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Sample 3
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
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1. "Fiscal Policy" is the federal government's plan for
a. international trade, designed to balance exports and imports.
b. spending and taxes, designed to influence the level of aggregate demand.
c. manipulating the money supply and the control of interest rates.
d. All of the above are correct.
2. Historically, the government has used fiscal policy to affect the economy through
a. central planning.
b. indicative planning.
c. aggregate demand.
d. aggregate supply.
3. Most of the taxes collected by governments tend to
a. remain fixed.
b. move in the opposite direction from GDP.
c. be sales taxes.
d. rise and fall with the level of GDP.
4. In contrast to changes in government spending, tax changes affect spending
a. directly.
b. in the same proportion.
c. by a greater amount.
d. indirectly.
5. When you compare the effects of government spending on aggregate demand with the effects of taxes on
aggregate demand, the effects of government spending are
a. smaller.
b. larger.
c. the same.
d. impossible to predict.
6. How does an increase in taxes affect the expenditure schedule?
a. It causes movement to the left along the schedule.
b. It causes the schedule to shift upward.
c. It causes movement to the right along the schedule.
d. It causes the schedule to shift downward.
7. Why does a tax change affect aggregate demand?
a. A tax change alters saving by an equal amount.
b. A tax change alters imports and net exports.
c. A tax change alters government spending by an equal amount.
d. A tax change alters disposable income and consumption spending.
8. The reason that the multiplier is smaller if there are variable taxes is that
a. taxes add to government spending, which increases income.
b. people get angry about taxes and decide to work less.
c. tax increases shift the expenditure line upward.
d. part of an increase in income is taken away in taxes.
9. During the period from 2001 to 2006, there will be several major cuts in personal income tax rates. What effect
will these have on the value of the multiplier?
a. They will decrease the value of the multiplier.
b. They will have no effect on the multiplier.
c. They will increase the value of the multiplier.
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d. The effect is uncertain.
The oversimplified formula for the multiplier is misleading because it ignores the effects of
a. price-level changes.
b. the foreign sector.
c. variable taxes.
d. All of the above are correct.
A change in a fixed tax will cause the consumption schedule to
a. become steeper.
b. become flatter.
c. shift in a parallel manner.
d. remain fixed as the economy moves along the schedule.
Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to
eliminate a budget deficit. Which action will have the larger effect on equilibrium GDP?
a. the increase in taxes
b. the decrease in spending
c. the effects will be equal
d. not possible to determine without knowing the multiplier
In order to maintain a balanced budget, Congress has decided to cut taxes and government spending both by $25
billion. What will happen to GDP?
a. It will increase.
b. It will remain the same.
c. It will decrease.
d. It's impossible to know without the multiplier.
How does the multiplier for a change in government spending compare to the multiplier for a change in taxes?
a. It is smaller.
b. It is the same.
c. It is larger.
d. It cannot be calculated.
Government transfer payments act as automatic stabilizers because as labor income decreases, transfer payments
a. decrease as well.
b. remain constant.
c. increase.
d. to the government increase.
Expansionary fiscal policy can cause a rise in real GDP in combination with
a. an increase in the price level.
b. a decrease in the price level.
c. no change in the price level.
d. a decrease in the price level if the aggregate supply curve is upward sloping.
After September 11, 2001, President George W. Bush believed in the need for a fiscal stimulus. The proper fiscal
policy to reflect this could include a(n)
a. increase in taxes.
b. reduction in transfer payments.
c. increase in government purchases.
d. All of the above are correct.
When total expenditures exceed the economy's potential GDP, the proper fiscal policy is to
a. increase transfer payments to the poor and elderly.
b. cut personal income tax rates.
c. decrease purchasing power.
d. increase purchasing power.
Which of the following will shift the aggregate demand curve outward?
a. tax cuts and government spending cuts
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b. tax increases and government spending increases
c. tax cuts and government spending increases
d. tax increases and government spending increases
Policy makers and citizens who want to expand the size of the government sector would favor stabilization
policies that
a. raise G to eliminate a recessionary gap and lower taxes to eliminate an inflationary gap.
b. raise G to eliminate a recessionary gap and raise taxes to eliminate an inflationary gap.
c. reduce taxes to eliminate a recessionary gap and raise G to eliminate an inflationary gap.
d. reduce taxes to eliminate a recessionary gap and reduce G to eliminate an inflationary gap.
The macroeconomic policy planner's job is made difficult because of
a. inaccurate multiplier estimates.
b. timing problems.
c. disagreements over potential GDP.
d. uncertain forecasts.
e. All of the above are correct.
Which of the following is a correct conclusion regarding the successful implementation of fiscal policy?
a. Successful fiscal policy would be easy to achieve if Congress would stay out of the
economy and permit natural market forces to restore full-employment equilibrium.
b. Successful fiscal policy is difficult to achieve because in the real world the investment, net
exports, and consumption schedules are constantly shifting.
c. Successful fiscal policy is much easier to achieve today because econometric models make
economic forecasting much easier.
d. As the income-expenditure model suggests, fiscal policy planners can move GDP to any
level they please by changing tax and spending levels.
The central idea of supply-side tax cuts is that certain types of tax cuts will increase
a. aggregate demand.
b. aggregate supply.
c. the supply of imports.
d. the supply of money.
A proponent of supply-side economics would advocate
a. reducing income taxes on saving.
b. reducing tax credits for research and development.
c. eliminating the depreciation allowance.
d. increasing the corporate income tax.
A reduction in the capital gains tax, often advocated by proponents of supply-side economics, is supposed to
stimulate increased
a. consumer spending.
b. net exports.
c. investment spending.
d. government spending.
Figure 10-3
____ 26. Which graph in Figure 10-3 best reflects a Keynesian view of the impact of a $500-per-person tax cut?
a. 1
b. 2
c. 3
d. 4
____ 27. Which graph in Figure 10-3 best reflects a supply-sider's view of the impact of an increase in the personal income
tax rate?
a. 1
b. 2
c. 3
d. 4
____ 28. If the demand-side effects of supply-side tax cuts are greater than the supply-side effects, then we can expect the
result to be a(n)
a. decrease in output and prices.
b. decrease in output and an increase in prices.
c. increase in output and prices.
d. increase in output and a decrease in prices.
____ 29. Which of the following conclusions about supply-side tax initiatives is accepted by most economists?
a. Supply-side tax cuts are likely to benefit the poor as much as the rich.
b. Supply-side tax cuts will almost certainly lead to smaller budget deficits.
c. Such tax cuts probably will increase aggregate supply quickly, but an increase in aggregate
demand will come later.
d. Tax reductions aimed at stimulating business investment are likely to have a greater impact
than tax reductions aimed at getting people to work longer hours or save more.
Table 10-1
Y=C+I+G
C = 500 + .8(Y - T)
I = 300
G = 700
T = .25Y
____ 30. Refer to Table 10-1. What is the equilibrium level of income in this model?
a. 5,000
b. 4,500
c. 3,750
d. 3,500
e. 3,250
____ 31. Refer to Table 10-1. What is the level of tax revenues in this model?
a. 1,000
b. 950
c. 945.5
d. 937.5
e. 437.5
____ 32. Refer to Table 10-1. What is the level of saving in this model?
a. 92.5
b. 72.5
c. 62.5
d. 52.5
e. 42.5
____ 33. What is the level of consumption in this model?
a. 2,950
b.
c.
d.
e.
2,750
2,550
2,350
2,150
AE
AS
AE1(P1)
1
0
P
Y1
Y
ASlr
P1
AS
1
AD1
0
Y1
Y
31. In the model depicted above, long-run full employment of resources occurs at the income level
a. Y1
b. Y2
c. Y3
d. cannot be determined without further information
32. In the model depicted above, if the level of income is Y1, the economy can be said to be
a. at long run full employment of resources
b. experiencing inflationary pressures
c. in a recession
d. at a point of short run disequilibrium
33. In the model depicted above, if the level of income is Y2, the economy can be said to be
a. at long run full employment of resources
b. experiencing inflationary pressures
c. in a recession
d. at a point short run equilibrium
33. In the model depicted above, if the level of income is Y1, Keynesian economics would suggest that
a. the government should increase taxes to dampen the inflationary pressures
b. the government should increase taxes to lower the government’s deficit
c. the government should decrease taxes or increase government spending to stimulate economic growth
d. the government should let the economy self adjust to a new higher level of Y.
34. In the model depicted above, if the level of Y equals Y1 and the government increases government spending, which of the
following will happen?
a. AE(P1) will initially shift to AE3(P2)
b. AE(P1) will initially shift to AE2(P1)
c. AE2(P1) will initially shift to AE3(P2)
d. none of the above will happen
35. In the model depicted above, if the government engages in expansionary fiscal policy,
a. the aggregate expenditure line will shift up and the aggregate demand curve will shift to the right
b. the aggregate expenditure line will shift up and the aggregate demand curve will not move
c. the aggregate demand curve will shift to the right and the aggregate expenditure line will not move
d. the aggregate expenditure line will shift down and the aggregate demand curve will shift to the left
36. In the model depicted above, if the economy is at a point such as (2), what will cause the economy to move to point (3)?
a. the economy will move to point (3) if the government decreases taxes
b. the economy will move to point (3) if the price level falls, encouraging people to spend more
c. the economy will move to point (3) if the price level rises, causing real wealth to fall
d. the economy will move to point (3) if interest rates fall, encouraging more investment spending in the business sector.
37. The Keynsian or demand side fiscal policy transmission process by which expansionary fiscal policy causes a change in
GDP is:
a. a rise in government spending and/or a decrease in taxes cause an increase in aggregate demand. As the economy
grows, interest rates and other prices fall, further stimulating economic growth.
b. a fall in government spending and/or an increase in taxes cause a decrease in aggregate demand. As the economy
contracts, interest rates and other prices fall, further stimulating economic growth.
c. a rise in government spending and/or a decrease in taxes cause an increase in aggregate demand. As the economy
grows, interest rates and other prices rise, causing some spending to decrease.
d. a rise in government spending accompanies by an equal rise in taxes cause a decrease in aggregate demand. As the
economy contracts, interest rates and other prices do not change. As a result, the expansion is not diminished by rising prices.
Sample 3
Answer Section
MULTIPLE CHOICE
1. B
2. C
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D
D
B
D
D
D
C
D
C
B
C
C
C
A
C
C
C
B
E
B
B
A
C
B
A
C
D
C
D
C
B