Question 1

Economists believe that the fiscal stimulus of 2009 was _____

Accepted Answer

A)   very effective because the large deficits and growing debt created an uncertain business climate.
B)   very effective because the small deficits and shrinking debt created a positive business climate.
C)   not very effective because the large deficits and growing debt created an uncertain business climate.
D)   not very effective because the small deficits and shrinking debt created a positive business climate.
E)   unrelated to federal debt or the business climate.F) None of the above
G) B) and C)

Question 2

-Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Which of the following would be the result of an increase in government purchases?

Accepted Answer

A)   a movement from Q₃ to Q₂
B)   a movement from e' to e*
C)   a movement from e'' to e*
D)   a movement from Q₂ to Q₃
E)   a movement from Q₁ to Q₃F) B) and C)
G) A) and E)

Question 3

A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False

Question 4

During an election year, the federal government would most likely increase _____

Accepted Answer

A)   tax rates.
B)   interest rates.
C)   the discount rate charged to commercial banks.
D)   the minimum reserve requirement of commercial banks.
E)   government purchases of goods and services.F) A) and D)
G) D) and E)

Question 5

Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not a weakness of fiscal policy?

Accepted Answer

A)   The implementation of fiscal policy is difficult.
B)   Time lags in fiscal policy are long and variable.
C)   Fiscal policy works only during periods of stagflation.
D)   Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.
E)   Fiscal policy might have undesirable long-term effects on short-run aggregate supply.F) A) and D)
G) D) and E)

Question 7

The natural rate of unemployment is _____

Accepted Answer

A)   equal to seasonal unemployment.
B)   usually equal to 3 percent.
C)   the unemployment rate when none of the work force is unemployed for more than six weeks.
D)   the unemployment rate at which the economy is producing its potential GDP.
E)   defined by the government.F) A) and E)
G) D) and E)

Question 8

Revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy are known as _____

Accepted Answer

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

Question 9

The simple spending multiplier understates the amount by which output changes.

Accepted Answer

A) True 
 B)False

Question 10

Given the desire of politicians to get reelected, they might try in the short run to use _____

Accepted Answer

A)   a contractionary monetary policy.
B)   an expansionary fiscal policy.
C)   an expansionary monetary policy.
D)   tax increases on high-income households.
E)   automatic stabilizers to control demand.F) B) and E)
G) C) and D)

Question 11

Which of the following is true of the Golden Age of fiscal policy of the 1960s?

Accepted Answer

A)   Fiscal policy was used to prevent output from expanding in 1964.
B)   Lyndon B. Johnson cut income tax rates to reduce inflationary pressures in the economy.
C)   A tax cut was introduced to increase savings and unemployment.
D)   A tax cut increased disposable income and consumption.
E)   The unemployment rate rose by 5 percent for the first time in seven years.F) A) and E)
G) A) and D) D

Question 12

The only way the government can affect aggregate demand is through changes in its own purchasing.

Accepted Answer

A) True 
 B)False

Question 13

Fiscal policy is likely to fail to correct stagflation in an economy because _____

Accepted Answer

A)   it affects both the aggregate demand and supply, but only aggregate supply needs to be changed.
B)   it affects both the aggregate demand and supply, but only aggregate demand needs to be changed.
C)   it affects aggregate demand only, but aggregate supply also needs to changed.
D)   it affects aggregate supply only, but only aggregate demand needs to be changed.
E)   it affects either aggregate demand or aggregate supply, but both need to be changed simultaneously.F) A) and B)
G) B) and D)

Question 14

A decrease in net taxes _____

Accepted Answer

A)   raises aggregate expenditure by raising disposable income, thereby increasing consumption.
B)   raises aggregate expenditure by raising disposable income, thereby decreasing consumption.
C)   lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption.
D)   lowers aggregate expenditure by lowering disposable income, consumption remaining constant.
E)   has no effect on aggregate expenditure.F) A) and B)
G) B) and D) A

Question 15

Permanent income _____

Accepted Answer

A)   is the income a person expects on average over the long term.
B)   is the income a person expects on average over the short term.
C)   is discretionary income.
D)   is the income that is spent on durable goods.
E)   is the income that is spent on nondurable goods.F) A) and B)
G) A) and C)

Question 16

The American Recovery and Reinvestment Act, signed by President Obama in 2009, was intended to _____

Accepted Answer

A)   increase tax revenues by increasing the tax rate.
B)   balance the budget by increasing defense spending and increasing taxes.
C)   stimulate the economy by increasing government spending in order to increase aggregate supply.
D)   stimulate the economy by decreasing taxes in order to increase aggregate supply.
E)   stimulate aggregate demand through tax benefits and spending programs.F) A) and D)
G) A) and C)

Question 17

The one-time tax cuts used by the Bush administration to stimulate the economy in 2008 proved to be very successful.

Accepted Answer

A) True 
 B)False

Question 18

What impact do tax rebates have?

Accepted Answer

A)   increased consumption
B)   decreased consumption
C)   increased investment
D)   decreased investment
E)   They have little impact on consumption.F) A) and B)
G) A) and D)

Question 19

Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?

Accepted Answer

A)   Transfer payments and taxes affect aggregate spending directly, just as consumption does.
B)   Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption.
C)   Changes in the amount of transfer payments and taxes cancel each other and therefore have no influence on any economic variable.
D)   Transfer payments and taxes affect disposable income but have no effect on consumption.
E)   Transfer payments affect disposable income, but taxes do not.F) B) and C)
G) None of the above

Question 20

The effect of automatic stabilizers on the business cycle is to _____

Accepted Answer

A)   make upswings larger and downswings smaller.
B)   make upswings smaller and downswings larger.
C)   make both upswings and downswings smaller.
D)   eliminate fiscal drag.
E)   make both upswings and downswings larger.F) A) and C)
G) A) and B) C

Exam 11: Fiscal Policy.

Economists believe that the fiscal stimulus of 2009 was _____

Correct AnswerverifiedShow Answer

-Refer to Exhibit 11.2, which shows the relationship between the price level and real GDP. Which of the following would be the result of an increase in government purchases?

Correct AnswerverifiedShow Answer

A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve.

Correct AnswerverifiedShow Answer

During an election year, the federal government would most likely increase _____

Correct AnswerverifiedShow Answer

Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded.

Correct AnswerverifiedShow Answer

Which of the following is not a weakness of fiscal policy?

Correct AnswerverifiedShow Answer

The natural rate of unemployment is _____

Correct AnswerverifiedShow Answer

Revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy are known as _____

Correct AnswerverifiedShow Answer

The simple spending multiplier understates the amount by which output changes.

Correct AnswerverifiedShow Answer

Given the desire of politicians to get reelected, they might try in the short run to use _____

Correct AnswerverifiedShow Answer

Which of the following is true of the Golden Age of fiscal policy of the 1960s?

Correct AnswerverifiedD

The only way the government can affect aggregate demand is through changes in its own purchasing.

Correct AnswerverifiedShow Answer

Fiscal policy is likely to fail to correct stagflation in an economy because _____

Correct AnswerverifiedShow Answer

A decrease in net taxes _____

Correct AnswerverifiedA

Permanent income _____

Correct AnswerverifiedShow Answer

The American Recovery and Reinvestment Act, signed by President Obama in 2009, was intended to _____

Correct AnswerverifiedShow Answer

The one-time tax cuts used by the Bush administration to stimulate the economy in 2008 proved to be very successful.

Correct AnswerverifiedShow Answer

What impact do tax rebates have?

Correct AnswerverifiedShow Answer

Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?

Correct AnswerverifiedShow Answer

The effect of automatic stabilizers on the business cycle is to _____

Correct AnswerverifiedC

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D

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A

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C