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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 (Q3 – Q1) 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 2008 and 2009 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 | |
Of the following groups, the largest proportion of the total 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. banks and other financial institutions. |
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| 4 | |
The effectiveness of an expansionary fiscal policy will be reduced if: |
| | A) | increased government borrowing increases interest rates, causing a reduction in private investment. |
| | B) | it is accompanied by a cut in Social Security taxes as well. |
| | C) | the price level falls. |
| | D) | stock prices rise. |
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| 5 | |
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) | Reducing or limiting personal deductions and credits when figuring personal income taxes |
| | C) | Expanded spending on new domestic security programs |
| | D) | Decreases in interest rates |
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| 6 | |
Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment? |
| | A) | A tax cut in a recession |
| | B) | A tax increase during inflation |
| | C) | An increase in government spending during a recession |
| | D) | A decrease in government spending in a recession |
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| 7 | |
Answer the next question using the following graph:
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Refer to the graph. If AD1 represents the current level of expenditures and Q2 is the full-employment level of GDP, the government should undertake: |
| | A) | an expansionary fiscal policy that reduces aggregate demand to AD2. |
| | B) | an expansionary fiscal policy that reduces aggregate demand to AD3. |
| | C) | a contractionary fiscal policy that reduces aggregate demand to AD2. |
| | D) | b. a contractionary fiscal policy that reduces aggregate demand to AD3. |
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| 8 | |
Built-in stabilizers: |
| | A) | automatically increase the size of deficits when the economy experiences demand-pull inflation. |
| | B) | avoid the problems associated with the administrative lag of discretionary fiscal policy. |
| | C) | automatically produce a budget that is balanced over the business cycle. |
| | D) | tend to offset the impact of discretionary fiscal policy. |
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| 9 | |
Answer the next question on the basis of the following diagram.
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An expansionary fiscal policy is best represented by graph: |
| | A) | A. |
| | B) | B. |
| | C) | C. |
| | D) | D. |
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| 10 | |
Which of the following exemplifies the crowding-out effect? An increase in government spending: |
| | A) | is financed by increasing the money supply, reducing interest rates and causing net exports to fall. |
| | B) | is financed by borrowing, raising interest rates and causing private investment to fall. |
| | C) | causes taxes to rise automatically, reducing consumption spending. |
| | D) | causes the price level to rise, reducing net exports. |
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