1. The use of government spending and taxes to influence the nation%u2019s spend
ID: 1177186 • Letter: 1
Question
1. The use of government spending and taxes to influence the nation%u2019s spending, employment and price level is known as: a. aggregate demand.
b. monetary policy.
c. fiscal policy.
d. presidential discretion.
2. Supply-side economic policies are designed to shift the aggregate supply curve to the right, whereas Keynesian economic policies focus on shifting the aggregate demand curve to the right during recessions and to the left during economic expansions. a. True.
b. False.
3. Expansionary fiscal policy includes:
a. increasing government spending.
b. increasing payroll taxes to finance health care.
c. decreasing government spending.
d. raising the minimum wage.
4. Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:
a. expanding and contracting the money supply.
b. encouraging business to expand or contract investment.
c. regulating net exports.
d. decreasing government spending or increasing taxes.
5. Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession? a. increased government spending.
b. higher taxes.
c. a balanced-budget reduction in both spending and taxes.
d. an expansion in the money supply.
6. If the marginal propensity to consume is 0.60, the value of the spending multiplier is: a. 0.4.
b. 0.6.
c. 1.5.
d. 2.5.
7. Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.75, and the government decides to increase aggregate demand. If an increase of $1,000 billion aggregate demand can restore full employment, the government should:
a. increase spending by $250 billion.
b. decrease spending by $750 billion.
c. increase spending by $1,000 billion.
d. increase spending by $750 billion.
8. Find the tax multiplier if the MPC is 0.75.
a. -4
b. -3
c. 0.33
d. 3
e. 4
9. Assume the marginal propensity to consume is 0.80 and the government cuts taxes by $100 billion. The aggregate demand curve will shift to the: a. right by $80 billion.
b. left by $200 billion.
c. right by $400 billion.
d. left by $400 billion.
e. None of the above.
10. It is inflationary for government to increase spending if:
a. it also cuts taxes.
b. the aggregate supply curve is flat.
c. the economy is at full employment.
d. equilibrium real GDP is well below full employment.
11. Following Keynesian economics, and assuming a marginal propensity to consume (MPC) of 0.75, an increase in taxes of $100 billion would be expected to shift the aggregate demand curve by $300 billion to the left. True or false?
12. The result of the balanced-budget multiplier is that aggregate demand changes by the amount of the change in: a. tax revenue.
b. government spending.
c. government spending plus tax revenue.
d. government spending minus tax revenue.
NOTE: Some form of the balanced budget multiplier is used by most states, but it is NOT used by the federal government.
13. The balanced budget multiplier is always equal to:
a. 0.50.
b. 0.75.
c. 1/MPC
d. 1.
14. Structures in the economy that tend to add to aggregate demand when the economy is in recession and subtract from aggregate demand when the economy is inflationary are known as:
a. tax transfers.
b. inventory investment.
c. accelerators.
d. depreciation.
e. automatic stabilizers.
15. Federal government spending varies _________with real GDP while taxes vary ______with real GDP.
a. cyclically, countercyclically
b. countercyclically, cyclically
c. directly, inversely
d. inversely, directly
16. Because of automatic stabilizers, a decline in the level of economic activity will cause:
a. a reduction in tax revenues collected.
b. an increase in government expenditures.
c. a greater budget deficit.
d. all of the above.
17. The unemployment compensation program is an example of a(an) ______________ ______________. It:
a. makes recessions and inflationary episodes more severe.
b. makes recessions and inflationary episodes less severe.
c. makes recessions more severe and inflationary episodes less severe.
d. makes recessions less severe and inflationary episodes more severe.
e. has no effect on the severity of recessions and inflationary episodes.
18. The school of economic thought which argues through tax reductions and deregulation, government creates the proper incentives for the private sector to increase aggregate supply is known as the: a. rational expectations school.
b. neo-Keynesian school.
c. supply-side school.
d. new classical school.
e. classical school.
19. The Laffer Curve belongs to which of the following schools of economic thought? a. Keynesian.
b. supply-side.
c. demand management.
d. classical.
20. The Laffer Curve is a graph of the relationship between tax rates and: a. real GDP.
b. total tax revenues.
c. government spending.
d. inflation.
Bonus!
In a well-thought out and well written paragraph of at least three sentences, fully explain why an increase in government spending for goods and services is more expansionary than a decrease in taxes (a tax cut) for the same amount.
Explanation / Answer
The correct option is c) , because expenditure made by government or changes made to tax rate etc. comes under fiscal policy. The statement is false because supply side economics is the classical economics where aggregate supply is vertical. Also for the Keynesian economy the economic polices do focus on shifting aggregate demand curve towards right by increased government spending but do not focus on decreasing demand or shifting AD curve to left. The correct option is a) because expansionary fiscal policies shift the AD curve right wards and increase in government spending will also shift the AD curve rightwards while others will not. The correct option is d, because this will shift the AD curve leftward. The correct option is a, because this will increase aggregate demand to maximum possible and is performed by the government. Option d is correct, Multiplier = 1/(1-MPC) = 1/0.4 = 2.5 Increase in AD = 1/(1-MPC) * increase in govt. spending . So, increase in government spending is = 1000*0.25 = $250 billion. Option a)
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