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| 1 | |
Answer the next question using the following graph:
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Refer to the graph. Suppose the full-employment level of GDP is Q1, but a significant decline in investment demand has pushed the economy into recession as shown by the decline in aggregate demand to AD2. Currently, output is at Q3 and there is a negative GDP gap of $100 billion. If the multiplier is 5, which of the following would most likely move the economy back to its full potential? |
| | A) | A tax cut of $20 billion |
| | B) | Increased government spending of $20 billion |
| | C) | A tax cut of $100 billion |
| | D) | Increased government spending of $100 billion |
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| 2 | |
Use the following table of hypothetical budget data to answer the next question:
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Refer to the table. The changes in the budget conditions between 2005 and 2006 best reflect: |
| | A) | demand-pull inflation |
| | B) | a cut in government spending |
| | C) | a tax increase |
| | D) | an expansionary fiscal policy |
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| 3 | |
A contractionary fiscal policy generally results in a lower price level. |
| | A) | True |
| | B) | False |
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| 4 | |
Of the following groups, the largest proportion of the public debt is held by: |
| | A) | foreign individuals and institutions |
| | B) | U.S. government agencies, including the Federal Reserve |
| | C) | State and local governments |
| | D) | U.S. individuals, banks, and other financial institutions |
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| 5 | |
The effectiveness of an expansionary fiscal policy will be reduced if: |
| | A) | borrowing increases interest rates and crowds out private investment |
| | B) | accompanied by a cut in Social Security taxes as well |
| | C) | the price level falls |
| | D) | stock prices rise |
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| 6 | |
An expansionary fiscal policy would call for a: |
| | A) | deficit during a period of demand-pull inflation |
| | B) | surplus during a period of demand-pull inflation |
| | C) | deficit during a recession |
| | D) | surplus during a recession |
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| 7 | |
An economy currently is experiencing a negative GDP gap of $500 billion, or 3% of its GDP. An appropriate fiscal policy would be: |
| | A) | a decrease in taxes |
| | B) | a decrease in government spending |
| | C) | an equal decrease in taxes and government spending |
| | D) | an increase in interest rates |
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| 8 | |
Suppose the full-employment level of GDP is $250 billion in a hypothetical economy. Currently, aggregate expenditures total $270 billion. Which of the following would be most in accord with appropriate fiscal policy? |
| | A) | Lower tax rates on corporate income |
| | B) | Lower personal exemption amounts for each dependent when figuring personal income taxes |
| | C) | Expanded spending on new domestic security programs |
| | D) | Decreases in interest rates |
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| 9 | |
Answer the next question on the basis of the following diagram, which illustrates the current tax and spending structure in the economy. All figures are in billions of dollars.
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Refer to the diagram. If the full-employment level of GDP is $500 billion: |
| | A) | the government is running a standardized budget surplus |
| | B) | the government is running a standardized budget deficit |
| | C) | the government's fiscal policy is expansionary |
| | D) | the economy is in a recession |
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| 10 | |
Answer the next question on the basis of the following diagram, which illustrates the current tax and spending structure in the economy. All figures are in billions of dollars.
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Refer to the diagram. If the full-employment level of GDP is $400 billion but the actual level of GDP is $300 billion: |
| | A) | the actual budget and standardized budget are both balanced |
| | B) | the actual budget is in surplus while the standardized budget is balanced |
| | C) | the actual budget is in deficit while the standardized budget is balanced |
| | D) | the actual budget is balanced while the standardized budget is in surplus |
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