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Macro Econ: Chapter 9

Terms in this set (73)

Fiscal policy refers to:
A) the techniques used by a business firm to reduce its tax liability.
B) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's money supply.
C) the spending and taxing policies used by the government to influence the economy.
D) the government's ability to regulate a firm's behavior in the financial markets.
C) the spending and taxing policies used by the government to influence the economy.
Which of the following is NOT a category of fiscal policy?
A) government policies regarding the purchase of goods and services
B) government policies regarding taxation
C) government policies regarding money supply in the economy
D) government policies regarding transfer payments and welfare benefits
C) government policies regarding money supply in the economy
What determines tax revenues?
A) the income tax rate
B) the rate of interest
C) the money supply in the economy
D) the rate of inflation
A) the income tax rate
Which of the following is INCORRECT regarding tax revenues?
A) they increase during recessions
B) they change with changes in the tax rate
C) they are a revenue source in the government's budget
D) they increase the rate of interest
A) they increase during recessions
During recessions, government spending usually
A) decreases because unemployment payments decrease.
B) increases because unemployment payments increase.
C) decrease because unemployment payments increase.
D) increases because unemployment payments decrease.
B) increases because unemployment payments increase.
Disposable income
A) increases when net taxes increase.
B) increases when income increases.
C) decreases when saving increases.
D) increases when saving decreases.
B) increases when income increases.
When the government sector is included in the income-expenditure model, the equation for aggregate income is
A) Y = C + S - T.
B) Y = C + I.
C) Y = C + I + G.
D) Y = C + S + I.
C) Y = C + I + G.
The difference between what a government spends and what it collects in taxes in a year is
A) net revenue.
B) net taxes.
C) the government budget deficit or surplus.
D) the government debt.
C) the government budget deficit or surplus.
Bill's income is $1,000 and his net taxes are $350. His disposable income is
A) $1,350.
B) $650.
C) -$350.
D) $750.
B) $650.
In 2007, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2007, the city of Canfield had a
A) budget surplus of $450,000.
B) budget surplus of $50,000.
C) budget deficit of $50,000.
D) budget surplus of $5,000.
B) budget surplus of $50,000.
In 2007, the city of Miketown collected $250,000 in taxes and spent $350,000. In 2007, the city of Miketown had a
A) budget surplus of $100,000.
B) budget surplus of 57%.
C) budget deficit of $100,000.
D) budget deficit of $200,000.
C) budget deficit of $100,000.
After government is added to the income-expenditure model, the formula for the aggregate consumption function is
A) C = a - b(Y - T).
B) C = a - b(T - Y).
C) C = a + b(Y + T).
D) C = a + b(Y - T).
D) C = a + b(Y - T).
The aggregate consumption function is C = 100 + .6Yd. If income is $1,000 and net taxes are $300, consumption equals
A) 800.
B) 520.
C) 580.
D) 700.
B) 520.
The aggregate consumption function is C = 100 + .8Yd. If income is $600 and net taxes are zero, consumption equals
A) zero.
B) 460.
C) 580.
D) 360.
C) 580.
If output is less than planned aggregate expenditure, there will be
A) an unplanned increase in inventories.
B) an unplanned decrease in inventories.
C) no change in inventories.
D) a planned increase in inventories.
B) an unplanned decrease in inventories.
Assuming there is no foreign trade in the economy, the economy is in equilibrium when
A) S + T = C + I.
B) I + G = S + T.
C) IT = S + G.
D) G + T = S + I.
B) I + G = S + T.
Assuming there is no foreign trade in the economy, equilibrium is achieved when government purchases equal
A) saving minus net taxes minus consumption.
B) saving plus net taxes minus investment.
C) net taxes plus investment minus saving.
D) net taxes minus investment minus saving.
B) saving plus net taxes minus investment.
If planned injections exceed leakages, output will
A) decrease.
B) increase.
C) remain constant.
D) either increase or decrease.
B) increase.
For the economy to be in equilibrium,
A) government purchases must equal tax revenue and saving must equal investment.
B) government purchases must equal the sum of tax revenue, saving and investment.
C) government purchases plus investment must equal saving plus tax revenue.
D) investment plus tax revenue must equal government purchases plus saving.
C) government purchases plus investment must equal saving plus tax revenue.
The economy is in equilibrium when aggregate output equals consumption spending.
FALSE
For the economy to be in equilibrium, the following condition must be satisfied: G + I = S + T.
TRUE
When investment is greater than planned investment, output grows.
FALSE
Disposable income is income less net taxes.
TRUE
If the government wants to reduce unemployment, government purchases should be ________ and/or taxes should be ________.
A) increased; increased
B) decreased; decreased
C) decreased; increased
D) increased; decreased
D) increased; decreased
The government purchases multiplier is
A) the difference between the old equilibrium level of output and the new equilibrium level of output.
B) the ratio of the change in government purchases to the change in the equilibrium level of output.
C) the ratio of the change in the equilibrium level of output to a change in government purchases.
D) the difference between the new and old levels of government purchases.
C) the ratio of the change in the equilibrium level of output to a change in government purchases.
A decrease in lump-sum taxes will
A) make the consumption function flatter.
B) make the consumption function steeper.
C) shift the consumption function downward.
D) shift the consumption function upward.
D) shift the consumption function upward.
The tax multiplier is
A) the ratio of the change in taxes to the change in the equilibrium level of output.
B) the MPC multiplied by the MPS.
C) the difference in taxes multiplied by the change in the equilibrium level of output.
D) the ratio of the change in the equilibrium level of output to the change in taxes.
D) the ratio of the change in the equilibrium level of output to the change in taxes.
As the size of the MPC increases, the value of the balanced-budget multiplier
A) increases.
B) decreases.
C) remains constant.
D) could either increase or decrease.
C) remains constant.
Suppose that in the beginning of 2007 the federal debt was $9 trillion. During 2007, the government balanced its budget. At the end of 2007, the federal debt
A) increased.
B) stayed the same.
C) decreased.
D) was eliminated.
B) stayed the same.
If autonomous spending increases, the aggregate expenditure function becomes steeper.
FALSE
If the government increases taxes by $4 billion and increases spending by $4 billion, equilibrium output increases by $4 billion.
TRUE
A tax cut of $12 billion will have less effect on the economy than an increase in government purchases of $12 billion.
TRUE
The total amount owed by the federal government to the public is the
A) federal budget deficit.
B) federal debt.
C) net tax revenue.
D) fiscal drag.
B) federal debt.
What is the largest expenditure source in the government's budget?
A) consumption
B) transfer payments
C) net interest payments
D) net subsidies
B) transfer payments
What is the largest source of revenue in the government's budget?
A) social insurance
B) indirect business taxes
C) corporate taxes
D) personal taxes
D) personal taxes
A government's debt is reduced when it
A) balances is budget.
B) sells more bonds.
C) runs a deficit.
D) runs a surplus.
D) runs a surplus.
When a government runs a deficit
A) its debt increases.
B) it must raise taxes
C) its debt decreases.
D) it must cut spending.
A) its debt increases.
The amount the government owes to the public is the deficit.
FALSE
If tax receipts are less than government expenditures the government is running a deficit.
TRUE
Defense spending is the largest part of the U.S. government spending.
FALSE
The government budget is balanced when tax receipts equal government spending.
TRUE
Which of the following is a CORRECT sequence of events during a recession?
A) unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises
B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises
C) unemployment rises, income falls, tax revenue rises, unemployment benefits fall, and the budget deficit falls
D) unemployment rises, income rises, tax revenue rises, unemployment benefits rise, and the budget deficit rises
B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises
Which of the following is a CORRECT sequence of events during an expansion?
A) unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit falls
B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises
C) unemployment rises, income falls, tax revenue rises, unemployment benefits fall, and the budget deficit falls
D) unemployment falls, income rises, tax revenue rises, unemployment benefits fall, and the budget deficit falls
D) unemployment falls, income rises, tax revenue rises, unemployment benefits fall, and the budget deficit falls
The presence of automatic stabilizers means that the federal deficit is ________ than it otherwise would be in a recession and ________ than it otherwise would be in an expansion.
A) larger; smaller
B) smaller; larger
C) smaller; smaller
D) larger; larger
A) larger; smaller
During a recession, automatic stabilizers cause the federal deficit to
A) decrease.
B) either increase or decrease.
C) remain unchanged.
D) increase.
D) increase.
An example of an automatic stabilizer is
A) the food stamp program.
B) changing the tax laws to increase the marginal tax rates.
C) the indexation of social security benefits to the consumer price index.
D) the interest the government pays on loans.
A) the food stamp program.
If the economy is in a recession, the full-employment deficit is ________ the actual deficit.
A) larger than
B) equal to
C) smaller than
D) equal to or larger than
C) smaller than
If the economy's full-employment output is $6 trillion, actual output is $3.5 trillion, and the budget deficit is $20 billion, the deficit in this case is known as a
A) natural employment deficit.
B) cyclical deficit.
C) structural deficit.
D) debt deficit.
B) cyclical deficit.
If the economy's full-employment output is $9 trillion, actual output is $9 trillion, and the budget deficit is $20 billion, the deficit in this case is known as a
A) natural employment deficit.
B) cyclical deficit.
C) structural deficit.
D) fiscal deficit.
C) structural deficit.
Assume that in the United States the actual deficit is $300 billion. If the United States were at full employment, the deficit would be $100 billion. The structural deficit in the United States is
A) $100 billion.
B) $200 billion.
C) $300 billion.
D) $400 billion.
A) $100 billion.
Assume that in the Atlantis the actual deficit is $200 billion. If the Atlantis were at full employment, the deficit would be $50 billion. The structural deficit in the Atlantis is
A) $100 billion.
B) $200 billion.
C) $50 billion.
D) $150 billion.
C) $50 billion.
In which case will the government collect more tax revenue?
A) 40% tax rate and $40,000 average income
B) 90% tax rate and $10,000 average income
C) 20% tax rate and $90,000 average income
D) 4% tax rate and $80,000 average income
C) 20% tax rate and $90,000 average income
If taxes are a function of income, then the AE function is
A) flatter than if taxes are a lump-sum amount.
B) steeper than if taxes are a lump-sum amount.
C) vertical.
D) downward sloping.
A) flatter than if taxes are a lump-sum amount.
Related to the Economics in Practice on p. 174 [486]: The value of the rebate checks issued by the government in 2008 will impact the economy and be affected by the
A) government spending multiplier.
B) tax multiplier.
C) money multiplier.
D) balanced-budget multiplier.
B) tax multiplier.
Related to the Economics in Practice on p. 174 [486]: As a direct stimulus for the economy, tax rebates will generally have ________ increasing government spending.
A) a greater impact than
B) a smaller impact than
C) an equal impact to
D) no impact, as opposed to
B) a smaller impact than
During recessions, automatic stabilizers work to reduce government expenditures and increase government revenues.
FALSE
The structural deficit is the deficit at full employment.
TRUE
In an expansion the U.S. federal government deficit automatically grows.
FALSE
Automatic stabilizers include those elements of government spending that automatically grow during a recession.
TRUE
The formula for the government spending multiplier is
A) 1/(1 + MPC).
B) 1/MPS.
C) 1/MPC.
D) 1/(1 + MPS).
B) 1/MPS.
The formula for the tax multiplier is
A) -(MPS/MPC).
B) MPS/MPC.
C) -(MPC/MPS).
D) -1/MPS.
C) -(MPC/MPS).
If the MPS is 0.2, the tax multiplier is
A) -4.
B) -1.11.
C) -9.
D) -5.
A) -4.
If the MPS is 0.1, the government spending multiplier is
A) 10.
B) 1.11.
C) 5.
D) 2.
A) 10.
If the MPC is 0.9, the tax multiplier is
A) -9.
B) -10.
C) -1.10.
D) 10.
A) -9.
The balanced-budget multiplier
A) equals 0.
B) is greater than 0 but less than 1.
C) is greater than 1.
D) equals 1.
D) equals 1.
As the MPC decreases, the government spending multiplier increases.
FALSE
The balanced-budget multiplier works whenever the government increases spending and increases taxes by the same amount.
TRUE
If taxes depend on income, then the magnitude of the government spending multiplier ________ it would be if taxes were a lump-sum amount.
A) could be either larger than or smaller than
B) is larger than
C) is equal to what
D) is smaller than
D) is smaller than
If taxes depend on income, then the absolute value of the tax multiplier ________ it would be if taxes were a lump-sum amount.
A) could be either larger than or smaller than
B) is larger than
C) is equal to what
D) is smaller than
D) is smaller than
As the tax rate increases, the government spending multiplier
A) increases.
B) decreases.
C) does not change.
D) could either increase or decrease depending on the value of the MPC.
B) decreases.
As the tax rate increases, the absolute value of the tax multiplier
A) increases.
B) decreases.
C) does not change.
D) could either increase or decrease depending on the value of the MPC.
B) decreases.
When taxes depend on income, a higher tax rate implies a higher government spending multiplier.
FALSE
When the tax rate increases, the absolute value of the tax multiplier falls.
TRUE
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