Fiscal Policy Gebhardt Chapter 12 Exam Prep

Chapter 12 Test Bank KEY

1. During the Great Depression, Keynes advocated the use of _____ policy to increase the _____ goods and services.

A. monetary; aggregate demand for

B. fiscal; aggregate demand for

C. monetary; aggregate supply of

D. fiscal; aggregate supply of

2. Which of the following relies on government taxes and spending to change macro outcomes?

A. fiscal policy

B. monetary policy

C. income policy

D. foreign-trade policy

3. What fiscal policy tools are used to shift the aggregate demand curve?

A. government spending and interest rates

B. taxes and interest rates

C. government spending and taxes

D. taxes and employment rates

4. Fiscal policy includes

A. an increase in interest rates.

B. an increase in taxes.

C. a reduction in trade barriers.

D. an increase in the minimum wage.

5. Fiscal policy includes

A. a decrease in immigration restrictions.

B. a decrease in import barriers.

C. an increase in government spending.

D. an increase in the discount rate.

6. The total quantity of output demanded at alternative price levels refers to

A. macro equilibrium.

B. consumption.

C. market demand.

D. aggregate demand.

7. Which of the following could cause a recession?

A. a decline in aggregate demand

B. a decline in unemployment

C. An increase in aggregate supply

D. An increase in government spending

8. Inflation occurs when

A. aggregate demand increases faster than unemployment.

B. unemployment increases faster than the labor force.

C. aggregate demand increases faster than output.

D. output increases faster than unemployment.

9. The four components of aggregate demand are

A. net exports, income, interest, and investment.

B. consumption, investment, government spending, and net exports.

C. consumption, interest, and government spending.

D. net exports, government spending, investment, and foreign trade.

10. Which of the following is the largest component of aggregate demand for the U.S. economy?

A. consumption

B. government expenditures

C. business investment

D. net exports

11. Which of the following is NOT a component of aggregate demand?

A. consumption

B. net exports

C. investment

D. income transfers

12. Expenditures by households on final goods and services is referred to as

A. investment.

B. disposable income.

C. consumption.

D. aggregate demand.

13. An improvement in consumer confidence will cause

A. a movement down the aggregate demand curve.

B. the aggregate supply curve to shift to the right.

C. the aggregate demand curve to shift to the right.

D. the aggregate demand curve to shift to the left.

14. Ceteris paribus, an increase in _______ will cause an increase in _______.

A. disposable income; government spending

B. consumer confidence; aggregate demand

C. taxes; consumption

D. imports; disposable income

15. Ceteris paribus, _______ in consumer confidence will cause _______ in aggregate demand.

A. a decrease; a decrease

B. a decrease; no change

C. an increase; a decrease

D. an increase; no change

16. Expenditures on new plant and equipment plus changes in business inventories defines

A. aggregate demand.

B. investment.

C. net exports.

D. fiscal policy.

17. Which of the following is NOT an example of investment spending?

A. construction of a new factory

B. the purchase of stock in the stock market

C. inventory expenditures

D. new equipment

18. In a graph of the aggregate demand curve, an increase in investment by businesses is represented by a

A. movement down the curve.

B. movement up the curve.

C. rightward shift of the curve.

D. leftward shift of the curve.

19. In a graph of the aggregate demand curve, a decrease in investment by businesses is represented by a

A. leftward shift of the curve.

B. rightward shift of the curve.

C. movement up the curve.

D. movement down the curve.

20. All of the following represent government spending as a part of aggregate demand except for

A. flood control

B. national parks

C. police and fire protection

D. Social Security checks

21. All of the following represent government spending as a part of aggregate demand except for

A. federal government spending on roads.

B. state and local government spending on schools.

C. income transfers.

D. national defense.

22. When calculating aggregate demand, government expenditure

A. includes only federal government spending on goods and services.

B. includes spending by federal, state, and local governments on goods and services.

C. includes income transfers.

D. represents the largest component of aggregate demand in the United States.

23. When calculating aggregate demand, government expenditure

A. includes income transfers.

B. includes expenditures by the federal government but not state and local government.

C. represents the largest component of aggregate demand for the United States.

D. includes spending by federal, state, and local governments on goods and services.

24. Exports minus imports are referred to as

A. net imports.

B. net exports.

C. sub imports.

D. sub exports.

25. Net exports for the United States are

A. negative if American exports are less than imports.

B. negative if American exports are greater than imports.

C. zero if American exports are greater than imports.

D. positive if American exports are less than imports.

26. Net exports in the United States are

A. always positive.

B. greater than federal government expenditures as a percentage of GDP.

C. included in the calculation of GDP.

D. the sum of exports and imports.

27. Ceteris paribus, a decrease in exports will generate which of the following changes for aggregate demand?

A. a rightward shift of the curve

B. a leftward shift of the curve

C. an upward movement along the curve

D. a downward movement along the curve

28. The combination of price level and real output that is compatible with both aggregate demand and aggregate supply is known as

A. full employment.

B. fiscal policy.

C. inflation.

D. equilibrium.

29. Equilibrium

A. will only occur at full employment.

B. can occur at any output level.

C. will occur at or below full employment.

D. will occur at or above full employment.

30. All economists agree that in the short run

A. equilibrium may not be possible.

B. macro failure is possible.

C. full employment will occur.

D. demand-side policies are the best option.

31. Which of the following will occur if aggregate demand is below full employment GDP?

A. recession

B. excessive aggregate demand

C. inflation

D. a stable economy

32. Which of the following will occur if aggregate demand is above full employment GDP?

A. recession

B. high unemployment

C. inflation

D. a stable economy

33. According to Keynes, which of the following is always at macro equilibrium?

A. The economy achieves full employment.

B. Aggregate demand is inadequate.

C. Prices are at the appropriate level.

D. Aggregate demand equals aggregate supply.

34. Which of the following is about Keynes?

A. He focused primarily on reducing inflation by shifting aggregate supply.

B. He was a classical economist and prescribed a policy of laissez faire.

C. He believed aggregate demand could be inadequate to ensure full employment.

D. He was opposed to government intervention in the economy.

35. According to Keynes, which of the following is possible at the intersection of aggregate supply and aggregate demand?

A. full employment or high levels of unemployment, but not inflation

B. inflation, full employment, or high levels of unemployment

C. inflation and high levels of unemployment, but not full employment

D. full employment, but not high levels of unemployment or inflation

36. Which of the following is consistent with what Keynes believed?

A. Markets automatically self-adjust to full employment very quickly.

B. The economy is inherently stable.

C. Monetary policy should be used to shift the aggregate supply curve.

D. Fiscal policy should be used to shift the aggregate demand curve when aggregate demand is not at the appropriate level.

37. Between 1921 and 1927, the stock market's value more than doubled, adding billions of dollars to the wealth of U.S. households and businesses. Which of the following indicates the appropriate change in the U.S. economy as a result of this stock market boom?

A. The economy moved up along the aggregate demand curve.

B. The economy moved down along the aggregate demand curve.

C. Aggregate demand shifted to the left.

D. Aggregate demand shifted to the right.

38. On October 24, 1929, the stock market crashed. By the end of the year, over $40 billion of wealth had vanished. Which of the following indicates the appropriate change in the U.S. economy as a result of the crash?

A. The economy moved up along the aggregate demand curve.

B. The economy moved down along the aggregate demand curve.

C. Aggregate demand shifted to the left.

D. Aggregate demand shifted to the right.

39. Most of the countries in the world suffered long and deep losses of output and employment between 1930 and 1935, which meant fewer purchases of U.S. goods and services. Which of the following indicates the appropriate change in the U.S. economy as foreigners purchased fewer U.S. goods and services?

A. Aggregate demand shifted to the left.

B. Aggregate demand shifted to the right.

C. The economy moved up along the aggregate demand curve.

D. The economy moved down along the aggregate demand curve.

40. When the economy overheats, the government sometimes cools it down with higher taxes, spending reductions, and less money. Which of the following indicates the appropriate change in the U.S. economy after these types of government interventions?

A. Aggregate demand shifts to the left.

B. Aggregate demand shifts to the right.

C. The economy moves up along the aggregate demand curve.

D. The economy moves down along the aggregate demand curve.

41. If the value of the dollar plummets in international currency markets, initially this causes foreigners to buy more American goods. Which of the following indicates the appropriate change in the U.S. economy from the dollar become less valuable?

A. The economy moves up along the aggregate demand curve.

B. The economy moves down along the aggregate demand curve.

C. Aggregate demand shifts to the left.

D. Aggregate demand shifts to the right.

42. The Tax Equity and Fiscal Responsibility Act of 1982 increased taxes in an effort to reduce inflationary pressure. Which of the following indicates the appropriate change in the U.S. economy as a result of this policy?

A. Aggregate demand shifted to the left.

B. Aggregate demand shifted to the right.

C. The economy moved up along the aggregate demand curve.

D. The economy moved down along the aggregate demand curve.

43. The terrorist attacks in September 2001 reduced consumer confidence. Which of the following indicates the resulting change in the U.S. economy after 9/11?

A. The economy moved up along the aggregate demand curve.

B. The economy moved down along the aggregate demand curve.

C. Aggregate demand shifted to the left.

D. Aggregate demand shifted to the right.

44. The GDP gap is

A. the difference between equilibrium output and full employment output.

B. the amount of output at the ideal price level

C. equal to the difference between imports and exports

D. equal to the multiplier

45. Fiscal stimulus is

A. an increase or decrease in government spending.

B. an increase in government spending or a decrease in taxes.

C. achieved when government dollars are spent on consumer goods but not on military goods.

D. the difference between equilibrium output and full-employment output.

46. A tax cut or government spending increase intended to shift aggregate demand to the right is known as

A. aggregate demand excess.

B. the GDP gap.

C. fiscal stimulus.

D. fiscal restraint.

47. The purpose of fiscal stimulus is to shift aggregate

A. demand to the left.

B. demand to the right.

C. supply to the left.

D. supply to the right.

48. Which of the following provides fiscal stimulus to the economy?

A. higher interest rates

B. increased imports

C. more efficient employment of resources

D. increased government purchases

49. Fiscal stimulus includes all of the following except

A. government spending for highways.

B. government purchase of military goods.

C. an increase in saving.

D. a tax cut.

50. Which of the following is an example of fiscal stimulus?

A. an increase in government spending on new military jet fighters

B. an increase in consumption because of improved consumer confidence

C. an increase in personal income taxes for families with children

D. an increase in the purchase of office buildings by foreign investors

51. If an economy has a GDP gap such that equilibrium output is less than full employment output, which of the following is a correct fiscal policy action?

A. a reduction in Social Security payments

B. an increase in the money supply

C. an increase in government expenditures

D. an increase in the tax rate

52. Which of the following will definitely result in fiscal stimulus?

A. greater government spending and lower taxes

B. greater government spending and higher taxes

C. lower government spending and lower taxes

D. lower government spending and higher taxes

53. Which of the following is a fiscal policy prescription for ending a recession?

A. Raise taxes to pay for greater transfer payments to stimulate the economy.

B. Increase government expenditures to let the multiplier work.

C. Raise interest rates to stimulate saving.

D. Restrict exports to increase injections in the domestic economy.

54. Saving

A. is the part of disposable income that is not yet spent.

B. only includes dollars deposited in a financial institution.

C. is a part of aggregate demand.

D. is equal to income plus consumption.

55. Which of the following does not meet the economic definition of saving?

A. a graduate assistant spends all of their income on tuition

B. a student deposits money in their savings account

C. a professor spends less than they make each month

D. the president's secretary puts cash under their mattress

56. The fraction of each additional dollar of disposable income not spent on consumption is referred to as

A. the money multiplier.

B. the marginal propensity to consume.

C. the marginal propensity to save.

D. fiscal savings rates.

57. The marginal propensity to consume is

A. total consumption in a given period divided by total disposable income.

B. the percentage of total disposable income spent on consumption.

C. that part of the average consumer dollar that goes to the purchase of final goods.

D. the fraction of each additional dollar of disposable income spent on consumption.

58. Which of the following is the correct formula for the marginal propensity to consume?

A. 1 ÷ (1 − Marginal Propensity to Save)

B. (Total Consumption) ÷ (Total Disposable Income)

C. 1 − Marginal Propensity to Save

D. (Change in Consumption) + (Change in Disposable Income)

59. If consumers spend 79 cents out of every extra dollar received, the

A. multiplier is 0.79.

B. marginal propensity to consume is 0.79.

C. marginal propensity to save is 0.79.

D. marginal propensity to consume is 0.21.

60. If consumers spend 98 cents out of every extra dollar received, the

A. marginal propensity to consume is 98.

B. marginal propensity to save is 1.02.

C. marginal propensity to consume is 0.98.

D. marginal propensity to consume is 0.02.

61. If consumers spend 85 cents out of every extra dollar received, the

A. marginal propensity to consume is 0.85.

B. marginal propensity to consume is 0.15.

C. marginal propensity to consume is 6.67.

D. marginal propensity to save is 0.85.

62. Ceteris paribus, if the government transfers income from individuals with a high marginal propensity to consume to those with a low marginal propensity to consume, in the short run, spending and output will

A. increase.

B. decrease.

C. stay the same.

D. increase or decrease depending on the level of saving.

63. The marginal propensity to save is equal to

A. 1 − (Marginal Propensity to Consume).

B. 1 − Multiplier.

C. 1 ÷ (Marginal Propensity to Consume).

D. (Total Savings) ÷ (Total Disposable Income).

64. The marginal propensity to save is

A. equal to (1 + Marginal Propensity to Consume).

B. the fraction of each additional dollar of saving that goes to the stock market.

C. the fraction of each additional dollar of disposable income that goes to saving.

D. (Total Savings) ÷ (Total Disposable Income).

65. If consumers save 8 cents out of every dollar received, the

A. marginal propensity to consume is 0.08.

B. marginal propensity to save is 0.08.

C. multiplier is 0.08.

D. multiplier is 0.92.

66. If consumers save 15 cents out of every dollar received, the

A. multiplier is 15.

B. marginal propensity to save is 0.85.

C. marginal propensity to save is 0.15.

D. multiplier is 0.15.

67. If consumers save 21 cents out of every dollar received, the

A. marginal propensity to save is 0.79.

B. marginal propensity to consume is 0.21.

C. multiplier is 0.21.

D. marginal propensity to save is 0.21.

68. Ceteris paribus, based on the circular flow model, a spending injection results in

A. a decrease in total income for consumers.

B. an increase in total income for consumers.

C. an increase in the marginal propensity to save.

D. a decrease in the marginal propensity to save.

69. Which of the following helps explain the multiplier effect?

A. Income is spent and re-spent in the circular flow model.

B. People buy a lot of luxury items.

C. Incomes tend to increase with inflation.

D. Banks only hold a fraction of their deposits on reserve.

70. Suppose government spending increases, which causes producers to hire more workers. As a result, households have more income to spend, which causes aggregate demand to increase even more, this is known as the

A. magnifying process.

B. multiplier process.

C. saving effect.

D. fiscal effect.

71. What is the total impact on aggregate demand because of a fiscal stimulus?

A. the amount of the initial increase in government spending

B. the changes in consumer spending, but not the change in government spending

C. the initial injection plus all subsequent increases in consumer spending triggered by the stimulus

D. the initial injection plus the consumption increase in the first round

72. If the current level of spending falls short of full employment, the government can close the GDP gap by

A. increasing government spending by an amount less than the GDP gap.

B. increasing government spending by an amount greater than the GDP gap.

C. decreasing government spending by an amount less than the GDP gap.

D. decreasing government spending by an amount greater than the GDP gap.

73. The multiplier is equal to

A. 1 − Marginal propensity to save.

B. Marginal propensity to save ÷ Marginal propensity to consume.

C. 1 ÷ Marginal propensity to save.

D. 1 ÷ Marginal propensity to consume.

74. If consumers spend 75 cents out of every extra dollar received, the

A. marginal propensity to save is 0.75.

B. marginal propensity to consume is 0.25.

C. multiplier is 4.

D. multiplier is 7.5.

75. If consumers spend 80 cents out of every extra dollar received, the

A. marginal propensity to save is 0.80.

B. marginal propensity to consume is 0.20.

C. multiplier is 20.

D. multiplier is 5.

76. Which of the following economies has the largest multiplier?

A. Economy A with a marginal propensity to save of 0.5

B. Economy B with a marginal propensity to save of 0.1

C. Economy C with a marginal propensity to consume of 0.8

D. Economy D with a marginal propensity to consume of 0.6

77. Which of the following economies has the largest multiplier?

A. Economy A with a marginal propensity to save of 0.08

B. Economy B with a marginal propensity to save of 0.12

C. Economy C with a marginal propensity to consume of 0.94

D. Economy D with a marginal propensity to consume of 0.70

78. If the marginal propensity to save is 0.1 and government spending is raised by $5 billion, then total aggregate spending will rise by

A. $500 million.

B. $5 billion.

C. $10 billion.

D. $50 billion.

79. Assume a marginal propensity to consume of 0.6. The change in total spending for the economy as a result of a $10 billion new government spending injection would be

A. $6 billion.

B. $25 billion.

C. $60 billion.

D. $600 billion.

80. Assume a marginal propensity to consume of 0.75. The change in total spending for the economy as a result of a $20 billion new government spending injection would be

A. $80 billion.

B. $27 billion.

C. $22 billion.

D. $15 billion.

81. Disposable income is

A. the after-tax income of consumers.

B. directly increased by a tax increase.

C. likely to be saved by consumers.

D. the sum of gross income and savings.

82. The after-tax income of consumers is defined as

A. consumption.

B. disposable income.

C. personal income.

D. savings.

83. With respect to the aggregate demand curve, a tax cut will

A. move the economy down along the curve.

B. move the economy up along the curve.

C. shift the curve leftward.

D. shift the curve rightward.

84. A tax cut is likely to cause

A. an increase in consumer spending.

B. a decrease in saving.

C. a decrease in aggregate demand.

D. an increase in government spending.

85. A tax cut of $8 billion with a marginal propensity to consume of 0.90 will cause a cumulative change in spending equal to

A. an increase of $720 million.

B. an increase of $72 billion.

C. an increase of $80 billion.

D. a decrease of $720 billion.

86. If aggregate supply is upward sloping, an increase in aggregate demand will result in

A. an increase in prices and a decrease in output.

B. an increase in prices and an increase in output.

C. a decrease in prices and a decrease in output.

D. a decrease in prices and an increase in output.

87. If aggregate supply is upward sloping, fiscal stimulus causes _______ in aggregate demand and _______ in prices.

A. a decrease; a decrease

B. a decrease; an increase

C. an increase; a decrease

D. an increase; an increase

88. Fiscal stimulus is most effective in changing the level of real output without causing inflation when the aggregate supply curve is

A. horizontal.

B. vertical.

C. upward sloping to the right.

D. downward sloping to the right.

89. Fiscal restraint

A. is used to reduce a recession.

B. causes a rightward shift of aggregate demand.

C. causes a rightward shift of aggregate supply.

D. includes tax hikes and spending cuts.

90. During an inflationary period, it is appropriate for the government to pursue policies that

A. stimulate aggregate demand.

B. reduce aggregate demand.

C. make budget deficits larger.

D. eliminate the public debt.

91. The aggregate demand curve shifts to the left when

A. government purchases are decreased.

B. government purchases are increased.

C. taxes are decreased.

D. government transfers are increased.

92. When aggregate demand exceeds the full employment level of output, the result is

A. significant unemployment.

B. higher inventory levels.

C. a higher average price level.

D. a recession.

93. Fiscal restraint will definitely occur if the government

A. reduces its spending and reduces tax rates.

B. reduces its spending and increases tax rates.

C. increases its spending and reduces tax rates.

D. increases its spending and increases tax rates.

94. If excessive aggregate demand causes prices to rise, which of the following would be a correct fiscal-policy action?

A. an increase in government expenditures

B. an increase in the money supply

C. an increase in Social Security payments

D. a tax increase

95. If the economy is experiencing inflation, which of the following is most likely to decrease aggregate demand?

A. increasing spending and cutting taxes

B. increasing spending and raising taxes

C. decreasing spending and cutting taxes

D. decreasing spending and raising taxes

96. If the multiplier is 5 and defense expenditures decrease by $40 million, aggregate demand decreases by a total of

A. $8 million.

B. $20 million.

C. $40 million.

D. $200 million.

97. If the multiplier is 2.5 and defense expenditures decrease by $10 million, aggregate demand decreases by a total of

A. $5 million.

B. $10 million.

C. $25 million.

D. $100 million.

98. Which of the following would be a Keynesian solution for inflation?

A. increase transfer payments to those people hurt by inflation

B. decrease government expenditures

C. restrict foreign imports into the country

D. do nothing because the economy is inherently stable

99. Which of the following is the appropriate fiscal policy during a recession?

A. a budget surplus

B. a budget deficit

C. a balanced budget

D. no change to the budget

100. A budget deficit is incurred whenever

A. tax revenues fall short of expenditures over the fiscal year.

B. discretionary fiscal spending is used to achieve macro equilibrium.

C. the U.S. Treasury engages in refinancing activities.

D. the government uses fiscal policy.

101. A budget deficit occurs if government spending

A. equals tax revenues.

B. is greater than tax revenues.

C. is less than tax revenues.

D. causes tax revenues to increase.

102. Which of the following will definitely reduce a budget deficit and provide fiscal restraint?

A. greater government spending and lower taxes

B. greater government spending and higher taxes

C. lower government spending and lower taxes

D. lower government spending and higher taxes

103. A budget surplus occurs if government spending

A. equals tax revenues.

B. is greater than tax revenues.

C. is less than tax revenues.

D. causes tax revenues to increase.

104. If the federal government uses its budget to shift aggregate demand in an attempt to manage the macroeconomy, it is likely that the budget will

A. always be balanced.

B. always be in a deficit.

C. always be in a surplus.

D. often be unbalanced.

105. According to Keynes,

A. an unbalanced budget was very appropriate at certain times.

B. an unbalanced budget was appropriate during a full-employment equilibrium.

C. a budget deficit was appropriate most of the time.

D. tax cuts were always appropriate because of their political appeal.

106. Income and Consumption Data

According to the table, what is the marginal propensity to consume?

A. 0.60

B. 0.75

C. 0.80

D. 0.85

107. Income and Consumption Data

According to the table, what is the marginal propensity to save? 

A. 0.30

B. 0.25

C. 0.20

D. 0.15

108. Income and Consumption Data

According to the table, what is the multiplier?

A. 0.75

B. 0.80

C. 4.00

D. 5.00

109. Income and Consumption Data

According to the table, what is saving at a disposable income of $100 billion per year?

A. $0 per year

B. $15 billion per year

C. $20 billion per year

D. $25 billion per year

110. Income and Consumption Data

According to the table, what is saving at a disposable income of $200 billion per year?

A. $0 per year

B. $20 billion per year

C. $22 billion per year

D. $45 billion per year

111.

Refer to the figure. Assuming aggregate demand is represented by AD3 and full employment output is $5.6 trillion per year, the economy confronts a real GDP gap of

A. $0 per year.

B. $400 billion per year.

C. $520 billion per year.

D. $560 billion per year.

112.

Refer to the figure. Assuming aggregate demand is represented by AD1 and full employment output is $5.6 trillion per year, the economy confronts a real GDP gap of

A. $0 per year.

B. $400 billion per year.

C. $800 billion per year.

D. $560 billion per year.

113.

Refer to the figure. Assuming aggregate demand is represented by AD1 and full employment output is $5.6 trillion per year, the equilibrium level of income is

A. $800 billion per year.

B. $5.2 trillion per year.

C. $5.6 trillion per year.

D. $6.0 trillion per year.

114.

Refer to the figure. Assume aggregate demand is represented by AD2. Which of the following could cause a shift to AD3?

A. an increase in government spending on goods and services

B. an increase in consumer spending

C. an increase in taxes

D. an increase in investment spending

115.

Refer to the figure. Assume aggregate demand is represented by AD3. Which of the following could cause a shift to AD2?

A. an increase in government spending on goods and services

B. an increase in taxes

C. a decrease in consumer confidence

D. a decrease in investment spending

116.

Refer to the figure. If Q3 represents full employment, then a shift from AD1 to

A. AD2 will result in a full employment equilibrium at point Y.

B. AD2 will close the GDP gap.

C. AD3 will take the economy past full employment to equilibrium at point Z.

D. AD3 will result in a full employment equilibrium at point X.

117.

Refer to the figure. If Q2 represents full employment, then a shift from AD1 to

A. AD2 takes the economy past full employment to equilibrium at point Y.

B. AD2 closes the GDP gap.

C. AD3 results in a full employment equilibrium at point W.

D. AD3 takes the economy past full employment to equilibrium at point Z.

118.

Refer to the figure. Assume that Q2 is full employment and the economy is in equilibrium at point V. Ceteris paribus, a shift in aggregate demand to AD2 will

A. result in equilibrium at point W.

B. result in equilibrium at point Y.

C. reduce the GDP gap, but would not close it.

D. cause an AD shortfall.

119.

Refer to the figure. Which fiscal policy action would increase aggregate demand from AD1 to AD2, ceteris paribus?

A. a decrease in transfer payments

B. a decrease in taxes

C. a decrease in government spending

D. an increase in saving

120.

Refer to the figure. Which fiscal policy action will increase aggregate demand from AD2 to AD3, ceteris paribus?

A. an increase in government spending

B. an increase in taxes

C. a decrease in exports

D. a decrease in government spending

121. Ceteris paribus, a decrease in consumer spending will result in

A. an increase in the MPS.

B. a rightward shift of the aggregate supply curve.

C. a leftward shift of the aggregate demand curve.

D. an increase in taxes.

122. Ceteris paribus, a decrease in consumer confidence will result in

A. an increase in consumer spending.

B. a rightward shift of the aggregate demand curve.

C. an increase in the equilibrium price level.

D. a decrease in the equilibrium level of output.

123. During the Great Depression, the primary reason why unemployment was so high was because unemployed workers were unskilled.

Employers could not use more workers because demand for output was low.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

124. Fiscal policy is unnecessary since aggregate demand is always compatible with economic stability.

Aggregate demand for goods and services will not always be compatible with economic stability.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-01 Define what fiscal policy is.
Topic: Components of Aggregate Demand

125. The four components of aggregate demand are: consumption, investment, government expenditures, and net exports.

The four major components of aggregate demand are: consumption, investment, government spending, and net exports.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

126. Aggregate demand is a constant level and does not change as the price level changes.

Aggregate demand is the total quantity of output demanded at alternative price levels. Price levels are not constant and so aggregate demand changes as well.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

127. To an economist, investment refers to the purchase of new plant and equipment by businesses.

Economic investments are expenditures on capital equipment.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

128. Government spending on goods and services plus income transfers are counted as part of aggregate demand.

Income transfers are not counted as part of aggregate demand because they do not reflect spending on goods and services.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

129. Full employment GDP is the most desired level of GDP for an economy.

The goal of fiscal policy is to achieve price stability and full employment.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

130. If aggregate demand is inadequate, equilibrium real output is less than the full employment output level.

Less aggregate demand will cause lower output levels and likely higher unemployment.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Components of Aggregate Demand

131. Keynes believed that aggregate demand would likely establish a full employment equilibrium without government intervention.

Keynes was convinced that government intervention was necessary to achieve our macroeconomic goals because the economy may not be able to self-correct to full employment.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: The Nature of Fiscal Policy

132. The use of government spending and taxes to change the level of aggregate demand is fiscal policy.

Fiscal policy is the use of government taxes and spending to alter macroeconomic outcomes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Define what fiscal policy is.
Topic: The Nature of Fiscal Policy

133. Fiscal policy is rarely used since aggregate demand is typically at the appropriate level for the economy to achieve full employment and price stability.

Aggregate demand for goods and services will not always be compatible with economic stability and the government frequently tweaks policy to adjust aggregate demand to desired levels.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: The Nature of Fiscal Policy

134. The GDP gap represents the value of goods and services that could have been produced by the economy, but were not produced because people are lazy.

The GDP gap is the difference between full employment output and the amount of output demanded at current price levels.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain why fiscal policy might be needed.
Topic: Fiscal Stimulus

135. For consumers, every dollar of income is either consumed or saved.

All income is either spent or saved.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

136. The marginal propensity to consume is equal to the change in consumption divided by the change in disposable income.

The marginal propensity to consume is the fraction of each additional dollar of disposable income spent on consumption.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

137. If consumers save $0.09 out of each additional dollar of disposable income, the marginal propensity to consume is 0.91.

If consumers save $0.09 of every additional dollar they would be spending $0.91 of the dollar, and this would represent the marginal propensity to consume.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

138. If consumers save $0.13 out of each additional dollar of disposable income, the marginal propensity to consume is 1.3.

If a consumer saves $0.13 out of each additional dollar, they are spending $0.87 and so the marginal propensity to consume would be 0.87.

AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

139. When individuals spend all of an income increase, the marginal propensity to save is zero.

If an individual spends all extra income, they have not saved. This will mean the marginal propensity to consume is one and the marginal propensity to save is zero.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

140. A tax cut causes a decrease in disposable income.

A tax hike causes a decrease in disposable income.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Stimulus

141. The greater the upward slope of the aggregate supply curve, the greater the increase in the price level when aggregate demand increases.

The degree of inflation caused by increased aggregate demand depends on the slope of the aggregate supply curve.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Stimulus

142. If the aggregate supply curve is upward sloping, an increase in aggregate demand will cause an increase in output and no change in prices.

Whenever the aggregate supply curve is upward sloping, an increase in aggregate demand increases prices as well as output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Stimulus

143. Fiscal restraint may be an appropriate policy if inflation is a threat.

If excessive aggregate demand is causing prices to rise, the goal of fiscal policy will be to reduce aggregate demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Restraint

144. A tax hike causes a decrease in disposable income.

Tax hikes leave less disposable income to spend on consumer goods.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Restraint

145. A tax hike will increase the level of aggregate demand since the government will have more money to spend.

A tax hike decreases disposable income.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Restraint

146. If the government uses fiscal policy to reduce the budget deficit during a recession, the government will make the recession worse, ceteris paribus.

To reduce the budget deficit, the government would raise taxes and cut spending, both of which would reduce aggregate demand and further decrease output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Specify how fiscal policy affects the federal budget.
Topic: Policy Perspectives

147. The best government policy during a period of inflation, ceteris paribus, is to balance the federal budget.

It is appropriate for the budget to be unbalanced in a period of inflation or recession.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Specify how fiscal policy affects the federal budget.
Topic: Policy Perspectives

148. In 2018, the output of the U.S was approximately 20 trillion dollars. Discuss how this output was divided among the components of aggregate demand.

Over two-thirds of that output consisted of consumer goods and services. The government sector demanded 18 percent of total output. Investment spending took another 17 percent. Finally, because imports exceeded exports, net exports was negative.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Define what fiscal policy is.
Topic: Components of Aggregate Demand

149. Discuss why aggregate demand falls when people buy more imports, ceteris paribus.

Aggregate demand represents all spending on domestically produced goods and services. For equal income levels, an increase in import purchases will mean that fewer people are buying domestic goods, ceteris paribus. This means that aggregate demand must fall.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Stimulus

150. Explain how macro equilibrium and full employment are determined in different ways.

Macro equilibrium occurs where aggregate demand and aggregate supply intersect. Here, all goods and services produced domestically are demanded. Full employment refers to the use of all available resources in production. It may be the case that all domestically produced goods and services are demanded, but some resources are still not used. If macro equilibrium does not occur at full employment, there is a GDP gap.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Stimulus

151. If macro equilibrium occurs at higher levels of unemployment resulting in a GDP gap, what would be the appropriate fiscal policy to close that gap and reduce unemployment?

A. raise taxes

B. decrease government spending

C. raise taxes and increase government spending

D. decrease taxes

152. If the economy is experiencing high inflation due to excessive aggregate demand, then appropriate fiscal policy could include raising taxes.

Appropriate fiscal policy to reduce inflation due to excessive aggregate demand would include raising taxes. People would have less money to spend, thus reducing aggregate demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Restraint

153. If the economy needs to grow by 400 billion dollars to achieve full employment, then the government must increase spending by 400 billion dollars in order to achieve that goal.

The multiplier allows the government to spend only a small part of what is necessary because once that money is injected into the economy, it will be re-spent multiple times as more people receive higher incomes. The effects of the government injection are then amplified so that the government would not need to spend the full $400 billion.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

154. Fiscal stimulus will never result in inflation.

Too much stimulus will cause the aggregate demand to increase to the point where prices and wages will rise sharply, thus resulting in inflation as demand for output outpaces increases to output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Tell how fiscal stimulus or restraint is achieved.
Topic: Fiscal Stimulus

155. Explain how increased consumer savings will impact aggregate demand. Will it affect aggregate supply? Why or why not?

If consumers began to save more and spend less, the impact of the multiplier would be reduced. Furthermore, spending will decrease with less consumption and this would decrease aggregate demand. An increase in consume savings will not directly affect aggregate supply because aggregate supply represents the production by businesses, not the spending by consumers.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Illustrate what the multiplier is and how it works.
Topic: Fiscal Stimulus

156. The primary components of aggregate demand are

A. consumption, investment, youth expenditures, and exports minus imports.

B. health care, education, automobiles, and net exports.

C. consumption, investment, government spending, and net exports.

D. entertainment, housing, food, and education.

157. Which of the following does not represent an example of government spending?

A. purchase of military aircraft

B. payment of Social Security benefits

C. paychecks to government workers

D. payment to the company that cleans the U.S. Capitol

158. If the economy is operating at a level of total spending that is $100 billion short of that consistent with full employment, the government would have to increase spending by

A. more than $100 billion to move the economy to full employment because some of the government spending "bleeds off" as economic waste.

B. exactly $100 billion.

C. $100 billion times the multiplier.

D. less than $100 billion due to the multiplier effect.

159. At the end of 2009, the 40 percent increase in inventories by businesses represented

A. an increase in consumption.

B. an increase in net exports.

C. an increase in investment.

D. an increase in government spending.

160. When you receive this week’s paycheck, you can either spend it or save it. The fraction of each additional dollar of disposable income that you ____ is known as your _____.

A. save; marginal propensity to invest

B. spend; marginal propensity to consume

C. invest; marginal propensity to multiply

D. pay as taxes; marginal propensity to spend

161. Which of these statements about fiscal policy is correct?

A. Fiscal restraint is implemented when the economy is experiencing high unemployment.

B. Fiscal stimulus is implemented when the economy is experiencing high inflation.

C. The goal of fiscal policy is to match aggregate demand with full employment potential.

D. All of these choices are correct.

162. Disposable income consists of all income

A. that is not needed to purchase essentials; hence, it is "disposable."

B. given by the product of total income times the marginal propensity to consume because this yields total marginal or "disposable" income.

C. that remains after taxes.

D. that is disposed of by saving it.

163. In 2009, the American Recovery and Reinvestment Act (ARRA) was an example of

A. budget surplus.

B. fiscal restraint.

C. fiscal stimulus.

D. net exporting.

164. Which of the following is the largest component of aggregate demand?

A. consumption

B. investment

C. government spending

D. net exports

165. Fiscal policy works mainly by shifting the ______ curve.

A. aggregate demand

B. aggregate supply

C. supply

D. government supply

166. Which of the following combinations represents a fiscal stimulus?

A. increasing government spending and raising taxes

B. decreasing government spending and reducing taxes

C. increasing government spending and reducing taxes

D. decreasing government spending and raising taxes

167. Fiscal restraint involves ______ government spending and ______ taxes.

A. increasing; increasing

B. decreasing; decreasing

C. increasing; decreasing

D. decreasing; increasing

168. A budget deficit occurs when government spending ______ tax revenues.

A. is greater than

B. is less than

C. equals

D. generates

169. What determines the size of a shift in aggregate demand that results from a personal income tax cut?

A. the marginal propensity to consume

B. the size and permanence of the tax cut

C. the level of consumer confidence

D. All of these choices are correct

170. For most of recent U.S. history, the federal budget has been in

A. balance.

B. deficit.

C. surplus.

D. a worse condition than now.