Economics Today, 17e (Miller) Chapter 13 Fiscal Policy 13.1 Discretionary Fiscal Policy 1) When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising A) monetary policy B) discretionary fiscal policy C) a Ricardian policy D) a laissez-faire policy Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 2) Which of the following is an example of fiscal policy? A) a reduction in the federal funds rate B) a reduction in the money supply C) a reduction in lump-sum taxes D) an increase in the physical stock of capital Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 3) Which of the following would shift the aggregate demand curve to the right? A) An increase in government spending B) An increase in taxes C) An increase in interest rates D) An increase in input prices Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 4) Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap? A) An increase in government spending B) An increase in taxes C) A decrease in interest rates D) An increase in the money supply Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 5) An increase in government spending would cause which of the following to happen? A) The aggregate demand curve would shift to the right B) The aggregate demand curve would shift to the left C) The aggregate supply curve would shift to the right D) The aggregate supply curve would shift to the left Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 6) Suppose the economy is experiencing a recessionary gap at the current level of GDP Which of the following fiscal policy actions would be most appropriate given this recessionary gap? A) decreasing interest rates B) increasing the money supply C) decreasing taxes D) a simultaneous and equal reduction in taxes and reduction in government spending Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 7) Fiscal policy refers to the A) manipulation of the money supply in order to increase the amount of paper currency in circulation B) adjustment of government spending and taxes in order to achieve certain national economic goals C) adjustment of national income data to account for price level changes D) changing the way unemployment data is calculated so as to make it appear that unemployment is lower than it actually is Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 8) Fiscal policy involves which of the following? A) Tax policy B) Interest rates C) Buying and selling government-agency bonds D) None of the above Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 9) When television commentators refer to "tax and spend" policy, they are referring to A) fiscal policy B) monetary policy C) the Federal Reserve policy D) automatic stabilizers Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 10) Which of the following is NOT a fiscal policy action? A) increasing government expenditures on military hardware B) decreasing government spending on the arts C) raising the quantity of money in circulation D) lowering income tax rates Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 11) Fiscal policy is defined as A) the design of a tax system to transfer income from the rich to the poor B) the use of Congressional power to pursue social and political goals C) the discretionary changing of government expenditures and/or taxes to achieve national economic goals D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 12) Which of the following is an example of a discretionary fiscal policy action? A) increasing government spending to deal with a recession B) a decrease in tax revenues as taxpayers' incomes decrease C) increasing the minimum wage rate D) raising regulations in the health care industry Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 13) Which of the following is a discretionary fiscal policy action? A) an increase in the amount of unemployment compensation because more people become unemployed B) a progressive tax system that leads to an increase in income tax revenues during an economic boom C) a deliberate tax cut when the economy experiences high unemployment D) an increase in Supplemental Security Income payments when more people become eligible for the benefits Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 14) Typical goals for fiscal policy are A) high employment and price stability B) high prices for consumers and low prices for businesses C) running high deficits and raising consumer prices D) increasing the money supply so the government can spend more Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 15) Fiscal policy to solve short-run economic problems supports the Keynesian notion of A) there being no government role in the economy B) an active government role in the economy C) the need for autocratic rule D) the long-run nature of the economy Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 16) According to traditional Keynesian economics, expansionary fiscal policy initiated by the federal government A) is never appropriate B) is an appropriate way to prevent recessions and depressions C) is an appropriate way to slow down an over-heated economy D) will always fail due to crowding out effects Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 17) Discretionary fiscal policy is A) automatic changes in government expenditures and interest rates that achieve certain national economic goals B) deliberate changes in government expenditures or taxes in order to achieve certain national economic goals C) used to achieve full employment by changing monetary growth targets D) changes in support for research and education in order to achieve certain national economic goals Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 18) All the following actions represent fiscal policy EXCEPT A) a reduction in the money supply by the Federal Reserve B) an increase in government spending C) a reduction in individual income tax rates D) an increase in corporate income tax rates Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 19) Fiscal policy is implemented by A) the central bank B) private businesses C) the Internal Revenue Service D) the federal government Answer: D Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 20) Which of the following represent expansionary fiscal policy? A) a reduction in government spending B) an increase in average individual income tax rates C) a cut in corporate income tax rates D) an increase in marginal individual income tax rates Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 21) The discretionary change of government expenditures or taxes to achieve national economic goals is A) a recessionary gap B) Ricardian-equivalence theorem C) supply-side economics D) fiscal policy Answer: D Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 22) Discretionary fiscal policy is best described as A) a deliberate attempt to cause the economy to move to full employment and price stability more quickly than it might otherwise B) a deliberate attempt to improve the functioning of free markets C) an automatic change in income transfer payments to keep the economy at full employment D) the design of a tax system that automatically stabilizes economic activity over time Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 23) Keynes believed that the way to prevent recessions and depressions was to A) reduce spending when there is a recessionary gap B) only change tax rates as a means of regulating the economy C) maximize the crowding out effect D) increase aggregate demand through expansionary fiscal policy Answer: D Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 24) Fiscal policy involves discretionary changes in A) interest rates B) exchange rates C) income tax rates D) the rate of growth of the quantity of money in circulation Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 25) According to traditional Keynesian analysis, fiscal policy operates by A) informing consumers and business people about its plans for the economy so they will know how to adjust their behavior B) indirectly affecting aggregate demand through its effect on interest rates C) directly affecting aggregate demand D) directly affecting aggregate supply Answer: C Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 26) To close a recessionary gap through fiscal policy, the government should A) decrease government spending in order to increase aggregate supply B) increase government spending in order to increase aggregate demand C) reduce taxes in order to stimulate investment, and thus increase aggregate supply D) increase government spending and taxes in order to both increase aggregate demand and aggregate supply Answer: B Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 27) An example of fiscal policy is A) a reduction in government spending B) a reduction in investment spending by the private sector C) an increase in autonomous spending by consumers D) an increase in Social Security spending by the elderly Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition Copyright © 2014 Pearson Education, Inc 28) Fiscal policy includes all of the following EXCEPT A) changing taxes B) changing government spending C) policies that influence aggregate demand D) policies that influence the rate of growth of the quantity of money in circulation Answer: D Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 29) If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will A) generate higher prices in the short run, but will induce aggregate supply to increase in the long run B) generate an increase in real GDP and higher prices in both the short run and the long run C) generate an increase in real GDP without higher prices in the short run, but then real GDP will return to its long-run level, and the price level will increase D) generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more Answer: D Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 30) If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should A) reduce aggregate demand by cutting government spending or raising taxes B) reduce aggregate demand by increasing government spending or cutting taxes C) increase aggregate supply by cutting government spending or raising taxes D) increase aggregate supply by increasing government spending or lowering taxes Answer: A Diff: Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 10 Copyright © 2014 Pearson Education, Inc 24) The advantage of automatic stabilizers is that they A) help to balance the budget B) reduce the size of the net public debt C) reduce the fluctuations in the business cycle D) help reduce the inflation rate Answer: C Diff: Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 25) All of the following are automatic stabilizers EXCEPT A) the federal income tax system B) welfare payments C) discretionary tax cuts D) unemployment compensation Answer: C Diff: Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 26) Automatic stabilizers are fiscal policy measures that A) must be determined by the Congress in each budget B) not require new legislation C) are determined by the Federal Reserve System D) are part of discretionary fiscal policy Answer: B Diff: Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 27) Automatic stabilizers A) work counter-cyclically to moderate the business cycle B) often make any downturn in the economy worse C) must be determined by the Congress in each budget D) are never altered Answer: A Diff: Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 81 Copyright © 2014 Pearson Education, Inc 28) Automatic stabilizers are designed to A) promote global trade B) simplify the tax system C) moderate changes in disposable income D) stabilize the bi-partisan budget process Answer: C Diff: Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 29) What are the automatic stabilizers the United States has in place, and how they function differently from discretionary fiscal policy? Answer: Automatic stabilizers are provisions of the tax law that cause changes in government spending or taxes without the action of Congress or the President The progressive income tax takes more money out of the hands of people during inflationary times and less during recessions Unemployment compensation gives spending power to people even when they are not working due to a recession The key difference is that automatic stabilizers work without the lags associated with discretionary fiscal policy Diff: Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 13.5 What Do We Really Know About Fiscal Policy? 1) If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect of this fiscal policy will be to A) increase real Gross Domestic Product (GDP) B) increase the price level C) increase either the real Gross Domestic Product (GDP) or the price level, depending on the length of the time lag D) decrease both real Gross Domestic Product (GDP) and the price level Answer: B Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 82 Copyright © 2014 Pearson Education, Inc 2) During normal times, discretionary fiscal policy A) is more effective in influencing real GDP than at times of a recession B) is probably not very effective in influencing real GDP due to time lags C) is more effective in influencing real GDP than automatic stabilizers D) works well because there are no lag problems in influencing real GDP Answer: B Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 3) Discretionary fiscal policy A) is not very effective in influencing real GDP during normal times because of time lags B) can be very effective in influencing real GDP during abnormal times, such as when a nation is at war C) may reassure investors and consumers that the federal government will be able to avert a major economic downturn D) all of the above Answer: D Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 4) During which time will fiscal policy be the most effective? A) Normal times B) Times of war C) In the middle of expansions D) Times of stagflation Answer: B Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 83 Copyright © 2014 Pearson Education, Inc 5) During normal times, A) fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be B) fiscal policy can immediately correct problems in the economy C) the Ricardian equivalence theorem makes fiscal policy very effective D) fiscal policy is not effective because of the recognition time lag Answer: D Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 6) Deficit financing A) is when the government adjusts taxes to raise money to pay for government projects B) is the mechanism behind the Laffer curve C) is how the automatic stabilizers work D) is when discretionary fiscal policy leads to spending more than is collected in taxes Answer: D Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 7) The traditional Keynesian approach to fiscal policy assumes A) the price level is constant B) government expenditures are often substitutes for private expenditures C) the Ricardian equivalence theorem is correct D) the validity of supply-side economics Answer: A Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 84 Copyright © 2014 Pearson Education, Inc 8) The traditional Keynesian approach to fiscal policy assumes A) current taxes are the only taxes taken into account by firms and consumers B) the focus of attention should be the long run C) prices are flexible while interest rates are not D) exchange rates are fixed Answer: A Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 9) The traditional Keynesian approach to fiscal policy assumes that A) the effect of unemployment compensation is to destabilize the economy B) an equal income distribution ensures a stable economy C) consumers spend more when their incomes are higher D) cutting taxes is a more effective way to stimulate the economy than is increasing government spending Answer: C Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 10) Fiscal policy during periods of relatively low unemployment and low inflation have A) little effect due to time lags and the crowding-out effect B) significant effect due to the timely intervention of the president and congress C) significant effect because the changes in fiscal policy gives investors confidence in the economy D) little effect because the global market makes up fifty percent of aggregate spending Answer: A Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 85 Copyright © 2014 Pearson Education, Inc 11) What are the effects of fiscal policy during normal times? What are the effects of fiscal policy during abnormal times? Answer: During normal times, discretionary fiscal policy may not have its intended effects and, therefore, may actually cause more harm than good The various time lags and the possible offsets make it fairly ineffective as a tool During a major recession, fiscal policy is more likely to be effective, since the offsets are less likely Diff: Topic: 13.5 What Do We Really Know About Fiscal Policy? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 13.6 Appendix D: Changes in Government Spending 1) In the traditional Keynesian model, if the government increases spending, then A) real Gross Domestic Product (GDP) will rise and the price level will remain constant B) real Gross Domestic Product (GDP) will increase and the price level will fall C) both real Gross Domestic Product (GDP) and the price level will rise D) real Gross Domestic Product (GDP) will remain constant and the price level will rise Answer: A Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 2) In the traditional Keynesian model, an increase in government spending A) causes the C + I + G + X line to shift upward by the full amount of the increase in government spending B) causes the C + I + G + X line to shift upward by an amount less than the increase in government spending C) causes the C + I + G + X line to shift upward by more than the increase in government spending D) causes no change in the C + I + G + X line Answer: A Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 86 Copyright © 2014 Pearson Education, Inc 3) In the traditional Keynesian model, if the government increases spending, then A) consumption will increase, and so real Gross Domestic Product (GDP) will increase by more than the increase in government spending B) consumption will decrease, and so real Gross Domestic Product (GDP) will increase by less than the increase in government spending C) consumption will remain the same, and so real Gross Domestic Product (GDP) will increase by the same amount of the increase in government spending D) consumption will increase or decrease, and so real Gross Domestic Product (GDP) will increase or decrease depending on the change in consumption Answer: A Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 4) According to the traditional Keynesian analysis, if the government increases spending by $10 million, then A) consumption will increase, and so total expenditures will increase by more than $10 million B) consumption will decrease, and so total expenditures will increase by less than the $10 million C) consumption will remain the same, and so total expenditures will increase by exactly $10 million D) consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption Answer: A Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 5) In the traditional Keynesian model, if the government increases government spending, A) the C + I + G + X line will shift down but the aggregate demand curve will not shift B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right D) the C + I + G + X line will shift up but the aggregate demand curve will not shift Answer: C Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 87 Copyright © 2014 Pearson Education, Inc 6) In the traditional Keynesian model, an increase in government spending raises total planned real expenditures by more than the original increase in government spending because A) consumption spending depends negatively on real GDP B) consumption spending depends positively on real GDP C) consumption spending is not related to real GDP D) of the crowding-out effect on consumption spending Answer: B Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 7) In the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT A) an increase in aggregate demand B) a higher price level C) an increase in consumption D) higher real GDP Answer: B Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 8) The traditional Keynesian approach concludes that an increase in government spending A) generates a greater increase in investment spending B) generates an equal increase in total spending because government spending makes up part of total spending C) generates a greater increase in total spending because consumption spending increases as incomes increase D) has no effect on total spending because consumers increase saving by an equal amount Answer: C Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 88 Copyright © 2014 Pearson Education, Inc 13.7 Appendix D: Changes in Taxes 1) According to the traditional Keynesian approach, if the government increases taxes, then A) real Gross Domestic Product (GDP) will fall and the price level will remain constant B) real Gross Domestic Product (GDP) will fall but the price level will rise C) both real Gross Domestic Product (GDP) and the price level will fall D) real Gross Domestic Product (GDP) will remain constant but the price level will rise Answer: A Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 2) In the traditional Keynesian model, a tax cut A) causes the C + I + G + X line to shift upward B) causes the C + I + G + X line to shift downward C) causes a movement along the C + I + G + X line D) does not affect the C + I + G + X line Answer: A Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 3) In the traditional Keynesian model, an increase in current taxes A) increases disposable income but does not affect consumption B) decreases both disposable income and consumption C) decreases disposable income but increases consumption D) has no effect on either disposable income or consumption Answer: B Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 89 Copyright © 2014 Pearson Education, Inc 4) According to the traditional Keynesian approach, a tax cut raises aggregate demand because A) taxes are part of the C + I + G + X line B) disposable income available to consumers increases C) taxpayers anticipate a tax increase in the future D) a tax cut always results in a balanced budget Answer: B Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 5) In the traditional Keynesian model, if the government cuts taxes, then A) both consumption and real Gross Domestic Product (GDP) will increase B) both consumption and real Gross Domestic Product (GDP) will decrease C) consumption will increase but Gross Domestic Product (GDP) will decrease D) consumption will decrease but Gross Domestic Product (GDP) will increase Answer: A Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 6) In the traditional Keynesian model, if the government cuts current taxes, A) the C + I + G + X line will shift down but the aggregate demand curve will not shift B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right D) the C + I + G + X line will shift up but the aggregate demand curve will not shift Answer: C Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 7) In the traditional Keynesian model, an income tax cut raises real GDP because A) consumption spending depends negatively on after-tax income B) consumption spending depends positively on after-tax income C) consumption spending is not related to after-tax income D) of the crowding-out effects of taxes Answer: B Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 90 Copyright © 2014 Pearson Education, Inc 8) In the traditional Keynesian model, an increase in taxes leads to all of the following EXCEPT A) a decrease in aggregate demand B) a lower price level C) a decrease in consumption D) lower real GDP Answer: B Diff: Topic: 13.6 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 9) According to the Keynesian approach, an increase in taxes A) will reduce consumption exactly by the amount of the taxes B) will reduce consumption by an amount less than the change in taxes C) will not impact consumption, as most consumption is autonomous D) will increase consumption, as the government will spend the extra tax revenue and that increases consumption Answer: B Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 10) According to the Keynesian approach, a decrease in taxes A) will increase consumption exactly by the amount of the taxes B) will increase consumption by an amount of less than the change in taxes C) will not impact consumption, as most consumption is autonomous D) will decrease consumption, as the government will have to spend less Answer: B Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 91 Copyright © 2014 Pearson Education, Inc 11) The Keynesian perspective on the effect of an increase in taxes is that this policy action A) generates reductions in consumption and in saving B) generates reductions in consumption and an increase in saving to pay for the new taxes C) has no impact on consumption D) increases current consumption and reduces future consumption Answer: A Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 12) Suppose there are two policy options facing a vote in the Senate In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion A Keynesian economist would argue for A) the tax option because it also affects the incentives workers face Long-run aggregate supply will increase with the tax cut, but not with the spending increase B) the tax option because it is easier to pass The effects on total spending would be identical C) the spending option because it won't affect the deficit the way the tax cut would D) the spending option because it has a bigger impact on total spending The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier Answer: D Diff: Topic: 13.7 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 92 Copyright © 2014 Pearson Education, Inc 13.8 Appendix D: The Balanced-Budget Multiplier 1) In Country Z, the government simultaneously increases its expenditures by $25 billion and increases taxes by $25 billion If the MPS is equal to 0.2, the government's action real GDP by A) increases; $125 billion B) increases; $25 billion C) increases; $100 billion D) has no effect on; $0 Answer: B Diff: Topic: 13.8 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 2) In Country Z, the government simultaneously decreases its expenditures by $20 billion and decreases taxes by $20 billion If the MPS is equal to 0.2, the government's action real GDP by A) decreases; $100 billion B) decreases; $20 billion C) decreases; $80 billion D) has no effect on; $0 Answer: B Diff: Topic: 13.8 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 3) The balanced-budget multiplier is equal to A) the percentage increase in government expenditures B) the reciprocal of the increase in government expenditures C) the percentage increase in taxes D) Answer: D Diff: Topic: 13.8 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 93 Copyright © 2014 Pearson Education, Inc 4) According to the traditional Keynesian analysis, if the government increases spending and pays for all of it by raising current taxes, then A) aggregate demand will decrease B) a budget deficit will occur C) a budget surplus will occur D) aggregate demand will increase Answer: D Diff: Topic: 13.8 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 5) According to the traditional Keynesian approach, if the government increases spending by $5 million and raises current taxes by $5 million at the same time, then A) real GDP will increase by $5 million B) real GDP will decrease by $5 million C) real GDP will decrease by more than $5 million D) real GDP will remain the same Answer: A Diff: Topic: 13.8 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 13.9 Appendix D: The Fixed Price Level Assumption 1) The Keynesian approach assumes that A) there is no unemployment in the economy B) the economy is self-regulating C) the government budget is always in deficit D) the price level is fixed Answer: D Diff: Topic: 13.9 Appendix D: The Fixed Price Level Assumption Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 94 Copyright © 2014 Pearson Education, Inc 2) If the price level is fixed, then an increase in government spending will lead to A) a larger increase in nominal GDP than in real GDP B) a smaller increase in nominal GDP than in real GDP C) no increase in either nominal GDP or real GDP D) an increase in nominal GDP by the same amount as an increase in real GDP Answer: D Diff: Topic: 13.9 Appendix D: The Fixed Price Level Assumption Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 3) According the traditional Keynesian approach, an increase in government spending is effective in lowering unemployment if A) the price level is fixed B) the price level is flexible C) the price level does not exist D) Ricardian equivalence occurs, regardless of the price level Answer: A Diff: Topic: 13.9 Appendix D: The Fixed Price Level Assumption Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 95 Copyright © 2014 Pearson Education, Inc ... Fiscal policy is implemented by A) the central bank B) private businesses C) the Internal Revenue Service D) the federal government Answer: D Diff: Topic: 13. 1 Discretionary Fiscal Policy Learning... A) a recessionary gap B) Ricardian-equivalence theorem C) supply-side economics D) fiscal policy Answer: D Diff: Topic: 13. 1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental... Diff: Topic: 13. 1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytic skills Question Status: Previous Edition 13 Copyright