Chapter 30 Review

Student:
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1. When the Federal government uses taxation and spending actions to stimulate the economy it is
conducting: 
A) Fiscal policy
B) Incomes policy
C) Monetary policy
D) Employment policy

2. When the Federal government takes budgetary action to stimulate the economy or rein in inflation,
such policy is: 
A) Active Monetary Policy
B) Automatic Fiscal Policy
C) Discretionary Fiscal Policy
D) Active Federal Policy

3. When the Federal government cut taxes and increases spending to stimulate the economy during
a period of recession, such actions are designed to be: 
A) Passive
B) Automatic
C) Countercyclical
D) Nondiscretionary

4. If Congress passes legislation to increase government spending to counter the effects of a
recession, then this would be an example of a(n): 
A) Supply-side fiscal policy
B) Expansionary fiscal policy
C) Contractionary fiscal policy
D) Nondiscretionary fiscal policy

 
5. If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this
would be an example of a(n): 
A) Supply-side fiscal policy
B) Expansionary fiscal policy
C) Contractionary fiscal policy
D) Nondiscretionary fiscal policy

6. The set of fiscal policies that would be most contractionary would be a(n): 
A) Increase in government spending and taxes
B) Decrease in government spending and taxes
C) Increase in government spending and a decrease in taxes
D) Decrease in government spending and an increase in taxes

7. The intent of contractionary fiscal policy is to: 

A) Increase aggregate demand
B) Decrease aggregate demand
C) Increase aggregate supply
D) Decrease aggregate supply

8. The goal of expansionary fiscal policy is to increase: 

A) The price level
B) Aggregate supply
C) Real GDP
D) Unemployment

9. If the government wishes to increase the level of real GDP, it might reduce: 
A) Taxes
B) Transfer payments
C) The size of the budget deficit
D) Its purchases of goods and services

 
    

10. Refer to the above graph. What combination would most likely cause a shift from AD1 to AD2? 
A) An increase in taxes and an increase in government spending
B) A decrease in taxes and an increase in government spending
C) An increase in taxes and no change in government spending
D) A decrease in taxes and a decrease in government spending

11. Refer to the above graph. What combination would most likely cause a shift from AD1 to AD3? 
A) An increase in taxes and an increase in government spending
B) A decrease in taxes and an increase in government spending
C) An increase in taxes and a decrease in government spending
D) A decrease in taxes and a decrease in government spending

12. Which combination of fiscal policy actions would most likely be offsetting? 

A) Increase taxes and government spending
B) Decrease taxes and increase government spending
C) Increase taxes, but make no change in government spending
D) Decrease government spending, but make no change in taxes

    

 
13. Refer to the figure above. The economy is at equilibrium at point A. What fiscal policy would be
most appropriate to control demand-pull inflation? 
A) Shift aggregate demand by increasing taxes
B) Shift aggregate demand by decreasing taxes
C) Shift aggregate supply by increasing taxes
D) Shift aggregate demand by increasing government spending

14. Refer to the figure above. The economy is at equilibrium at point B. What would expansionary
fiscal policy do? 
A) Shift aggregate demand from AD2 to AD1
B) Shift aggregate demand from AD2 to AD3
C) Move the economy from point B downward along AD2
D) Move the economy from point B upward along AD2

15. If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy
or policies that would most likely be recommended to correct this macroeconomic problem would be: 
A) Increased government spending or increased taxation, or a combination of the two actions
B) Increased government spending or decreased taxation, or a combination of the two actions
C) Increased government spending or increased taxation, but not a combination of the two actions
D) Decreased government spending or decreased taxation, or a combination of the two actions

16. The economy starts out with a balanced Federal budget. If the government then implements
expansionary fiscal policy, then there will be a: 
A) Trade deficit
B) Trade surplus
C) Budget deficit
D) Budget surplus

17. Contractionary fiscal policy would tend to make a budget deficit become: 

A) Bigger
B) Smaller
C) A trade deficit
D) A trade surplus

 
    

18. Refer to the above graph. Assume that the economy is in a recession with a price level of P1 and
output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be
the most likely new equilibrium price level and output? 
A) P2 and Q4
B) P1 and Q1
C) P2 and Q2
D) P1 and Q3

19. Refer to the above graph. Assume that the economy initially has a price level of P1 and output
level Q1. If the government implements expansionary fiscal policy, and the full multiplier effect was
felt, it would bring the economy to: 
A) P2 and Q4
B) P1 and Q1
C) P2 and Q2
D) P1 and Q3

20. You are given the following information about aggregate demand at the existing price level for an
economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases =
$100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is
$620 billion, then what combination of actions would be most consistent with closing the GDP-gap
here? 
A) Increase government spending and taxes
B) Decrease government spending and taxes
C) Decrease government spending and increase taxes
D) Increase government spending and decrease taxes

 
21. You are given the following information about aggregate demand at the existing price level for an
economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases =
$90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is
$600 billion, then what combination of actions would be most consistent with closing the GDP-gap
here? 
A) Increase government spending and taxes
B) Decrease government spending and taxes
C) Decrease government spending and increase taxes
D) Increase government spending and decrease taxes

22. Which of the following fiscal policy changes would be the most expansionary? 
A) A $40 billion increase in government spending
B) A $20 billion tax cut and $20 billion increase in government spending
C) A $10 billion tax cut and $30 billion increase in government spending
D) A $40 billion tax cut

23. An economy is experiencing a high rate of inflation. The government wants to reduce
consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the
government raise taxes to achieve its objective? 
A) $6 billion
B) $9 billion
C) $12 billion
D) $16 billion

24. The economy is in a recession. The government enacts a policy to increase spending by $2

billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government
spending assuming that the aggregate supply curve is horizontal across the range of GDP being
considered? 
A) $6 billion
B) $8 billion
C) $10 billion
D) $16 billion

 
25. In an economy, the government wants to increase aggregate demand by $50 billion at each price
level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase
government spending by: 
A) $10 billion
B) $20 billion
C) $31.25 billion
D) $40.50 billion

26. In an economy, the government wants to increase aggregate demand by $60 billion at each price
level to increase real GDP and reduce unemployment. If the MPC is 0.9, then it could: 
A) Decrease taxes by $6 billion
B) Decrease taxes by $12 billion
C) Increase government spending by $6 billion
D) Increase government spending by $12 billion

27. In an economy, the government wants to decrease aggregate demand by $48 billion at each price
level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could: 
A) Increase taxes by $16 billion
B) Increase taxes by $24 billion
C) Decrease government spending by $10 billion
D) Decrease government spending by $16 billion

28. As the economy declines into recession, the collection of personal income tax revenues
automatically falls. This relationship best describes how the progressive income tax system: 
A) Increases crowding out in the economy
B) Decreases real interest rates in the economy
C) Offsets the timing problem for fiscal policy
D) Serves as an automatic stabilizer for the economy

29. Which of the following is an example of built-in stability? As real GDP decreases, income tax
revenues: 
A) Increase and transfer payments decrease
B) Decrease and transfer payments increase
C) And transfer payments both decrease
D) And transfer payments both increase

 
30. Due to automatic stabilizers, when income rises, government transfer spending: 
A) Increases and tax revenues decrease
B) Decreases and tax revenues increase
C) And tax revenues decrease
D) And tax revenues increase

    

31. Refer to the above graph. A budget surplus would be associated with GDP level: 
A) H
B) J
C) K
D) L

32. In the above graph, tax revenues vary: 

A) Directly with the level of GDP
B) Inversely with the level of GDP
C) Directly with the level of government spending
D) Inversely with the level of government spending

33. Refer to the above graph. Automatic stability in this economy could be enhanced by: 
A) Changing the tax system so that the tax line has a steeper slope
B) Changing the tax system so that the tax line is shifted upward but parallel to its present position
C) Changing the government expenditures line so that it has a positive slope
D) Changing the tax system so that the tax line has a flatter slope

 
34. Which of the following serves as an automatic stabilizer in the economy? 
A) Interest rates
B) Exchange rates
C) The inflation rate
D) The progressive income tax

35. The cyclically-adjusted budget measures the Federal budget deficit or surplus if: 
A) The rate of inflation was zero
B) The economy was at full employment
C) The MPC was zero
D) The government had a balanced budget

36. The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into recession,
then the actual government budget will be: 
A) Balanced
B) In deficit
C) In surplus
D) Expanding

37. One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs
between the: 
A) Start of the recession and the time it takes to recognize that the recession has started
B) Start of a predicted recession and the actual start of the recession
C) Time fiscal action is taken and the time that the action has its effect on the economy
D) Time the need for the fiscal action is recognized and the time that the action is taken

38. One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs
between the: 
A) Start of the recession and the time it takes to recognize that the recession has started
B) Start of a predicted recession and the actual start of the recession
C) Time fiscal action is taken and the time that the action has its effect on the economy
D) Time the need for the fiscal action is recognized and the time that the action is taken

 
39. One timing problem with fiscal policy to counter a recession is an "administrative lag" that occurs
between the: 
A) Start of the recession and the time it takes to recognize that the recession has started
B) Start of a predicted recession and the actual start of the recession
C) Time fiscal action is taken and the time that the action has its effect on the economy
D) Time the need for the fiscal action is recognized and the time that the action is taken

40. The crowding-out effect suggests that: 

A) Increases in consumption are always at the expense of saving
B) Increases in government spending will close a recessionary expenditure gap
C) Increases in government spending may reduce private investment
D) High taxes reduce both consumption and saving

41. The crowding-out effect arises when: 

A) Government lends in the money market, thus decreasing interest rates
B) Government borrows in the money market, thus decreasing interest rates
C) Government lends in the money market, thus increasing interest rates
D) Government borrows in the money market, thus causing an increase in interest rates

42. The crowding-out effect works through interest rates to: 

A) Increase the effectiveness of expansionary fiscal policy
B) Decrease the effectiveness of expansionary fiscal policy
C) Decrease the effectiveness of contractionary fiscal policy
D) Increase the effectiveness of contractionary fiscal policy

43. The United States is experiencing a recession and Congress decides to adopt an expansionary
fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment
spending would: 
A) Increase, thus decreasing aggregate demand and partially offsetting the fiscal policy
B) Increase, thus increasing aggregate demand and partially reinforcing the fiscal policy
C) Decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy
D) Decrease, thus increasing aggregate demand and partially offsetting the fiscal policy

 
Chapter 30 Review Key
 

1. A
 
2. C
 
3. C
 
4. B
 
5. C
 
6. D
 
7. B
 
8. C
 
9. A
 
10. B
 
11. C
 
12. A
 
13. A
 
14. B
 
15. B
 
16. C
 
17. A
 
18. C
 
19. D
 
20. C
 
21. D
 
22. A
 
23. C
 
24. C
 
25. B
 
26. C
 
27. A
 
28. D
 
29. B
 
30. B
 
31. D
 
32. A
 
33. A
 
34. D
 
35. B
 
36. B
 
37. A
 
38. C
 
39. D
 
40. C
 
41. D
 
42. B
 
43. C