Quiz 11

Question 1

Suppose economic conditions call for a tax increase but Congress does not implement this measure because an election is approaching. This is an example of which of the real-world problems associated with fiscal policy?

Answer 1

pork barrel politics

Question 2

If the MPC for an economy is 0.50, a $360.0 billion increase in taxes will ultimately cause consumption to decrease by

Answer 2

$180.00 billion.

Question 3

If the MPC equals 0.75, a $100 billion transfer payment decrease will decrease consumption in the first round by

Answer 3

$75.0 billion.

Question 4

Which of the following is generally considered a desirable outcome of fiscal policy?

Answer 4

more jobs

Question 5

The statement “balancing the budget on the backs of the poor” refers to

Answer 5

transfer payment cuts in order to reduce government expenditures.

Question 6

Which of the following is true when the government attempts to move the economy to full employment by increasing spending?

Answer 6

aggregate demand will increase (shift) in two distinct steps: (1) the initial fiscal stimulus and (2) induced changes in consumption.

Question 7

From a Keynesian perspective, the way out of recession is to

Answer 7

get consumers to spend more on goods and services.

Question 8

Assume the economy is operating below full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process?

Answer 8

Fiscal policy can focus on changing the level of private sector spending through tax cuts and increases in income transfers or on increasing public sector spending, which will cause the government’s share of GDP to increase.

Question 9

The total change in aggregate spending generated by increased government spending depends on the

Answer 9

marginal propensity to consume.

Question 10

The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for

Answer 10

price level changes.

Question 11

Which of the following will most likely provide fiscal stimulus to the economy?

Answer 11

increasing transfer payments

Question 12

The balanced budget multiplier says that

Answer 12

an increase in government spending paid for by a tax increase of equal size shifts aggregate demand rightward.

Question 13

The “naïve” Keynesian model is unrealistic because it

Answer 13

it assumes that the aggregate supply curve is horizontal and therefore a rightward aggregate demand shifts would not cause prices to rise.

Question 14

Ceteris paribus, which of the following is true about the concept of crowding out?

Answer 14

It reduces the private sector’s ability to raise the level of output.

Question 15

Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be a

Answer 15

$125 billion.

Question 16

If the multiplier equals 2 and the AD shortfall is $6 million, the desired fiscal stimulus is

Answer 16

$3 million.