Econ Chapter 15 Quiz #15

Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. 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.

____

2. Fiscal policy is government action to influence aggregate demand and in turn to influence the level of real
GDP and the price level, through:
a. expanding and contracting the money supply.
b. regulation of net exports.
c. changes in government spending and/or tax revenues.
d. encouraging businesses to invest.

____

3. 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.

____

4. 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 follows Keynesian economics by using expansionary fiscal
policy to increase aggregate demand (total spending). 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.

____

5. Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP.
The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion
change in income?
a. $120 billion increase in government spending and $50 billion increase in tax revenue.
b. $140 billion increase in government spending and $70 billion increase in tax revenue.
c. $160 billion increase in government spending and $120 billion increase in tax revenue.
d. $220 billion increase in government spending and $100 billion increase in tax revenue.
e. $400 billion increase in government spending and $300 billion increase in tax revenue.

____

6. As the marginal propensity to consume (MPC) decreases, the spending multiplier:

a. increases.
b. decreases.
c. remains constant.
d. becomes undefinable.

____

7. If the marginal propensity to consume (MPC) is 0.50, the value of the spending multiplier is:
a. 5.
b. 1.
c. 2.
d. 5.

____

8. If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is:
a. 1.
b. 2.
c. 4.
d. 9.

____

9. If the MPC = 1, the spending multiplier is:

a. infinite.
b. zero.
c. 10.
d. 100.
e. 1.

____ 10. An increase in government spending by $100 would, if the MPC = 0.90, result in an increase in real GDP by:
a. $1,000.
b. $9,000.
c. $900.
d. $190.
e. inadequate information is given.
Exhibit 15-3 Aggregate demand and supply model

____ 11. Suppose the economy in Exhibit 15-3 is in equilibrium at point E 1 and the marginal propensity to consume
(MPC) is 0.80. Following Keynesian economics, to restore full employment, the government should increase
its spending by:
a. $200 billion.
b. $250 billion.
c. $500 billion.
d. $1 trillion.

____ 12. Find the tax multiplier if the MPC is 0.75.

a. 4.
b. 3.
c. 0.33.
d. 3.
e. 4.
____ 13. A tax multiplier equal to 4.30 would imply that a $100 tax increase would lead to a:
a. $430 decline in real GDP.
b. $430 increase in real GDP.
c. 4.3 percent increase in real GDP.
d. 4.3 percent decrease in real GDP.
e. 43 percent decrease in real GDP.
____ 14. If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally
by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC) is 0.80, federal
policymakers could follow Keynesian economics and restrain inflation by decreasing:
a. government spending by $200 billion.
b. taxes by $100 billion.
c. taxes by $1,000 billion.
d. government spending by $1,000 billion.
Exhibit 15-5 Aggregate demand and supply model

____ 15. Suppose the economy in Exhibit 15-5 is in equilibrium at point E 1 and the marginal propensity to consume
(MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E 2
and reduce inflation by:
a. increasing government spending by $50 billion.
b. decreasing government spending by $6 billion.
c. decreasing government spending by $100 billion.
d. decreasing government spending by $50 billion.

Exhibit 15-7 Aggregate demand and supply model

____ 16. Beginning at equilibrium E1 in Exhibit 15-7, assume the marginal propensity to consume (MPC) is 0.90 and
the government increases taxes by $100 billion. The aggregate demand curve will shift to the:
a. left by $1,000 billion.
b. right by $1,000 billion.
c. right by $900 billion.
d. left by $900 billion.
____ 17. Supply-side economics is based on the theory that:
a. budget deficits will stimulate demand, output, and employment.
b. budget deficits will lead to higher interest rates, which will weaken their expansionary
impact.
c. higher tax rates will increase tax revenues.
d. increases in aggregate supply lower the price level.
____ 18. Supply-side economists:
a. saw influence beyond in both the Bush and Clinton administrations.
b. disagreed with economist Arthur Laffer's views on taxes.
c. were influential in President Reagan's decision to change the tax structure.
d. believe that government regulations do not reduce productivity and undermine industrial
efficiency.

Exhibit 15-8 Aggregate demand and supply curves

____ 19. In Exhibit 15-8, supply-siders claimed that the shift from AS1 to AS2 would occur if the government:
a. increased tax rates and increased the amount of government regulation.
b. increased tax rates and decreased the amount of government regulation.
c. increased tax rates and decreased the amount of government regulation.
d. decreased tax rates and decreased the amount of government regulation.
e. decreased tax rates and decreased the amount of government regulation.
____ 20. During the Reagan administration, the Laffer curve was used to ague that:
a. the supply-side effects of tax cuts are relatively small.
b. discretionary tax cuts are unwise because they create stagflation.
c. lower income tax rates could increase tax revenues.
d. a "flat tax" would simplify the tax code and stimulate economic growth.

Econ Chapter 15 Quiz #15

Answer Section
MULTIPLE CHOICE
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D
RE
C
RE
A
SA
A
CA
A
CA
B
CA
C
SA
C
SA
A
CA
A
SA
A
CA
B
CA
A
CA
A
CA
D
CA
D
CA
D
CA
C
CA
D
CA
C
RE

PTS: 1

DIF: E

TOP: Fiscal policy

PTS: 1

DIF: E

TOP: Fiscal policy

PTS: 1

DIF: M

TOP: Fiscal policy to combat recession

PTS: 1

DIF: D

TOP: Fiscal policy to combat recession

PTS: 1

DIF: D

TOP: Fiscal policy to combat recession

PTS: 1

DIF: D

TOP: Spending multiplier

PTS: 1

DIF: E

TOP: Spending multiplier

PTS: 1

DIF: E

TOP: Spending multiplier

PTS: 1

DIF: D

TOP: Spending multiplier

PTS: 1

DIF: M

TOP: Spending multiplier

PTS: 1

DIF: D

TOP: Fiscal policy to combat recession

PTS: 1

DIF: D

TOP: Tax multiplier

PTS: 1

DIF: D

TOP: Tax multiplier

PTS: 1

DIF: D

TOP: Fiscal policy to combat inflation

PTS: 1

DIF: D

TOP: Fiscal policy to combat inflation

PTS: 1

DIF: D

TOP: Fiscal policy to combat inflation

PTS: 1

DIF: D

TOP: Supply-side economics

PTS: 1

DIF: D

TOP: Supply-side economics

PTS: 1

DIF: M

TOP: Supply-side economics

PTS: 1

DIF: M

TOP: Laffer curve