Chapter 12

1. Which of the following was instrumental in assigning to the Federal government the basic responsibility for promoting economic stability in the U.S. economy?
A.the Employment Act of 1946
B.the Tax Reform Act of 1986
C.the Ricardian equivalence theorem
D.the balanced-budget multiplier


2. If the government wishes to increase the level of real GDP, it might reduce
A.taxes
B.its purchases of goods and services
C.transfer payments
D.the size of the budget deficit


3. If Congress passes legislation to make a substantial increase in government spending to counter the effects of severe recession, this would be an example of a
A.supply-side fiscal policy
B.contractionary fiscal policy
C.discretionary fiscal policy
D.nondiscretionary fiscal policy


4. Which combination of policies would be the most expansionary?
A.an increase in government spending and taxes
B.a decrease in government spending and taxes
C.an increase in government spending and a decrease in taxes
D.a decrease in government spending and an increase in taxes


5. An economy is in a recession and the government decides to increase spending by $4 billion. The MPC is .8. What would be the full increase in real GDP from the change in government spending assuming the increase would be in the horizontal range of the aggregate supply curve?
A.$3.2 billion
B.$4 billion
C.$16 billion
D.$20 billion


6. Which combination of fiscal policies would be the most contractionary?
A.an increase in government spending and taxes
B.a decrease in government spending and taxes
C.an increase in government spending and a decrease in taxes
D.a decrease in government spending and an increase in taxes


7. Which is a more expansionary way for government to finance a budget deficit?
A.borrowing money in the money market
B.decreasing government spending
C.creating new money
D.increasing taxes


8. Which would be the most contractionary use of funds from a budget surplus?
A.cutting tax rates
B.impounding the funds
C.using the funds to retire outstanding government debt
D.increasing government spending on social programs


9. When government tax revenues change automatically and in a countercyclical direction over the course of the business cycle, this is an example of
A.the political business cycle
B.nondiscretionary fiscal policy
C.the full-employment budget
D.crowding out


10. If the economy is to have built-in stability, when real GDP falls,
A.tax revenues and government transfer payments both should fall
B.tax revenues and government transfer payments both should rise
C.tax revenues should fall and government transfer payments should rise
D.tax revenues should rise and government transfer payments should fall


11.
R-1 12a

If the slope of the line T were steeper, there would be
A.more built-in stability for the economy
B.less built-in stability for the economy
C.no change in the built-in stability for the economy
D.the need for more emphasis on discretionary fiscal policy



12.
R-1 12a

If the slope of the line T were flatter, there would be
A.larger cyclical deficits produced as GDP moved from Y3 to Y2
B.smaller cyclical deficits produced as GDP moved from Y3 to Y2
C.larger structural deficits produced as GDP moved from Y3 to Y2
D.smaller structural deficits produced as GDP moved from Y3 to Y2



13.
R-1 12a

Actions by the Federal government to raise marginal tax rates would tend to
A.flatten the slope of line T and increase built-in stability
B.flatten the slope of line T and decrease built-in stability
C.steepen the slope of line T and increase built-in stability
D.steepen the slope of line T and decrease built-in stability



14. With a proportional tax system, as the level of income increases in an economy, the average tax rate will
A.increase
B.decrease
C.remain the same
D.either increase or decrease


15. In any given year, the full-employment deficit is equal to the
A.structural deficit
B.cyclical deficit
C.actual deficit
D.zero-employment budget


16. If the full-employment budget shows a deficit of about $200 billion and the actual budget shows a deficit of about $250 billion over a several-year period, it can be conducted that there is
A.a structural deficit but not a cyclical deficit
B.a cyclical deficit but not a structural deficit
C.neither a cyclical nor structural deficit
D.both a cyclical and structural defict


17. When the actual budget deficit is greater than the full-employment deficit, it can be concluded that
A.discretionary fiscal policy is contractionary
B.the economy is at less than full employment
C.the tax system for the economy is regressive
D.the structural deficit has increased


18. A balanced-budget amendment that required the Federal government to balance its budget each year would be
A.expansionary at a time when fiscal policy should be contractionary
B.contractionary at a time when fiscal policy should be expansionary
C.expansionary at a time when fiscal policy should be expansionary
D.contractionary at a time when fiscal policy should be contractionary


19. The length of time involved for the fiscal action taken by Congress to affect output, employment, or the price level is referred to as the
A.administrative lag
B.operational lag
C.recognition lag
D.fiscal lag


20. The crowding-out effect of an expansionary (deficit) fiscal policy is the result of government borrowing in the money market which
A.increases interest rates and net investment spending in the economy
B.increases interest rates and decreases net investment spending
C.decreases interest rates and increases net investment spending
D.decreases interest rates and net investment spending


21. The effect of an expansionary fiscal policy on the real GDP of an economy operating in the horizontal range of the aggregate supply curve is partially or fully
A.reinforced by the crowding-out effect
B.offset by the crowding-out effect
C.reinforced by raising rax rates
D.offset by lowering tax rates


22. The effect of an expansionary fiscal policy on the real GDP of an economy operating in the upsloping portion of the aggregate supply curve is
A.increased by the net export effect
B.decreased by the creation of new money
C.increased by the crowding-out effect
D.decreased by a rise in the price level


23. Suppose the United States pursued an expansionary fiscal policy to stimulate its economy and eliminate a recession. The net export effect suggests that net exports would
A.decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy
B.decrease, thus increasing aggregate demand and partially offsetting the fiscal policy
C.increase, thus decreasing aggregate demand and partially offsetting fiscal policy
D.increase, thus increasing aggregate demand and partially reinforcing the fiscal policy


24. Suppose the United States pursued a contractionary fiscal policy to reduce the level of inflation. The net export effect suggests that net exports would
A.decrease, thus decreasing aggregate demand and partially reinforcing the fiscal policy
B.decrease, thus increasing aggregate demand and partially offsetting the fiscal policy
C.increase, thus decreasing aggregate demand and partially reinforcing the fiscal policy
D.increase, thus increasing aggregate demand and partially offsetting the fiscal policy


25. Supply-side fiscal policy is generally enacted through
A.a decrease in tax rates
B.a decrease in investment spending
C.an increase in government spending
D.an increase in automatic stabilizers



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