Question 1

Fiscal restraint is defined as

Accepted Answer

A)  Tax hikes or spending cuts intended to reduce aggregate demand.
B)  Tax hikes or spending cuts intended to increase aggregate demand.
C)  Tax cuts or spending hikes intended to increase aggregate demand.
D)  Tax cuts or spending hikes intended to reduce aggregate demand.E) B) and D)
F) All of the above

Question 2

1 and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of A) $200 billion. B) $400 billion. C) $600 billion. D) $800 billion. " class="answers-bank-image d-inline" rel="preload" > Refer to Figure 11.3.Assume aggregate demand is represented by AD1 and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

Accepted Answer

A)  $200 billion.
B)  $400 billion.
C)  $600 billion.
D)  $800 billion.E) None of the above
F) C) and D)

Question 3

The second crisis of economic theory refers to

Accepted Answer

A)  The typical fiscal policy trade-off between unemployment and inflation.
B)  The dominance of Keynesian views in fiscal policy to the exclusion of newer,more enlightened viewpoints.
C)  An emphasis on the level of output without concern for the content of output in terms of fiscal policy.
D)  Our inability to maintain full employment output over any significant period of time.E) A) and B)
F) C) and D)

Question 4

The general formula for calculating the desired fiscal stimulus is

Accepted Answer

A)  AD shortfall × the multiplier.
B)  1/(AD shortfall × the multiplier) .
C)  AD shortfall ÷ the multiplier.
D)  1/(AD shortfall ÷ the multiplier) .E) A) and B)
F) A) and C)

Question 5

An example of fiscal policy occurs when the government decreases corporate income taxes.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is a policy option to eliminate an AD shortfall?

Accepted Answer

A)  Decrease government purchases.
B)  Reduce taxes.
C)  Reduce transfer payments.
D)  All of the choices are correct.E) A) and B)
F) A) and C)

Question 7

Which of the following would cause both an increase in the price level and an increase in real output?

Accepted Answer

A)  A tax hike.
B)  A decrease in production costs.
C)  An increase in transfer payments.
D)  A decrease in government spending.E) C) and D)
F) B) and C)

Question 8

The World View article in the text titled "China Sets Big Stimulus Plan in Bid to Jump-Start Growth" states that China's plan includes spending in housing,infrastructure,and agriculture,as well as a tax deduction for capital spending by companies.These policies will cause the aggregate

Accepted Answer

A)  Demand curve to shift to the left.
B)  Supply curve to shift to the left.
C)  Demand curve to shift to the right.
D)  None of the choices are correct.E) A) and B)
F) B) and C) C

Question 9

Income transfers become part of aggregate demand as soon as they occur.

Accepted Answer

A) True 
 B)False

Question 10

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion.What effect would there be on aggregate demand?

Accepted Answer

A)  No impact.
B)  $50 billion increase.
C)  More than $50 billion increase after the multiplier effect.
D)  $50 billion decrease.E) B) and C)
F) C) and D)

Question 11

The total change in aggregate spending generated by increased government spending depends on the

Accepted Answer

A)  Marginal propensity to consume.
B)  Size of the recessionary GDP gap.
C)  AD shortfall.
D)  AD excess.E) A) and D)
F) None of the above

Question 12

Fiscal policy formation causes a delay in implementation even though a recession can usually be recognized within a few weeks after it begins.

Accepted Answer

A) True 
 B)False  False

Question 13

The inflationary GDP gap differs from the AD excess when

Accepted Answer

A)  The aggregate supply curve slopes upward.
B)  The multiplier effect raises spending.
C)  The aggregate supply curve is horizontal.
D)  There is a time lag in the implementation of fiscal policy.E) A) and B)
F) A) and D)

Question 14

Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?

Accepted Answer

A)  Price level changes will make up for the difference between the fiscal stimulus and the AD shortfall.
B)  The multiplier process will contribute to an additional increase in aggregate demand that will cause an inflationary gap.
C)  The government can increase taxes to create an additional increase in aggregate demand.
D)  The price level is constant.E) B) and C)
F) B) and D)

Question 15

If the desired fiscal restraint is $80 billion and the AD excess is $160 billion,we can conclude that

Accepted Answer

A)  The MPS is 0.50.
B)  The multiplier is 0.50.
C)  There is a recessionary gap.
D)  The MPC is 2.0.E) C) and D)
F) All of the above

Question 16

In a diagram of aggregate demand and supply curves,the AD shortfall is measured as the

Accepted Answer

A)  Vertical distance between the equilibrium price and the price at which the aggregate demand would intersect aggregate supply at full employment.
B)  Horizontal distance between the equilibrium output and the full-employment output.
C)  Horizontal distance between the aggregate demand curve necessary for full employment and the aggregate demand curve that intersects AS at the equilibrium price.
D)  Vertical distance between the recessionary GDP gap and the inflationary GDP gap.E) A) and D)
F) None of the above

Question 17

Assume the MPC is 0.80.If the government wants to eliminate an AD shortfall of $300 billion,it should

Accepted Answer

A)  Cut taxes by $75 billion.
B)  Cut taxes by $240 billion.
C)  Increase taxes by $60 billion.
D)  Cut taxes by $60 billion.E) A) and D)
F) All of the above

Question 18

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward-sloping,

Accepted Answer

A)  The economy will move to full employment.
B)  An AD surplus will occur.
C)  A recessionary GDP gap will still exist.
D)  An inflationary GDP gap will develop.E) None of the above
F) A) and B) C

Question 19

It is impossible for the government to maintain a balanced budget while using fiscal policy to eliminate a recessionary gap.

Accepted Answer

A) True 
 B)False

Question 20

1 and full-employment output is $5.6 trillion.To restore price stability,the AD curve must shift A) Leftward by $400 billion. B) Leftward by $800 billion. C) Rightward by $400 billion. D) Rightward by $800 billion. " class="answers-bank-image d-inline" rel="preload" > 
-Refer to Figure 11.3.Assume aggregate demand is represented by AD1 and full-employment output is $5.6 trillion.To restore price stability,the AD curve must shift

Accepted Answer

A)  Leftward by $400 billion.
B)  Leftward by $800 billion.
C)  Rightward by $400 billion.
D)  Rightward by $800 billion.E) B) and D)
F) A) and B)

Exam 11: Fiscal Policy

Fiscal restraint is defined as

Correct AnswerverifiedShow Answer

Refer to Figure 11.3.Assume aggregate demand is represented by AD1 and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

Correct AnswerverifiedShow Answer

The second crisis of economic theory refers to

Correct AnswerverifiedShow Answer

The general formula for calculating the desired fiscal stimulus is

Correct AnswerverifiedShow Answer

An example of fiscal policy occurs when the government decreases corporate income taxes.

Correct AnswerverifiedShow Answer

Which of the following is a policy option to eliminate an AD shortfall?

Correct AnswerverifiedShow Answer

Which of the following would cause both an increase in the price level and an increase in real output?

Correct AnswerverifiedShow Answer

The World View article in the text titled "China Sets Big Stimulus Plan in Bid to Jump-Start Growth" states that China's plan includes spending in housing,infrastructure,and agriculture,as well as a tax deduction for capital spending by companies.These policies will cause the aggregate

Correct AnswerverifiedC

Income transfers become part of aggregate demand as soon as they occur.

Correct AnswerverifiedShow Answer

Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion.What effect would there be on aggregate demand?

Correct AnswerverifiedShow Answer

The total change in aggregate spending generated by increased government spending depends on the

Correct AnswerverifiedShow Answer

Fiscal policy formation causes a delay in implementation even though a recession can usually be recognized within a few weeks after it begins.

Correct AnswerverifiedFalse

The inflationary GDP gap differs from the AD excess when

Correct AnswerverifiedShow Answer

Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?

Correct AnswerverifiedShow Answer

If the desired fiscal restraint is $80 billion and the AD excess is $160 billion,we can conclude that

Correct AnswerverifiedShow Answer

In a diagram of aggregate demand and supply curves,the AD shortfall is measured as the

Correct AnswerverifiedShow Answer

Assume the MPC is 0.80.If the government wants to eliminate an AD shortfall of $300 billion,it should

Correct AnswerverifiedShow Answer

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward-sloping,

Correct AnswerverifiedC

It is impossible for the government to maintain a balanced budget while using fiscal policy to eliminate a recessionary gap.

Correct AnswerverifiedShow Answer

-Refer to Figure 11.3.Assume aggregate demand is represented by AD1 and full-employment output is $5.6 trillion.To restore price stability,the AD curve must shift

Correct AnswerverifiedShow Answer

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Refer to Figure 11.3.Assume aggregate demand is represented by AD₁ and full-employment output is $5.6 trillion.The economy confronts an inflationary GDP gap of

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C

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False

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C

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-Refer to Figure 11.3.Assume aggregate demand is represented by AD₁ and full-employment output is $5.6 trillion.To restore price stability,the AD curve must shift

Correct Answer
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