economics chapter 11

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According to Keynes, the level of economic activity is predominantly determined by the level of:
A. Aggregate supply.
B. Aggregate demand.
C. Unemployment.
D. Interest rates.

B

The use of government taxes and spending to alter economic outcomes is known as:
A. Monetary policy.
B. Fiscal policy.
C. Income policy.
D. Foreign-trade policy.

B.

Payments to individuals for which no current goods or services are exchanged are known as:
A. Social Security payroll taxes.
B. Income transfers.
C. AD shortfalls.
D. AD excesses.

B

Which of the following fiscal policies would cause a decrease in aggregate expenditures?
A. An increase in transfer payments and an increase in government spending
B. An increase in transfer payments and a decrease in taxes
C. A decrease in taxes and an increase in government spending
D. An increase in taxes and a decrease in government spending

D

From a Keynesian perspective, the way out of recession is to:
A. Wait for the economy to fix itself.
B. Monetary restraint.
C. Get consumers to spend less on goods and services.
D. Get consumers to spend more on goods and services.

D

A tax cut intended to increase aggregate demand is an example of:
A. Fiscal restraint.
B. Monetary restraint.
C, Fiscal stimulus.
D. Fiscal targeting.

C

Which of the following is a fiscal policy tool used to stimulate the economy?
A. Lower interest rates
B. Increased imports
C. Reducing inefficient employment of resources
D. Increased government purchases

D

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

C

The total change in aggregate spending generated by increased government spending depends on the:
A. Marginal propensity to consume.
B Size of the recessionary GDP gap.
C, AD shortfall.
D. AD excess.

A

Which of the following is true when the government attempts to move the economy to full employment by increasing spending?
A. The desired stimulus should be set by the AD shortfall multiplied by the multiplier.
B. It must initially spend more than the GDP gap if the aggregate supply curve is upward-sloping.
C. The total change in spending includes both the new government spending and the subsequent increases in consumer spending.
D. The desired stimulus should be set by the multiplier divided by the AD shortfall.

C

If the multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand, we can conclude that:
A. Government spending decreased by $125 million.
B. Taxes increased by $500 million.
C. Taxes decreased by $100 million.
D. Government spending decreased by $100 million.

A

Assume the MPC is 0.80. The change in total spending for the economy due to a $200 billion government spending increase is:
A. $160 billion.
B. $200 billion.
C. $800 billion.
D. $1,000 billion.

D
The value of the multiplier is equal to 1 divided by 1 minus the marginal propensity to consume. If the MPC is .8, the multiplier is 5. The amount that AD increases from fiscal stimulus is equal to the multiplier times the new spending injection or fiscal stimulus. So if the government increases spending by $200 billion, the total change in spending will by $1000 billion (5 × 200).

To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75, the government should decrease taxes by:
A. $400 billion.
B. $120 billion.
C. $30 billion.
D. $40 billion.

D
The desired fiscal stimulus is equal to the AD shortfall divided by the multiplier. ($120/4 = $30) The general formula for computing the desired tax cut is the desired fiscal stimulus divided by the MPC. ($30/.75 = $40) Therefore the government should decrease taxes by $40 billion.

Assume the MPC is 0.75. To eliminate an AD shortfall of $200 billion, the government should:
A. Decrease spending by $50 billion.
B. Increase spending by $50 billion.
C. Increase taxes by $66.7 billion.
D. Increase spending by $800 billion.

B.
The general formula for computing the desired stimulus (increase in government spending) is the AD shortfall divided by the multiplier, therefore $200 billion divided by 4 (1/(1 - .75)) is equal to $50 billion. A decrease in spending or an increase in taxes would cause the shortfall to increase.

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?
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 which 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.

B

A tax cut:
A. Directly decreases the disposable income of consumers.
B. Contains less fiscal stimulus than an increase in government spending of the same size.
C. Shifts the AD curve to the left.
D. Indirectly increases the disposable income of consumers.

B

What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount?
A. Aggregate demand falls by the amount of the government spending
B. There is no effect
C. Aggregate demand rises by the amount of the government spending
D. Aggregate demand rises by the amount of the government spending times the multiplier

C

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will:
A. Increase by $400 billion.
B. Increase by $100 billion.
C. Decrease by $400 billion.
D. Not change.

B
The balanced budget multiplier is equal to 1. In this case, a $100 billion increase in government expenditures combined with an equivalent increase in taxes increases aggregate demand by $100 billion.

The balanced budget multiplier is equal to:
A. Zero.
B. 1.
C. 1 times the change in taxes.
D. The change in government spending minus the change in taxes.

B

Which of the following is a policy option to eliminate an AD shortfall?
A Decrease government purchases
B. Reduce taxes
C. Reduce transfer payments
D All choices are correct

B

Ceteris paribus, which of the following is true about the concept of crowding out?
A. It increases the private sector's ability to raise the level of output
B. It does not affect the private sector's ability to raise the level of output
C. It reduces the private sector's ability to raise the level of output
D. It occurs when spending increases are matched with tax increases

C

The crowding out effect refers to a decrease in:
A. Consumption or investment as a result of an increase in government borrowing.
B. Investment resulting from an increase in consumption and a decrease in savings.
C. Government spending resulting from a decrease in taxes.
D. Consumption resulting from an increase in investment.

A

According to Figure 11.2, a shift from AD1 to AD2 will:
A. Move equilibrium to QF.
B. Eliminate the GDP gap because of the increase in output.
C. Move equilibrium to point Y because of an increase in the price level.
D. Move the economy to point Y and then the market mechanism will move the economy to point Z.

C

A shift from AD1 to AD2 in Figure 11.2 will:
A. Worsen the existing unemployment problem.
B. Reduce, but not close, the GDP gap.
C. Cause significant inflation.
D. Eliminate the GDP gap.

B

According to Figure 11.2, a shift from AD1 to AD2 will:
A. Move equilibrium to QF.
B. Eliminate the GDP gap because of the increase in output.
C. Move equilibrium to point Y because of an increase in the price level.
D. Move the economy to point Y and then the market mechanism will move the economy to point Z.

C

A shift from AD1 to AD2 in Figure 11.2 will:
A. Worsen the existing unemployment problem.
B. Reduce, but not close, the GDP gap.
C. Cause significant inflation.
D. Eliminate the GDP gap.

B

According to Keynes, the level of economic activity is predominantly determined by the level of:
A. Aggregate supply.
B. Aggregate demand.
C. Unemployment.
D. Interest rates.

B

The use of government taxes and spending to alter economic outcomes is known as:
A. Monetary policy.
B. Fiscal policy.
C. Income policy.
D. Foreign-trade policy

B

Payments to individuals for which no current goods or services are exchanged are known as:
A. Social Security payroll taxes.
B. Income transfers.
C. AD shortfalls.
D. AD excesses.

B

Which of the following fiscal policies would cause a decrease in aggregate expenditures?
A. An increase in transfer payments and an increase in government spending
B. An increase in transfer payments and a decrease in taxes
C. A decrease in taxes and an increase in government spending
D. An increase in taxes and a decrease in government spending

D

From a Keynesian perspective, the way out of recession is to:
A. Wait for the economy to fix itself.
B. Monetary restraint.
C. Get consumers to spend less on goods and services.
D. Get consumers to spend more on goods and services.

D

A tax cut intended to increase aggregate demand is an example of:
A. Fiscal restraint.
B. Monetary restraint.
C. Fiscal stimulus.
D. Fiscal targeting.

C

Which of the following is a fiscal policy tool used to stimulate the economy?
A. Lower interest rates
B. Increased imports
C. Reducing inefficient employment of resources
D. Increased government purchases

D

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

C

The total change in aggregate spending generated by increased government spending depends on the:
A. Marginal propensity to consume.
B. Size of the recessionary GDP gap.
C. AD shortfall.
D. AD excess.

A

Which of the following is true when the government attempts to move the economy to full employment by increasing spending?
A. The desired stimulus should be set by the AD shortfall multiplied by the multiplier.
B. It must initially spend more than the GDP gap if the aggregate supply curve is upward-sloping.
C. The total change in spending includes both the new government spending and the subsequent increases in consumer spending.
D. The desired stimulus should be set by the multiplier divided by the AD shortfall.

C

If the multiplier is 4 and a change in government spending leads to a $500 million decrease in aggregate demand, we can conclude that:
A. Government spending decreased by $125 million.
B. Taxes increased by $500 million.
C. Taxes decreased by $100 million.
D. Government spending decreased by $100 million.

A

Assume the MPC is 0.80. The change in total spending for the economy due to a $200 billion government spending increase is:
A. $160 billion.
B. $200 billion.
C. $800 billion.
D. $1,000 billion.

D

To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75, the government should decrease taxes by:
A. $400 billion.
B. $120 billion.
C. $30 billion.
D. $40 billion.

D

Assume the MPC is 0.75. To eliminate an AD shortfall of $200 billion, the government should:
A. Decrease spending by $50 billion.
B. Increase spending by $50 billion.
C. Increase taxes by $66.7 billion.
D. Increase spending by $800 billion.

B.
The general formula for computing the desired stimulus (increase in government spending) is the AD shortfall divided by the multiplier, therefore $200 billion divided by 4 (1/(1 - .75)) is equal to $50 billion. A decrease in spending or an increase in taxes would cause the shortfall to increase.

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?
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 which 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.

B

A tax cut:
A. Directly decreases the disposable income of consumers.
B. Contains less fiscal stimulus than an increase in government spending of the same size.
C. Shifts the AD curve to the left.
D. Indirectly increases the disposable income of consumers.

B

What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount?
A. Aggregate demand falls by the amount of the government spending
B. There is no effect
C. Aggregate demand rises by the amount of the government spending
D. Aggregate demand rises by the amount of the government spending times the multiplier

C

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will:
A. Increase by $400 billion.
B. Increase by $100 billion.
C. Decrease by $400 billion.
D. Not change.

B

The balanced budget multiplier is equal to:
A. Zero.
B. 1.
C. 1 times the change in taxes.
D. The change in government spending minus the change in taxes.

B

Which of the following is a policy option to eliminate an AD shortfall?
A. Decrease government purchases
B. Reduce taxes
C. Reduce transfer payments
D. All choices are correct

B

Ceteris paribus, which of the following is true about the concept of crowding out?
A. It increases the private sector's ability to raise the level of output
B. It does not affect the private sector's ability to raise the level of output
C. It reduces the private sector's ability to raise the level of output
D. It occurs when spending increases are matched with tax increases

C

The crowding out effect refers to a decrease in:
A. Consumption or investment as a result of an increase in government borrowing.
B. Investment resulting from an increase in consumption and a decrease in savings.
C. Government spending resulting from a decrease in taxes.
D. Consumption resulting from an increase in investment.

A.

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