Question 1

During a recession, unemployment insurance ensures that _____

Accepted Answer

A)   the disposable income of those who are unemployed will increase above the usual level.
B)   disposable income does not fall as much as the decrease in GDP.
C)   disposable income increases as GDP falls.
D)   the marginal propensity to consume increases.
E)   the marginal propensity to consume decreases.F) A) and B)
G) A) and C)

Question 2

Which of the following is a component of aggregate demand?

Accepted Answer

A)   transfer payments from the government
B)   taxation by the government
C)   purchases by the government
D)   borrowing by the government
E)   saving by consumersF) A) and E)
G) A) and D)

Question 3

One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output, but at the cost of increasing the price level.

Accepted Answer

A) True 
 B)False

Question 4

Deliberate manipulation of government spending and taxes to promote macroeconomic goals is known as _____

Accepted Answer

A)   discretionary fiscal policy.
B)   automatic stabilizers.
C)   expansionary fiscal policy.
D)   contractionary fiscal policy.
E)   monetary policy.F) C) and E)
G) A) and B)

Question 5

What effect did the financial crisis have on credit markets around the world?

Accepted Answer

A)   It did not affect the U.S. credit markets.
B)   It did not affect the global markets.
C)   It made credit markets more liquid.
D)   It froze credit markets.
E)   The crises only affected the stock market, not the credit market.F) None of the above
G) A) and E)

Question 6

The effectiveness of any stimulus program depends on _____

Accepted Answer

A)   the size of the tax cuts.
B)   the size of the tax increases.
C)   the size of the tax and spending multipliers.
D)   the size of the budget deficit.
E)   the size of the budget surplus.F) A) and B)
G) All of the above

Question 7

Unemployment insurance is an example of a discretionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 8

All of the following are likely to be effective at eliminating a recessionary gap, except one. Which is the exception?

Accepted Answer

A)   reducing Social Security payments to beneficiaries
B)   reducing personal income taxes
C)   increasing government expenditures on the interstate highway network
D)   increasing farm subsidies
E)   reducing corporate income taxesF) A) and C)
G) A) and B)

Question 9

The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.

Accepted Answer

A) True 
 B)False

Question 10

A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in net taxes.

Accepted Answer

A) True 
 B)False

Question 11

Fiscal policy used to close a recessionary gap is known as _____

Accepted Answer

A)   discretionary fiscal policy.
B)   an automatic stabilizer.
C)   expansionary fiscal policy.
D)   contractionary fiscal policy.
E)   monetary policy.F) A) and E)
G) C) and E)

Question 12

Which of the following is an example of an automatic stabilizer?

Accepted Answer

A)   a decrease in tax rates by Congress in times of unemployment
B)   a decrease in tax rates by Congress in times of inflation
C)   an increase in government defense spending during war
D)   an increase in unemployment compensation during recession
E)   a decrease in welfare programs during inflationF) None of the above
G) A) and B)

Question 13

A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.

Accepted Answer

A) True 
 B)False

Question 14

Suppose the government reduces its budget deficit at the same time that energy prices rise sharply. Which of the following is most likely to happen?

Accepted Answer

A)   The price level will rise, since higher energy prices increase the cost of production.
B)   Real GDP will fall since both events will tend to cause an economic contraction.
C)   The price level will fall because the aggregate demand curve has shifted leftward.
D)   Real GDP will rise as less government spending leads to more opportunities for the private sector.
E)   Both the price level and real GDP will fall.F) A) and E)
G) C) and D)

Question 15

Discretionary fiscal policy works by shifting the aggregate demand curve.

Accepted Answer

A) True 
 B)False

Question 16

Higher unemployment benefits funded by higher taxes on earnings would _____

Accepted Answer

A)   decrease the aggregate supply in an economy.
B)   increase the supply of labor in an economy.
C)   increase the price level in an economy.
D)   decrease the aggregate demand in an economy.
E)   increase the opportunity cost of leisure.F) C) and D)
G) B) and C)

Question 17

If fiscal policy is used to close an expansionary gap, the _____

Accepted Answer

A)   short-run aggregate supply curve shifts leftward and the price level falls.
B)   short-run aggregate supply curve shifts rightward and the price level increases.
C)   short-run aggregate supply curve shifts rightward and the price level falls.
D)   aggregate demand curve shifts leftward and the price level falls.
E)   aggregate demand curve shifts rightward and the price level falls.F) B) and E)
G) C) and D)

Question 18

Which of the following are components of fiscal policy?

Accepted Answer

A)   transfer payments only
B)   money supply and government purchases
C)   government purchases only
D)   government purchases, transfer payments, and taxes
E)   taxes and money supplyF) B) and D)
G) All of the above

Question 19

There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.

Accepted Answer

A) True 
 B)False

Question 20

_____ when net taxes are reduced.

Accepted Answer

A)   Net exports decrease
B)   Government purchases remain constant
C)   Government purchases rise
D)   Consumption falls
E)   Consumption risesF) A) and E)
G) A) and D)

Exam 11: Fiscal Policy.

Deliberate manipulation of government spending and taxes to promote macroeconomic goals is known as _____

Correct AnswerverifiedShow Answer

During a recession, unemployment insurance ensures that _____

Correct AnswerverifiedShow Answer

The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.

Correct AnswerverifiedShow Answer

There is substantial evidence that people base their consumption decisions more on their current income than on the average income they expect to receive over a long period of time.

Correct AnswerverifiedShow Answer

One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output, but at the cost of increasing the price level.

Correct AnswerverifiedShow Answer

Fiscal policy used to close a recessionary gap is known as _____

Correct AnswerverifiedShow Answer

If fiscal policy is used to close an expansionary gap, the _____

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_____ when net taxes are reduced.

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Suppose the government reduces its budget deficit at the same time that energy prices rise sharply. Which of the following is most likely to happen?

Correct AnswerverifiedShow Answer

A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in net taxes.

Correct AnswerverifiedShow Answer

Discretionary fiscal policy works by shifting the aggregate demand curve.

Correct AnswerverifiedShow Answer

Higher unemployment benefits funded by higher taxes on earnings would _____

Correct AnswerverifiedShow Answer

A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.

Correct AnswerverifiedShow Answer

All of the following are likely to be effective at eliminating a recessionary gap, except one. Which is the exception?

Correct AnswerverifiedShow Answer

Unemployment insurance is an example of a discretionary fiscal policy.

Correct AnswerverifiedShow Answer

Which of the following is a component of aggregate demand?

Correct AnswerverifiedShow Answer

What effect did the financial crisis have on credit markets around the world?

Correct AnswerverifiedShow Answer

Which of the following are components of fiscal policy?

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Which of the following is an example of an automatic stabilizer?

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The effectiveness of any stimulus program depends on _____

Correct AnswerverifiedShow Answer

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