A is incorrect because it refers to the aggregate demand curve, not the aggregate supply curve. Option B is also incorrect because it refers to the supply side of the economy, whereas the aggregate demand curve shows the demand side of the economy. Option D is incorrect because it refers to aggregate supply, which is not directly related to expenditure decisions.

Question 4

The effects of tax cuts or government spending dissipate and each additional change in consumption and income becomes smaller and smaller because
A)some of the increase in income will be lost through taxation.
B)some of the increase is saved and does not result in an increase in consumer demand.
C)some of the increase in consumption will be an additional demand for imported goods.
D)All of the above.
E)None of the above.

Accepted Answer

All of the given options are true and contribute to the diminishing effects of tax cuts or government spending on consumption and income. Some of the increased income is lost through taxation, some is saved and does not result in increased demand, and some is spent on imported goods, which does not contribute to domestic economic growth. As a result, with each additional change in consumption and income, the initial impact is reduced.

Question 5

Fiscal policy is
A)the selling of government bonds by the Treasury.
B)the deliberate manipulation of the money supply designed to affect the interest rate.
C)the deliberate manipulation of taxation and spending designed to affect the economy.
D)the selling of foreign exchange reserves designed to change the exchange rate.
E)All of the above.

Accepted Answer

Fiscal policy refers to government's decisions on taxation and spending with the aim of positively influencing the economy. Option A is incorrect because selling government bonds is a monetary policy tool, not fiscal policy. Option B is incorrect because manipulating the money supply is also a monetary policy tool. Option D is incorrect because selling foreign exchange reserves is an intervention in the foreign exchange market, not inherently linked to fiscal policy.

Question 6

When spending and incomes in an economy increase,
A)imports are likely to increase.
B)imports are likely to be unchanged.
C)imports are likely to decrease.
D)exports are likely to decrease.

Accepted Answer

When spending and incomes in an economy increase, people tend to have more disposable income to spend on goods and services, including imported goods. Therefore, imports are likely to increase.

Question 7

Which of the following is NOT one of the factors your text identifies that could affect the size of the multiplier?
A)What sector of the economy receives the initial increase in spending
B)How the spending is financed
C)Whether the economy is in recession or at full employment
D)Whether the economy is in autarky equilibrium

Accepted Answer

The size of the multiplier is not affected by whether the economy is in autarky equilibrium. The other factors listed (A, B, and C) can all have an impact on the size of the multiplier.

Question 8

What typically happens to imports as income and spending rise?

Accepted Answer

The answer of What typically happens to imports as income...

Question 9

If consumption spending increases because people feel more confident about the future,
A)aggregate demand will shift to the left.
B)aggregate demand will shift to the right.
C)aggregate supply will shift to the left.
D)aggregate supply will shift to the right.

Accepted Answer

An increase in consumption spending represents an increase in household expenditure, which is a component of aggregate demand. When people feel more confident about the future, they are likely to spend more money on goods and services, leading to an increase in aggregate demand. Therefore, the correct answer is that aggregate demand will shift to the right. Options A, C, and D are incorrect as they describe shifts in the aggregate demand and supply curves based on factors other than changes in consumption spending.

Question 10

Economic growth would be illustrated by
A)a rightward shift of aggregate demand.
B)a leftward shift of aggregate demand.
C)a rightward shift of aggregate supply.
D)a leftward shift of aggregate supply.

Accepted Answer

Economic growth is shown by an increase in the potential output of the economy. This is represented by a rightward shift of the aggregate supply (AS) curve, indicating that firms are able to produce more goods and services at each price level. This increase in output leads to an increase in real GDP and, if aggregate demand (AD) remains constant, a decrease in the price level. Therefore, C) a rightward shift of aggregate supply is the correct answer.

Question 11

Suppose the Asian financial crisis decreased U.S.exports.In the aggregate demand/aggregate supply model,this would be represented as
A)a shift to the right of aggregate supply,which would result in more production for the U.S.economy.
B)a shift to the left of aggregate supply,which would result in less production for the U.S.economy.
C)a shift to the right of aggregate demand,leading to more spending and production in the U.S.economy.
D)a shift to the left of aggregate demand,leading to less spending and production in the U.S.economy.

Accepted Answer

A decrease in U.S. exports due to the Asian financial crisis would cause a decrease in aggregate demand for the U.S. economy. This would shift the aggregate demand curve to the left, resulting in less spending and production in the U.S. economy. Therefore, the correct answer is D.

Question 12

When aggregate demand increases,
A)the price level is likely to rise as GDP rises.
B)the price level is likely to fall as GDP rises.
C)aggregate supply will shift to the right.
D)aggregate supply will shift to the left.

Accepted Answer

When aggregate demand increases, there is a greater demand for goods and services in the economy. This typically leads to an increase in production (GDP) to meet the increased demand. However, this increase in production can also lead to higher prices due to supply constraints or inflation. Therefore, the price level is likely to rise as GDP rises.

Question 13

Government spending and taxes
A)do not change aggregate demand.
B)are an important component of aggregate supply.
C)do not play a big role in determining GDP.
D)are a major determinant of aggregate demand.
E)cannot affect the price level.

Accepted Answer

Government spending and taxes can have a significant impact on aggregate demand, which is a key determinant of GDP. An increase in government spending or decrease in taxes would increase disposable income and therefore, consumer spending, which would in turn increase aggregate demand. Conversely, a decrease in government spending or increase in taxes would decrease disposable income and consumer spending, leading to a decrease in aggregate demand. Therefore, government spending and taxes play a major role in determining the level of aggregate demand and ultimately, GDP.

Question 14

For any given increase in spending that is not directly caused by an increase in income,the impact on equilibrium GDP is greater than the initial spending increase.

Accepted Answer

This is known as the multiplier effect. As the initial increase in spending leads to an increase in demand for goods and services, businesses will respond by increasing production and hiring more workers, leading to a further increase in income and spending. This cycle continues until the impact on equilibrium GDP is greater than the initial spending increase.

Question 15

Starting from a balanced budget,which of the following would NOT cause a deficit?
A)A decrease in taxes
B)An increase in spending of goods and services
C)An increase in transfer payments
D)A 50 percent increase in spending accompanied by a 40 percent increase in taxes
E)None of the above.

Accepted Answer

The answer of Starting from a balanced budget,which of the...

Question 16

If a component of aggregate demand increases,
A)GDP in the United States is likely to increase less than that component of spending increased.
B)GDP in the United States is likely to increase more than that component of spending increased.
C)GDP in the United States is likely to decrease.
D)GDP in the United States will not change.

Accepted Answer

When a component of aggregate demand increases, GDP in the United States is likely to increase more than that component of spending increased. This is because of the multiplier effect, which states that any increase in spending will lead to an even greater increase in GDP as the increased spending leads to increased income and further spending. Therefore, the overall increase in GDP will be greater than the initial increase in spending.

Question 17

Intermediate inputs are
A)goods used for household consumption only.
B)goods used for government consumption only.
C)goods purchased by one business from another to use in production.
D)goods purchased by foreigners.
E)raw materials used in the production process.

Accepted Answer

Intermediate inputs are goods purchased by one business from another to use in production.

Question 18

Changes in aggregate demand
A)could be caused by changes in the spending decisions of the households,businesses,the government,and foreigners.
B)are very uncommon.
C)are unlikely to change quickly in response to economic events.
D)are primarily based on changes in firms' abilities to produce products.
E)are not affected by changes in government policies.

Accepted Answer

Changes in aggregate demand can be caused by changes in consumption spending by households, investment spending by businesses, government spending, and net exports. These spending decisions can be influenced by various factors such as changes in income, interest rates, taxes, and international trade. Therefore, option A is the correct choice. Option B is incorrect because changes in aggregate demand are not uncommon, in fact, they are quite frequent. Option C is incorrect because aggregate demand can change quickly in response to economic events such as a recession, inflation, or a natural disaster. Option D is incorrect because changes in firms' abilities to produce products primarily affect aggregate supply, not demand. Option E is incorrect because changes in government policies can have a significant impact on aggregate demand through changes in government spending, taxes, and regulations.

Question 19

Along the aggregate supply curve
A)the horizontal part represents a situation where the economy is operating above full employment levels.
B)inflation would be a primary concern along the horizontal part of the aggregate supply curve.
C)idle resources,such as labor and capital,would be a feature of the vertical section of the aggregate supply curve.
D)the horizontal section of the aggregate supply curve represents the limit of production.
E)the middle,upward-sloping part of the aggregate supply curve would be associated with a growing economy that experienced increased prices from resources that are becoming relatively scarce.

Accepted Answer

The middle, upward-sloping part of the aggregate supply curve represents a situation where the economy is growing, but resources are becoming relatively scarce, leading to increased prices. The horizontal part of the aggregate supply curve represents a situation where the economy is operating above full employment levels, leading to inflation as idle resources become scarce. The vertical section of the aggregate supply curve represents a situation where all resources are fully utilized, and additional production can only be achieved through technological improvements or an increase in the quantity of resources.

Question 20

Which of the following may NOT serve as a possible chain reaction for either fiscal or monetary policy?
A)G↑ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....
B)T↓ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....
C)M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↓ ⇒ C↓....
D)M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑ ⇒ C↑....
E)M↓ ⇒ i↑ ⇒ I↓ ⇒ Y↓ ⇒ C↓....

Accepted Answer

An increase in the money supply (M↑) typically leads to a decrease in interest rates (i↓), which should increase investment (I↑), not decrease it (I↓). Thus, option C does not represent a typical chain reaction for monetary policy.

Quiz 11: An Introduction to Open Economy Macroeconomics

All of the following make the use of fiscal policy less attractive except

Taxes,savings,and imports tend to magnify the effect of any spending change in the economy;that is,if investment spending initially increases,then spending will grow even more as taxes,savings,and imports increase,so the economic growth will accelerate.

Which of the following is TRUE?

The effects of tax cuts or government spending dissipate and each additional change in consumption and income becomes smaller and smaller because

Fiscal policy is

When spending and incomes in an economy increase,

Which of the following is NOT one of the factors your text identifies that could affect the size of the multiplier?

What typically happens to imports as income and spending rise?

If consumption spending increases because people feel more confident about the future,

Economic growth would be illustrated by

Suppose the Asian financial crisis decreased U.S.exports.In the aggregate demand/aggregate supply model,this would be represented as

When aggregate demand increases,

Government spending and taxes

For any given increase in spending that is not directly caused by an increase in income,the impact on equilibrium GDP is greater than the initial spending increase.

Starting from a balanced budget,which of the following would NOT cause a deficit?

If a component of aggregate demand increases,

Intermediate inputs are

Changes in aggregate demand

Along the aggregate supply curve

Which of the following may NOT serve as a possible chain reaction for either fiscal or monetary policy?