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Chapter 12 Test banks

Council of Economic Advisers.
The group of three economists appointed by the President to provide fiscal policy recommendations is the:
intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
Council of Economic Advisers.
deficits during recessions and surpluses during periods of demand-pull inflation.
Countercyclical discretionary fiscal policy calls for:
manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
Fiscal policy refers to the:
involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
Discretionary fiscal policy is so named because it:
is designed to expand real GDP.
Expansionary fiscal policy is so named because it:
is aimed at reducing aggregate demand and thus achieving price stability.
Contractionary fiscal policy is so named because it:
tax cuts during recession and reductions in government spending during inflation.
An economist who favors smaller government would recommend:
increasing government spending by $4 billion.
If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:
decreasing taxes by $25 billion.
If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:
increases in government spending during recession and tax increases during inflation.
An economist who favored expanded government would recommend:
reducing government expenditures by $20 billion.
If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by:
increasing taxes by $20 billion.
If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:
deficits are incurred during recessions and surpluses during inflations.
Discretionary fiscal policy will stabilize the economy most when:
an increase in saving.
The effect of a government surplus on the equilibrium level of GDP is substantially the same as:
an excess of government expenditures over tax receipts.
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward:
Reductions in Federal tax rates on personal and corporate income.
Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?
increase tax rates and/or reduce government spending.
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:
reduce tax rates and/or increase government spending.
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should:
a decrease in tax rates.
An appropriate fiscal policy for a severe recession is:
a tax rate increase.
An appropriate fiscal policy for severe demand-pull inflation is:
shift the AD curve to the left.
In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:
a $10 billion increase in government spending
Which of the following represents the most expansionary fiscal policy?
leftward shift in the economy’s aggregate demand curve.
Which of the following represents the most contractionary fiscal policy?
rightward shift in the economy’s aggregate demand curve.
An expansionary fiscal policy is shown as a:
larger is the economy’s MPC.
A tax reduction of a specific amount will be more expansionary, the:
smaller is the economy’s MPS.
A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the:
reduce taxes by $80 billion.
Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should:
increase government expenditures by $50 billion.
Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should:
increase government expenditures by $40 billion.
Suppose the price level is fixed, the MPC is .8, the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should:
with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
Built-in stability means that:
economy would become more stable.
If Congress adjusted the U.S. tax system so that the MPC was reduced, the
require no legislative action by Congress to be made effective.
A major advantage of the built-in or automatic stabilizers is that they:
Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
Which of the following best describes the built-in stabilizers as they function in the United States?
Built-in stability only partially offsets fluctuations in economic activity.
Which of the following statements is correct?
GDP:
$0
100
200
300
400
Consumption:
$8
88
168
248
320
Answer the question on the basis of the following before-tax consumption schedule for a closed economy:
GDP:
$0
100
200
300
400
Consumption:
$40
120
200
280
360
Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is now imposed in this economy, the consumption schedule will be:
is regressive
Answer the question on the basis of the following before-tax consumption schedule for a closed economy:
GDP:
$0
100
200
300
400
Consumption:
$40
120
200
280
360
Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system:
.8 both before and after taxes.
Answer the question on the basis of the following before-tax consumption schedule for a closed economy:
GDP:
$0
100
200
300
400
Consumption:
$40
120
200
280
360
Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is:
neither increases nor decreases built-in stability.
Answer the question on the basis of the following before-tax consumption schedule for a closed economy:
GDP:
$0
100
200
300
400
Consumption:
$40
120
200
280
360
Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, we can conclude that the tax:
GDP:
$100
200
300
400
500
Consumption:
$134
188
242
296
350
(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy:
GDP:
$100
200
300
400
500
Consumption:
$140
200
260
320
380
Refer to the above data. If a 10 percent proportional tax on income is imposed, the consumption schedule will now be:
both consumption and saving to increase by smaller and smaller absolute amounts as GDP rises.
(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy:
GDP:
$100
200
300
400
500
Consumption:
$140
200
260
320
380
Refer to the above data. The 10 percent proportional tax on income would cause:
reduce the size of the multiplier and make the economy more stable.
(Advanced analysis) Answer the question on the basis of the following before-tax consumption schedule for an economy:
GDP:
$100
200
300
400
500
Consumption:
$140
200
260
320
380
Refer to the above data. A 10 percent proportional tax on income would:
the size of the Federal government’s budgetary surplus or deficit when the economy is operating at full employment.
The cyclically-adjusted budget refers to:
what the size of the Federal budget deficit or surplus would be if the economy was at full employment.
The cyclically-adjusted budget tells us:
The cyclically-adjusted budget is less likely to show a deficit than is the actual budget.
Which of the following statements is correct?
tax revenues would exceed government expenditures if full employment were achieved.
If the economy has a cyclically-adjusted budget surplus, this means that:
cannot be determined whether the government engaged in expansionary or contractionary fiscal policy in 2009.
The actual budget deficit of the Federal government in 2009 was about $1.4 trillion. On the basis of this information it:
the cyclically-adjusted budget has neither a deficit nor a surplus.
When current government expenditures equal current tax revenues and the economy is achieving full employment:
the cyclically-adjusted budget has a deficit.
When current government expenditures exceed current tax revenues and the economy is achieving full employment:
the cyclically-adjusted budget has a surplus.
When current tax revenues exceed current government expenditures and the economy is achieving full employment:
contractionary fiscal policy.
Suppose the government purposely changes the economy’s cyclically-adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n):
expansionary fiscal policy.
Suppose the government purposely changes the economy’s cyclically-adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n):
neutral fiscal policy.
Suppose the government cuts taxes to keep the economy’s cyclically-adjusted budget in balance when the economy is expanding. The government is engaging in a(n):
a recession.
Year: Actual Budget: Adjusted budget:
1998 0 0
1999 -3 0
2000 -5 -2
2001 -2 -2
2002 +2 +1
Refer to the above data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect:
an expansionary fiscal policy.
Year: Actual Budget: Adjusted budget:
1998 0 0
1999 -3 0
2000 -5 -2
2001 -2 -2
2002 +2 +1
Refer to the above data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect:
a recession.
Year: Actual Budget: Adjusted budget:
1998 0 0
1999 -3 0
2000 -5 -2
2001 -2 -2
2002 +2 +1
Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:
an expansionary fiscal policy.
Year: Actual Budget: Adjusted budget:
1998 0 0
1999 -3 0
2000 -5 -2
2001 -2 -2
2002 +2 +1
Refer to the above data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect:
an expansion of real GDP and an automatic increase in tax revenues.
Year: Actual Budget: Adjusted budget:
1998 0 0
1999 -3 0
2000 -5 -2
2001 -2 -2
2002 +2 +1
Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:
contractionary fiscal policy.
Year: Actual Budget: Adjusted budget:
1998 0 0
1999 -3 0
2000 -5 -2
2001 -2 -2
2002 +2 +1
Refer to the above table for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n):
increase the cyclically-adjusted deficit but reduce the actual deficit.
An effective expansionary fiscal policy will:
cyclically-adjusted deficit.
Economists refer to a budget deficit that exists when the economy is achieving full employment as a:
the actual and the cyclically-adjusted budgets will be equal.
When the economy is at full employment:
assume that government is having a contractionary effect on the economy.
If government increases the size of its cyclically-adjusted surplus, we can:
subtracting government tax revenues from government spending in a particular year.
The Federal budget deficit is found by:
budget deficit.
The amount by which government expenditures exceed revenues during a particular year is the:
budget surplus.
The amount by which Federal tax revenues exceed Federal government expenditures during a particular year is the:
large Federal budget deficits.
Since 2002, the United States has had:
Fiscal policy swung from contractionary to expansionary in 2002.
Which of the following is a true statement?
the recession of 2001.
The immediate primary cause of the swing from Federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was:
Bursting of the Dot.Com stock market bubble.
Which of the following did not contribute directly to the Great Recession?
implemented a $787 billion package of tax cuts and government expenditure increases.
The American Recovery and Reinvestment Act of 2009:
rose to -7.3 percent of potential GDP in 2009.
The cyclically-adjusted budget deficit for the United States:
stimulate aggregate demand and employment.
The American Recovery and Reinvestment Act of 2009 was implemented primarily to:
primarily by a combination of recession and expansionary fiscal policy.
Increases in the Federal budget deficit from 2007 to 2009 were caused:
5.
Answer the question on the basis of the following sequence of events involving fiscal policy:
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.
Refer to the above information. The operational lag of fiscal policy is reflected in event(s):
1 and 2.
Answer the question on the basis of the following sequence of events involving fiscal policy:
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.
Refer to the above information. The recognition lag of fiscal policy is reflected in events:
3 and 4
Answer the question on the basis of the following sequence of events involving fiscal policy:
(1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.
Refer to the above information. The administrative lag of fiscal policy is reflected in events:
Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
Which of the following best describes the idea of a political business cycle?
politicians will manipulate the economy to enhance their chances of being reelected.
The political business cycle refers to the possibility that:
increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
The crowding-out effect of expansionary fiscal policy suggests that:
government spending increases at the expense of private investment.
The crowding-out effect of expansionary fiscal policy suggests that:
the crowding-out effect.
The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:
strongest when the economy is at full employment.
The crowding-out effect is:
An increase in government spending on infrastructure that increases private sector productivity.
Which of the following fiscal policy actions is most likely to increase aggregate supply?
consists of the historical accumulation of all past Federal deficits and surpluses.
The U.S. public debt:
the Federal government owes to holders of U.S. securities.
The public debt is the amount of money that:
Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
The public debt is held as:
$460 billion.
Security: Amount:
Treasury Bills $220
Corporate Bonds 140
Treasury Notes 80
Corporate stock 200
US savings bonds 60
treasury bonds 100
The public debt for the above economy is:
increase the public debt from $460 billion to $480 billion.
Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the above economy would:
not change the size of the public debt.
Other things equal, an increase of corporate bonds from $140 billion to $150 billion in the above economy would:
increased by $20 billion.
Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government’s public debt would have:
decreased by $150 billion.
Suppose the Federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government’s public debt would have:
demand-pull inflation
Which of the following is not a significant contributor to the U.S. public debt?
reducing national income and therefore tax revenues.
Recessions have contributed to the public debt by:
There is a tendency for the public debt to grow during recessions.
Which of the following statements is correct?
about a third as large as the GDP.
In 2009, the U.S. Federal debt held by the public was:
interest on the debt as a percentage of the GDP.
The average tax rate required to service the public debt is roughly measured by:
$11.9 trillion.
In 2009, the U.S. public debt was about:
43 percent.
What percentage of the U.S. public debt is held by Federal agencies and the Federal Reserve?
29 percent
Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?
larger than the portion held by Federal Agencies and the Federal Reserve.
The portion of the public debt held outside Federal agencies and the Federal Reserve is:
the U.S. public (individuals, businesses, financial institutions, etc.) and state and local governments.
The largest proportion of the U.S. public debt is held by:
29
In 2009, about ____ percent of the U.S. public debt was held by people and institutions abroad.
43
In 2009, about ____ percent of the U.S. public debt was held by the Federal government and Federal Reserve.
the bulk of the public debt is owned by U.S. citizens and institutions.
To say that “the U.S. public debt is mostly held internally” is to say that:
is thought to increase income inequality.
Payment of interest on the U.S. public debt:
reducing the current level of investment.
The most likely way the public debt burdens future generations, if at all, is by:
is financed by borrowing.
Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:
government borrowing to finance the public debt increases the real interest rate and reduces private investment.
The crowding-out effect suggests that:
crowding-out effect.
The Federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the:
may be very small or conceivably zero when the economy is in a severe depression.
The real burden of an increase in the public debt:
an increase in public investment
Which one of the following might offset a crowding-out effect of financing a large public debt?
construction of highways
Which of the following is the best example of public investment?
Bankruptcy of the Federal government
Which of the following is not considered a legitimate concern of a large public debt?
Crowding-out of private investment
Which of the following is considered a legitimate concern of a large public debt?
7.6
(Last Word) The combined cost of Social Security and Medicare programs was what percent of U.S. GDP in 2008?
5:1; 2:1
(Last Word) In 1960 the ratio of workers to Social Security and Medicare beneficiaries was ______; by 2040 it is projected to be _________.
Restricting immigration of skilled working-age adults.
(Last Word) Which of the following would not help to relieve the Social Security and Medicare shortfalls?

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