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Fiscal policy refers to
A) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's money supply. B) the government's ability to regulate a firm's behavior in the financial markets.
C) the spending and taxing policies used by the government to influence the economy.
D) the techniques used by a business firm to reduce its tax liability.
The use of fiscal policy to stabilize the economy is limited because
A) changes in government spending and tax rates have a small effect on interest rates.
B) changes in government spending and tax rates have a small effect on aggregate demand.
C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.
D) the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code.
Crowding out refers to a decline in ________ as a result of an increase in ________.
A) government purchases; tax rates B) tax revenues; unemployment
C) government purchases; private expenditures D) private expenditures; government purchases
Proponents of spending on infrastructure as a means to stimulate the economy note that the multiplier effect for ________ is estimated to be larger than the multiplier effect for ________, and would therefore have a greater impact on expanding GDP.
A) a balanced budget; tax increases
B) decreases in government spending; a balanced budget C) increases in government spending; tax cuts
D) tax increases; increases in government spending
Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________.
A) more; less B) more; more C) less; less D) less; more
An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
A) increase; fall; rises B) increase; rise; falls C) decrease; rise; falls D) decrease; fall; rises
An increase in individual income taxes ________ disposable income, which ________ consumption spending. A) decreases; increases B) decreases; decreases
C) increases; decreases D) increases; increases
Refer to Figure 16-1. An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above.
A) A to B B) C to D C) B to C D) B to A E) E to B
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
A) lower; higher B) lower; lower C) higher; higher D) higher; lower
Refer to Figure 16-2. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B
A) the unemployment rate is very low.
B) there is pressure on wages and prices to rise.
C) firms are operating below capacity.
D) income and profits are rising.
E) the economy is above full employment.
Refer to Figure 16-3. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely pursue
A) contractionary fiscal policy.
B) expansionary automatic stabilizers.
C) contractionary monetary policy. D) expansionary fiscal policy.
E) expansionary monetary policy.
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant
A) increase in inflation. B) decrease in real GDP.
C) decrease in oil prices.D) increase in labor productivity.
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
A) increase; rise; falls B) decrease; fall; rises C) increase; fall; rises D) decrease; rise; falls
The objective of an expansionary fiscal policy is to
A) reduce growth in international trade. B) reduce growth in output. C) reduce unemployment. D) reduce inflation.
The objective of a contractionary fiscal policy is to A)increasestagflation. B)reduceunemployment.
C) reduce inflation. D) increase growth in output.
Aggregate demand increases if
A) the government increases spending. B) the government increases taxes. C) the Fed sells government bonds. D) the Fed raises the discount rate.
In which case will the government collect more tax revenue?
A) 4% tax rate and $80,000 average income B) 40% tax rate and $40,000 average income C) 20% tax rate and $90,000 average income D) 90% tax rate and $10,000 average income
An example of an automatic stabilizer is
A) the indexation of social security benefits to the consumer price index. B) the interest the government pays on loans.
C) the food stamp program.
D) changing the tax laws to increase the marginal tax rates.
18) During a recession, automatic stabilizers cause the federal deficit to A) increase. B) decrease.
C) remain unchanged. D) either increase or decrease.
The presence of automatic stabilizers means that the federal deficit is ________ than it otherwise would be in a recession and ________ than it otherwise would be in an expansion.
A) larger; smaller B) smaller; larger C) larger; larger D) smaller; smaller
Which of the following is a CORRECT sequence of events during a recession?
A) unemployment rises, income falls, tax revenue rises, unemployment benefits fall, and the budget deficit falls B) unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises C) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises D) unemployment rises, income rises, tax revenue rises, unemployment benefits rise, and the budget deficit rises
When a government runs a deficit
A) it must raise taxes B) it must cut spending. C) its debt decreases. D) its debt increases.
A government's debt is reduced when it A) runs a surplus. B) sells more bonds. C) balances its budget. D) runs a deficit.
The total amount owed by the federal government to the public is the A) net tax revenue. B) federal budget deficit.
C) fiscal drag. D) federal debt.
Suppose that in the beginning of 2012 the federal debt was $9 trillion. During 2012, the government balanced its budget. At the end of 2012, the federal debt
A) increased. B) decreased. C) stayed the same. D) was eliminated
Bill's income is $1,000 and his net taxes are $350. His disposable income is A) $1,350. B) $750. C) $650.D) -$350.
The tax multiplier is
A) the ratio of the change in taxes to the change in the equilibrium level of output. B) the difference in taxes multiplied by the change in the equilibrium level of output. C) the ratio of the change in the equilibrium level of output to the change in taxes. D) the MPC multiplied by the MPS.
If the government spending multiplier is 5 and government spending decreases by $200 billion, output will ________ by $________ billion.
A) increase; 200 B) decrease; 40 C) decrease; 200D) decrease; 1,000
The President of Vulcan hires you as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the MPC in Vulcan is 0.6. Which of the following would be the best advice to give to the Vulcan president?
A) increase taxes by $2.5 billion B) reduce government purchases by $10 billion
C) reduce government purchases by $4 billion D) increase taxes by $10 billion
If the government wants to reduce unemployment, government purchases should be ________ and/or taxes should be ________.
A) decreased; increased B) increased; increased
C) increased; decreased D) decreased; decreased
In 2012, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2012, the city of Canfield had a A) budget deficit of $50,000. B) budget surplus of $450,000.
C) budget surplus of $50,000. D) budget surplus of $5,000.
The difference between what a government spends and what it collects in taxes in a year is A) the government debt. B) net taxes.
C) the government budget deficit or surplus. D) net revenue.
During recessions, government spending usually
A) increases because unemployment payments decrease. B) increases because unemployment payments increase. C) decreases because unemployment payments decrease. D) decrease because unemployment payments increase.
Which of the following is INCORRECT regarding tax revenues? A) they increase during economic expansions
B) they are a revenue source in the government's budget
C) they change with changes in the tax rate
D) they increase during recessions
Which of the following is NOT a category of fiscal policy?
A) government policies regarding taxation
B) government policies regarding transfer payments and welfare benefits C) government policies regarding the purchase of goods and services
D) government policies regarding money supply in the economy
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