Deck 18: Fiscal Policy and National Output

Question 1

An MPS of 0.6 allows a $1 billion change in intended government expenditures to change the equilibrium GDP by ________ billion.

A) $0.4
B) $0.6
C) $1
D) $1.67
E) $2.5

Answer 1

D

Question 2

Tax collections alter the equilibrium level of GDP by

A) causing a change in government spending.
B) changing the relationship between government expenditures and GDP.
C) changing the relationship between consumption expenditures and GDP.
D) shifting the 45-degree line to the left.
E) causing an increase in prices.

Answer 2

C

Question 3

According to the Keynesian view,the short-run aggregate supply curve is

A) horizontal.
B) downward sloping.
C) close to vertical.
D) shaped like a parabola.
E) dependent on the shape of the aggregate demand curve.

Answer 3

A

Question 4

The higher the tax rate,government spending unchanged,the

A) higher the level of intended spending.
B) lower the equilibrium level of GDP.
C) higher the amount of consumption.
D) lower the 45-degree line.
E) higher the amount of disposable income.

Question 5

Higher personal tax rates

A) cause the relationship between consumption expenditures and GDP to become flatter.
B) increase household disposable income.
C) change the amount people want to spend out of each after-tax dollar but leave the spending percentage of pretax income unchanged.
D) cause equilibrium levels of GDP to rise.
E) are mandated by the Employment Act of 1946.

Question 6

The preceding diagram shows that a(n)

A) decrease in the tax rate results in a desire to spend less out of each level of GDP.
B) decrease in the tax rate leads to an equilibrium in which GDP diverges from intended spending.
C) decrease in the tax rate induces an increase in the equilibrium value of GDP.
D) increase in the tax rate induces an increase in the equilibrium value of GDP.
E) increase in the tax rate causes a decline in government expenditures.

Question 7

Excessive unemployment is a sign of a(n)

A) vertical short-run aggregate supply curve.
B) automatic stabilizer.
C) rapidly increasing price level.
D) recessionary gap.
E) excessive amount of total aggregate spending.

Question 8

If the multiplier is 3,a $1 billion decrease in government spending will

A) lower equilibrium GDP by one-third.
B) lower equilibrium GDP by 3.
C) raise equilibrium GDP by one-third.
D) raise equilibrium GDP by 3.
E) leave equilibrium GDP unchanged but change intended spending by one-third.

Question 9

In a simple Keynesian model,a decrease in government spending

A) shifts the C + I + G line upward.
B) reduces potential GDP below its full-employment level.
C) causes price levels to rapidly increase.
D) means the C + I + G line intersects the 45-degree line at a reduced GDP.
E) affects the composition of GDP but not its value.

Question 10

The following questions are based on the following diagram:

From the diagram,one can infer that the

A) C + I + G line cannot change.
B) marginal propensity to save is 1.
C) multiplier is 2.5.
D) 45-degree line is unstable.
E) total intended spending always equals GDP.

Question 11

Using the spending and taxing powers of government to stabilize the economy is called fiscal

A) fitness.
B) policy.
C) federalism.
D) finance.
E) reserve.

Question 12

Fiscal policy is the

A) policy that corporations follow to maintain their dividends when profit rises.
B) name given to Federal Reserve Banks' efforts to control interest rates.
C) process by which prices are established in the stock market.
D) use of government spending and taxation for stabilization purposes.
E) international trade and commerce policy pursued by a nation.

Question 13

The use of government spending and taxes for stabilization purposes is known as

A) unemployment compensation.
B) fiscal policy.
C) budget multipliers.
D) employment finance.
E) Keynesian consumption.

Question 14

Lower personal tax rates reduce

A) intended spending.
B) the equilibrium level of GDP.
C) the value of the multiplier.
D) the difference between GDP and disposable income.
E) the level of employment.

Question 15

The fundamental idea of fiscal policy is that

A) the government should spend more than it collects in taxes.
B) decision making should be left to the Council of Economic Advisers.
C) the government can change the equilibrium GDP by promoting a change in public and/or private spending.
D) the government should always balance its budget.
E) unemployment is a less serious concern than inflation.

Question 16

The government may attempt to reduce unemployment by

A) shifting the aggregate demand curve to the left.
B) increasing the tax rate on personal income.
C) reducing private spending.
D) increasing government spending.
E) decreasing the multiplier.

Question 17

A recessionary gap

A) exists when actual spending is greater than its potential.
B) means that equilibrium total real output is below potential output.
C) measures the decrease in total real output needed to achieve price stability.
D) indicates the extent of the recession needed to raise the rate of inflation.
E) can be eliminated by fiscal policies designed to shift the C + I + G + (X - MI) line downward.

Question 18

The following questions are based on the following diagram:

From the diagram,one can infer that

A) changes in government spending change the value of the multiplier.
B) an increase in government spending results in a budget surplus.
C) a decrease in government spending results in a corresponding increase in private spending.
D) government spending should always be increased.
E) an increase (or decrease) in government spending leads to an increase (or decrease) in total intended spending.

Question 19

One reason NOT to wait for wage rates and other input prices to fall and shift the short-run aggregate supply curve to the right in an economy experiencing a recessionary gap is that

A) such action will result in inflation.
B) unemployment would fall too fast for a complete adjustment.
C) a government budget deficit would be created.
D) it would take too long because wages and prices tend to be sticky.
E) falling prices would reduce exports.

Question 20

In a simple Keynesian model,an increase in government spending,other things being equal

A) increases the equilibrium GDP by a multiplier effect.
B) alters the composition of, but not the total amount of, intended spending.
C) shifts the C + I + G line downward.
D) pushes the aggregate demand curve to the left, causing price levels to fall.
E) changes the angle of the 45-degree line.

Question 21

The following questions are based on the following diagram:

Which of the following events would correct the condition shown?

A) a decrease in private sector spending
B) an increase in the money supply by the government
C) an increase in government spending accompanied by a tax cut
D) a decrease in potential output because of a natural disaster
E) a decrease in the price level through the imposition of wage and price controls

Question 22

The following questions are based on the following diagram:

Which of the following events would correct the condition shown?

A) a decrease in the money supply by the government
B) a shift to the left in the short-run aggregate supply curve
C) a significant tax increase accompanied by a decrease in government spending
D) an increase in private sector spending
E) an increase in wages and other input prices

Question 23

If equilibrium GDP exceeds potential GDP

A) potential output is much greater than actual output.
B) the economy is in a recession.
C) price levels are falling.
D) actual spending is too low.
E) an inflationary gap exists.

Question 24

An inflationary gap

A) exists when actual spending is less than intended spending.
B) measures the additional intended spending needed to ensure full employment.
C) indicates the additional spending needed to lower the rate of inflation.
D) measures the increase in GDP needed to achieve full employment.
E) can be eliminated by fiscal policies designed to shift the aggregate demand curve to the left.

Question 25

If the economy is operating on the positively sloped range of the short-run aggregate supply curve,fiscal policy that increases total spending

A) lowers total real output and raises the price level.
B) promotes increased employment with higher price levels.
C) shifts the aggregate supply curve to the right, increasing the price level.
D) raises total real output and lowers the price level.
E) shifts the aggregate demand curve to the left.

Question 26

When the equilibrium level of output in an economy is above its potential output

A) the government should raise its spending.
B) there is an inflationary gap.
C) the long-run aggregate supply curve is horizontal.
D) unemployment rates are high.
E) wages and prices must be rapidly falling.

Question 27

The government may attempt to reduce unemployment by

A) pushing the aggregate demand curve to the left.
B) increasing the tax rate on personal income.
C) reducing government expenditures.
D) decreasing net exports.
E) cutting taxes.

Question 28

The following questions are based on the following diagram:

Which of the following events would correct the condition shown?

A) an increase in the money supply by the government
B) a cut in government spending accompanied by a tax increase
C) a decrease in the price level through imposing wage and price controls
D) an increase in spending by the private sector
E) a decrease in potential output because of a natural disaster

Question 29

Refer to the following graphs for the following questions.

Which of the diagrams best reflects the existence of an inflationary gap?

A) A
B) B
C) C
D) D
E) E

Question 30

Government anti-inflationary fiscal policy

A) is intended to shift the short-run aggregate supply curve to the left.
B) typically leads to an increase in total real output and a rise in the price level.
C) leads to a reduction in total real output when the short-run aggregate supply curve is positively sloped.
D)shifts the aggregate demand curve to the right.
E)is undertaken when the economy is in the horizontal range of the short-run aggregate supply curve.

Question 31

The following questions are based on the following diagram:

Which of the following events would correct the condition shown?

A) an increase in spending by the private sector
B) a decrease in potential output because of a natural disaster
C) an increase in wages and other input prices
D) an increase in the money supply by the government
E) an increase in government spending accompanied by a tax cut

Question 32

High rates of unemployment generally mean that

A) the aggregate demand curve is rising.
B) the aggregate demand curve is horizontal.
C) the equilibrium output is above potential output.
D) policies to increase spending are appropriate.
E) the price level is rising.

Question 33

Refer to the following graphs for the following questions.

Which of the diagrams best reflects the existence of a recessionary gap?

A) A
B) B
C) C
D) D
E) E

Question 34

In an economy experiencing a high unemployment rate,appropriate fiscal policy would attempt to

A) wait for wages and other input prices to fall.
B) discourage firms from investing.
C) increase personal tax rates.
D) reduce welfare payments to households.
E) shift the aggregate demand curve to the right.

Question 35

The existence of an inflationary gap implies that

A) the aggregate demand curve intersects the aggregate supply curve above potential output.
B)fiscal policy should be used to push the aggregate demand curve to the right.
C)equilibrium GDP is below full-employment GDP.
D)the aggregate demand curve must be raised to promote a full-employment GDP.
E)government spending should be raised and taxes lowered to help the economy deal with inflation.

Question 36

The following questions are based on the following diagram:

Which of the following events would correct the condition shown?

A) a decrease in wages and other input prices
B) a shift to the left in the short-run aggregate supply curve
C) a significant tax increase accompanied by a reduction in government spending
D) a reduction in private sector spending
E) a decrease in the money supply by the government

Question 37

When inflation constitutes a major economic problem,government policy may attempt to

A) shift the aggregate demand curve to the left.
B) shift the aggregate supply curve to the left.
C) encourage and augment spending.
D) raise the equilibrium price level.
E) raise the minimum wage to reduce the effective price level.

Question 38

Aggregate demand shifts to the right when

A) government spending is reduced.
B) tax rates are reduced.
C) equilibrium GDP is reduced.
D) total intended spending is reduced.
E) the inflationary gap is reduced.

Question 39

Fiscal policy that promotes,either directly or indirectly,the reduction of private and public spending would be appropriate when the economy is

A) experiencing a high rate of inflation.
B) experiencing a high rate of unemployment.
C) entering a recession.
D) exporting more than it imports.
E) experiencing rapidly falling price levels.

Question 40

The following questions are based on the following diagram:

Which of the following events would correct the condition shown?

A) an increase in wages and other input prices
B) a decrease in the money supply by the government
C) a reduction in private sector spending
D) a shift to the left of aggregate demand
E) an increase in government spending coupled with a tax cut

Question 41

In recent years,many economists believe that changes in taxes rather than changes in government expenditures should be the primary fiscal weapon to fight unemployment or inflation because

A) it is easier to get Congress to take speedy action on tax changes than on spending changes.
B) changes in government spending shift the aggregate supply curve rather than the aggregate demand curve.
C) taxes directly affect the income of the government, making it easier to balance the budget every year.
D) taxes change disposable income while having no impact on GDP.
E) it is better to base the level of government spending on its long-run merits than short-term stabilization considerations.

Question 42

An expenditure by the government for which no products or services are received in exchange is called a

A) tax.
B) public good.
C) transfer payment.
D) multiplier.
E) stabilizer.

Question 43

The tax cut of 1964

A) represents one of the few failures of modern fiscal policy.
B) was a factor leading to increased consumption expenditures.
C) was passed over the objections of President Kennedy.
D) was enacted to reduce inflationary pressures.
E) induced a decline in investment expenditures.

Question 44

Which of the following categories of federal government expenditures are ranked correctly in order of their importance?

A) income security, Social Security, interest, health, national defense
B) Social Security, national defense, income security, Medicare, health
C) transportation, health, interest, national defense, veterans' benefits
D) interest, health, national defense, agriculture, energy
E) national defense, Medicare, education, Social Security, general government

Question 45

Unemployment compensation and welfare payments tend to stabilize the economy by

A) holding government expenditures at a constant level.
B) accelerating the decrease in disposable income caused by a fall in GDP.
C) reducing corporate dividends when GDP increases.
D) being financed by taxes whose revenues rise and fall as the level of employment rises and falls.
E) equalizing the burden of inflation.

Question 46

Over the last 50 years,federal,state,and local governments have

A) increased their expenditures faster than the growth in total output.
B) gradually but steadily declined in importance in economic matters.
C) demonstrated a movement toward significant public ownership of the means of production.
D) moved increasingly toward nationalization of the defense industry.
E) appreciably expanded public ownership in the electric power industry.

Question 47

Automatic stabilizers

A) make sure that the government budget is balanced every year.
B) give Congress the complete authority for determining fiscal policy.
C) are under the control of the Council of Economic Advisers.
D) force Congress to expedite budget hearings during times of economic hardship.
E) come into play without the need for new legislation or administrative decisions.

Question 48

The government can use fiscal policy to reduce inflation by

A) increasing total spending.
B) modifying the tax laws to induce less personal saving.
C) increasing government expenditures.
D) increasing the budget deficit.
E) increasing the tax rate on personal income.

Question 49

Excluded from the list of those having primary responsibility for making fiscal policy is the

A) president of the United States.
B) Council of Economic Advisers.
C) Federal Reserve System.
D) Congressional Budget Office.
E) Joint Economic Committee of Congress.

Question 50

The Council of Economic Advisers

A) was established to help the president carry out the objectives of the Employment Act of 1946.
B) was established by President Kennedy to promote fiscal policy.
C) is directly responsible to the House Ways and Means Committee.
D) was made an integral part of the policy-making process under the leadership of John Maynard Keynes.
E) has consistently urged balanced budgets.

Question 51

Personal and corporate income taxes serve as automatic stabilizers by causing

A) tax revenues to fall as GDP rises.
B) the government budget to run a surplus during recessions.
C) continuous prosperity.
D) government tax revenues to rise and fall as GDP rises and falls.
E) discretionary fiscal programs to become meaningless.

Question 52

A basic objection to increased public works spending when serious unemployment appears likely to develop is that

A) such spending would lead to a budget deficit.
B) such spending would lead to a decline in GDP.
C) all public works projects are wasteful.
D) there is a long lag between authorizing a program and actually spending the money.
E) stabilization policy is more important than the long-run desirability of public works.

Question 53

The Employment Act of 1946

A) reduced tax rates 10 percent across the board.
B) established the Joint Economic Committee of Congress and the Council of Economic Advisers.
C) made it a matter of government policy to promote a favorable balance of trade.
D) created automatic stabilizers to replace discretionary fiscal policy.
E) requires the government to undertake spending on public works to ensure full employment.

Question 54

Discretionary fiscal policy is

A) the responsibility of the Federal Reserve System.
B) designed to increase the size of recessionary and inflationary gaps.
C) focused on making the 45-degree line more vertical.
D) intended to ensure continuing corporate dividends under changing sales conditions.
E) implemented through changes in government expenditures and tax rates.

Question 55

From an economic perspective the optimal level of government spending occurs when

A) spending is financed by an equal amount of taxes.
B) no more than 50 percent of the GDP is spent by government.
C) the president controls the amount of spending by using the line-item veto.
D) the value of extra benefits derived from an extra dollar of government spending is equal to the dollar of cost.
E) the government has reached the statutory limit of its borrowing as established by Congress.

Question 56

The structural features of our economy that work to offset the effects of the business cycle are called

A) tools of discretionary policy.
B) public works programs.
C) full-employment bills.
D) automatic stabilizers.
E) countercyclical propensities.

Question 57

Currently,the largest share of the annual federal budget goes toward

A) interest on the national debt.
B) energy programs.
C) education and health.
D) national defense and other items connected with international relations and national security.
E) Social Security programs, welfare and other income-security programs, health, and education.

Question 58

The commitment of the government to ensure maximum employment,production,and purchasing power is provided for in the

A) Automatic Stabilizer Act of 1953.
B) Taft-Hartley Act of 1947.
C) Employment Act of 1946.
D) Consumer Price Index.
E) Truman Doctrine.

Question 59

Automatic stabilizers make fiscal policy easier to undertake because they

A) allow economists to formulate rules so that the economy is perpetually stable.
B) enable policy makers to prescribe public works programs during inflationary periods since expenditures for unemployment and welfare have correspondingly decreased.
C) act to increase spending when the economy turns down and to decrease spending when the economy overheats.
D) eliminate the causes of unemployment and inflation experienced by the economy.
E) give the president the complete authority for determining stabilization policy.

Question 60

Tax cuts and tax surcharges are examples of

A) public works programs.
B) discretionary fiscal policy.
C) welfare transfers.
D) monetary policy.
E) automatic stabilizers.

Question 61

The greatest source of federal government tax receipts is the ________ tax.

A) personal income
B) corporate income
C) estate and gift
D) general sales
E) property

Question 62

The greatest source of revenue for most state governments is the ________ tax.

A) personal income
B) corporate income
C) estate and gift.
D) general sales
E) property

Question 63

A decrease in the value of exports minus imports will

A) lower equilibrium GDP.
B) lead to a decline in net investment.
C) lead to a decline in the 45-degree line.
D) shift the total intended spending line upward.
E) lower the value of the multiplier.

Question 64

When a prospering economy began to show signs of hitting a slump,President Eisenhower,despite diverse suggestions from all sides,held the tax rate stable and,in effect,did nothing.In hindsight,most economists of the 1990s agree that Eisenhower's strategy

A) led to a long period of economic stagnation during the 1950s.
B) was hopelessly naive; a tax increase would have been the right move.
C) would have been enhanced by increased government spending and more attention to balancing the budget.
D) represented a tragic return to the old, worn theories of classical economics.
E) was right given the effects of automatic stabilizers on the economy.

Question 65

Why was economist John Kenneth Galbraith opposed to the tax cut advocated by Walter Heller in 1964?

A) He did not believe the tax cut would have the desired impact.
B) He felt the tax cut would have the long-term effect of reducing the government's income.
C) He did not believe the tax cut would get support in Congress.
D) He feared that tax cuts would gain popularity at the expense of important programs to assist the needy.
E) He wanted to be chairperson of the Council of Economic Advisers and was angry at being made ambassador to India.

Question 66

The value of the multiplier in an open economy is generally

A) less than zero.
B) greater than the multiplier in a closed economy.
C) identical to the value of the multiplier in a closed economy.
D) less than the value of the multiplier in a closed economy.
E) indeterminate because the behavior of exports is unpredictable.

Question 67

In an open economy,if government expenditures,tax receipts,and exports are the same at all levels of GDP,the multiplier effect of a $1 increase in intended spending on net exports raises the equilibrium GDP by ________,where MPI = marginal propensity to import.

A) 1/MPI
B) 1/(MPS + MPI )
C) 1/(MPS - MPI )
D) 1/(1 - MPI )
E) 1/(MPC + MPI )

Question 68

The difference between the value of exports and the value of imports is called

A) depreciation.
B) capital accumulation.
C) net exports.
D) the balance of payments.
E) the terms of trade.

Question 69

When President Kennedy took office in 1961,the economy was marked by relatively high unemployment.On the advice of Walter Heller,Kennedy agreed to a tax cut to deal with the problem.Viewed in historical perspective,the impact of this tax cut of 1964 was

A) great, stimulating investment, greatly reducing unemployment, and increasing GDP.
B) negligible on income and employment but caused a rapid increase in inflation.
C) moderate, insufficient to convince most economists that the decision was correct.
D) very slight, disappointing those who had favored a government spending package in place of the tax cut.
E) negligible, so slight as to indicate that the decision was a poor one.

Question 70

In a simple Keynesian model,when net exports increase,the

A) C + I + G + (X - M₁) line shifts downward.
B) 45-degree line becomes flatter.
C) multiplier falls to zero.
D) aggregate demand curve shifts to the left.
E) equilibrium level of GDP increases by an amount greater than the increase in net exports.

Question 71

Why did the automatic stabilizers have more of an effect on our economy during the Eisenhower presidency than they did during the 1930s when Roosevelt was president?

A) We had shifted from an agricultural economy to an industrial economy.
B) We had learned more about controlling inflation and unemployment, so less adjustment was needed.
C) As the classical economists predicted, inflation and unemployment had begun to balance each other out.
D) The size of the federal government had increased dramatically since the 1930s.
E) In reality, the opposite is true; the automatic stabilizers had a greater impact in the 1930s than in the 1950s.

Question 72

The following questions are based on the following diagram showing the equilibrium level of GDP. Exports are currently $60 billion and imports are $40 billion.

If in the preceding question the multiplier is 3,the new level of GDP will be ________ billion.

A) $545
B) $515
C) $485
D) $470
E) $455

Question 73

The following questions are based on the following diagram showing the equilibrium level of GDP. Exports are currently $60 billion and imports are $40 billion.

If exports rise to $65 billion and imports rise to $50 billion,the C + I + G + (X - M₁)line moves ________ billion.

A) up by $5
B) up by $15
C) down by $15
D) down by $10
E) down by $5

Question 74

In what way was the Employment Act of 1946 signed into law by President Truman significantly different from the original bill introduced into the U.S.Senate in January 1945?

A) The final act guaranteed the right to employment; the original bill did not.
B) The final act marked a commitment by government to high employment but not the guaranteed employment written into the original.
C) The final act limited the government's power to tax in a way that the original had not.
D) The original bill was far less supportive of workers' rights than the final version.
E) The final act mandated deficit spending; the original bill required the government to balance its budget.

Question 75

The greatest source of revenue for local governments is the ________ tax.

A) personal income
B) corporate income
C) estate and gift
D) general sales
E) property