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Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) In fiscal policy, the inside lags can take a long time because: 1)
A) macroeconomic data take time to gather and can be unreliable.
B) changes in taxes and government spending require approval from Congress and the
president.
C) consumers are usually slow in spending their tax rebate checks.
D) A and B are both correct.
Answer: D
Explanation: A)
B)
C)
D)
2) What kind of active fiscal policy was implemented in early 2008 in response to a slowing economy? 2)
A) decreased government spending on infrastructure
B) increased government spending on infrastructure
C) increased tax rates to the rich aimed at closing the budget deficit
D) tax rebates and investment incentives
Answer: D
Explanation: A)
B)
C)
D)
Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
3) According to the application, one implication of increasing the taxes to pay for the higher costs of 3)
entitlement programs is:
A) an increase in the disposable income of the nonretired individuals.
B) a smaller US Federal Budget.
C) a higher interest rate on US Treasury Bills.
D) the increased tax burden on firms and individuals.
Answer: D
Explanation: A)
B)
C)
D)
1
4) The permanent income view of consumption spending postulate when households receive a tax cut 4)
that is deemed temporary, then their consumption spending
A) will not change and the tax rebate is saved.
B) will decrease.
C) will increase by the full amount of the tax cut.
D) will increase by less than the tax cut.
Answer: A
Explanation: A)
B)
C)
D)
6) According to the Laffer curve, higher tax rates will result in lower tax revenues if: 6)
A) only the poor are taxed.
B) workers are encouraged to work more hours.
C) economic activity is severely discouraged.
D) only the rich are taxed.
Answer: C
Explanation: A)
B)
C)
D)
2
Figure 10.1
8) Refer to Figure 10.1 to answer this question. Which of the following fiscal policies would move the 8)
economy from point B to point A?
A) higher taxes B) lower government spending
C) lower taxes D) lower money supply
Answer: C
Explanation: A)
B)
C)
D)
9) Assume that the short-run AS is upward sloping. If the government chooses to reduce government 9)
expenditure or to increase taxes, according to the Aggregate Supply - Aggregate Demand model:
A) the price level will rise and GDP will decrease.
B) the price level will fall and GDP will increase.
C) the price level will fall and GDP will decrease.
D) the price level will rise and GDP will increase.
Answer: C
Explanation: A)
B)
C)
D)
3
11) In 2009, federal spending was about: 11)
A) $2.7 trillion. B) $2.9 trillion. C) $3.52 trillion. D) $4.2 trillion.
Answer: C
Explanation: A)
B)
C)
D)
12) During the 1930s, politicians did not use fiscal policy to counter the Great Depression because: 12)
A) they feared the consequences of government budget deficits.
B) the Federal Reserve system opposed the idea.
C) the adherence to the gold standard prevented the necessary increase in the money supply.
D) they were concerned about the ensuing increase in interest rates.
Answer: A
Explanation: A)
B)
C)
D)
Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
13) According to the application, increasing life expectancy would affect the budget because 13)
A) as the population grows older, Medicare payments would increase.
B) as the population grows older, Medicaid payments would increase.
C) as the population grows older, the Social Security payments will increase.
D) all of the above are correct
Answer: D
Explanation: A)
B)
C)
D)
14) Successful stabilization policies are very difficult to implement because all of the following reasons, 14)
except:
A) decision-makers are slow to respond to changes in the economy.
B) the difference in the length between inside and outside lags.
C) decision-makers are slow to recognize changes in the economy.
D) fiscal policy takes time to operate.
Answer: B
Explanation: A)
B)
C)
D)
4
15) The length of time that the U.S. Treasury Department takes to print and mail tax rebate checks to 15)
help the economy out of a recession is part of the:
A) inside lag. B) inside-outside lag.
C) outside lag. D) identification lag.
Answer: C
Explanation: A)
B)
C)
D)
16) Which of the following contributed to the U.S. budget deficit in 2009? 16)
A) the large stimulus package in 2009.
B) the U.S. recession in 2007-2009
C) the large expenses associated with the wars in Iraq and Afghanistan
D) All of the above are correct.
Answer: D
Explanation: A)
B)
C)
D)
17) The basic idea of the fiscal multiplier is that an initial increase in government spending will have a: 17)
A) more than a one-to-one impact on short run aggregate supply.
B) more than a one-to-one impact on aggregate demand.
C) more than a one-to-one impact on long run aggregate supply.
D) more than a one-to-one impact on the budget deficit.
Answer: B
Explanation: A)
B)
C)
D)
18) Which of the following is included in "Entitlement and mandatory spending?" 18)
A) Medicare B) Medicaid
C) Social Security D) All of the above are correct.
Answer: D
Explanation: A)
B)
C)
D)
5
Recall Application 2, "The Confucius Curve?" to answer the following questions:
20) According to the application, when Yu Juo was asked what should be done when the government 20)
had insufficient funds, his response was:
A) raise tax rates from 20 to 10 percent. B) cut tax rates from 20 to 10 percent.
C) cut tax rates from 50 to 20 percent. D) print currency.
Answer: B
Explanation: A)
B)
C)
D)
Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
22) According to the application, estimates of the size of spending for Social Security, Medicare and 22)
Medicaid is approximately ________ percent of GDP by 2075.
A) 7 B) 18 C) 22 D) 9
Answer: C
Explanation: A)
B)
C)
D)
23) Because taxes and transfer payments such as unemployment insurance act to change GDP without 23)
the need for policymakers to take explicit action, then these taxes and transfer payments are called:
A) discretionary stabilizers. B) automatic stabilizers.
C) mandatory stabilizers. D) fluctuation stabilizers.
Answer: B
Explanation: A)
B)
C)
D)
6
24) The key lesson to remember about budget deficits is that during a recession we should focus on: 24)
A) what the monetary policy does to the economy and not on what it does to the deficit.
B) what the fiscal policy does to the economy and not on what it does to the deficit.
C) what the fiscal policy does to the deficit and not on what it does to the economy.
D) what the fiscal policy does to the deficit and not on what it does to the national debt.
Answer: B
Explanation: A)
B)
C)
D)
25) In 2009, federal taxes were about ________ percent of GDP. 25)
A) 14.7 B) 25 C) 33 D) 71
Answer: A
Explanation: A)
B)
C)
D)
27) An increased federal budget surplus during an expansion serves as an automatic economic 27)
stabilizer for all of the following reasons except:
A) higher personal income translates into a higher tax load and so consumption spending is
slightly curbed.
B) higher corporate profits translate into a higher tax load and so investment spending is slightly
curbed.
C) the positive government saving stimulates consumption spending.
D) reduced transfer payments from welfare programs partly offset the overall increase in
household income.
Answer: C
Explanation: A)
B)
C)
D)
7
Recall Application 2, "The Confucius Curve?" to answer the following questions:
29) According to the application, the central idea for the Laffer curve is: 29)
A) cutting tax rates may increase GDP growth.
B) cutting tax rates may decrease inflation.
C) cutting tax rates may increase tax revenues.
D) cutting tax rates may decrease tax revenues.
Answer: C
Explanation: A)
B)
C)
D)
30) During the Kennedy Era, the tax cut implemented resulted in 30)
A) driving the economy deeper into a depression.
B) stimulating economic growth.
C) facilitating a recession.
D) pushed the economy into stagflation.
Answer: B
Explanation: A)
B)
C)
D)
8
33) The lags associated with fiscal policy can: 33)
A) stimulate output beyond full employment.
B) magnify economic fluctuations.
C) depress output below full employment.
D) all of the above
Answer: D
Explanation: A)
B)
C)
D)
34) All of the following are examples of outside lags associated with fiscal policy, except: 34)
A) the time it takes for individuals to increase consumption when personal taxes are lowered.
B) the delays in the actual formulation of fiscal policy.
C) the delays in the working of the multiplier effect through the economy.
D) the time it takes for businesses to increase investment when corporate taxes are lowered.
Answer: B
Explanation: A)
B)
C)
D)
36) Maintaining a balanced budget during an economic recession would be the difficult to implement 36)
because:
A) corporate income taxes would have to be raised in order to compensate for lower tax
revenues.
B) personal income taxes would have to be raised in order to compensate for lower tax revenues.
C) transfer payments would have to be reduced in order to curb spending.
D) all of the above
Answer: D
Explanation: A)
B)
C)
D)
9
37) Net interest spending consists of: 37)
A) interest payments on commercial debt held by the government.
B) interest payments on foreign debt held by the government.
C) interest payments on government debt held by the public.
D) all of the above
Answer: C
Explanation: A)
B)
C)
D)
Figure 10.2
39) Refer to Figure 10.2 to answer the question below. Points A, B, and C correspond to a GDP level in 39)
Year 2. Suppose that in Year 1 the economy was projected to be at Pt. A by Year 2. Which of the
following policies could bring the economy to Point B instead?
A) a correctly timed tax cut B) a correctly timed tax increase
C) an ill-timed tax cut D) an ill-timed tax increase
Answer: C
Explanation: A)
B)
C)
D)
10
40) An increase in government spending or a decrease in taxes will cause: 40)
A) the aggregate demand curve to the right.
B) the SR aggregate supply curve to the right.
C) the aggregate demand curve to the left.
D) the SR aggregate supply curve to the left.
Answer: A
Explanation: A)
B)
C)
D)
41) Which of the following is considered as the largest fiscal policy in U.S. history? 41)
A) the 2001 economic stimulus package in 2001
B) the 1992 expansionary stimulus package proposed by President Clinton in 1993
C) the New Deal in 1933
D) the $787 billion economic stimulus package in 2009
Answer: D
Explanation: A)
B)
C)
D)
44) Which of the following is a federal and state health program that benefits the poor? 44)
A) Defense B) Medicaid C) Medicare D) Social Security
Answer: B
Explanation: A)
B)
C)
D)
11
45) The discretionary spending component of federal spending includes all programs that: 45)
A) is authorized by prior law.
B) Congress authorizes on a monthly basis.
C) is made mandatory by the president of the US.
D) Congress authorizes on an annual basis.
Answer: D
Explanation: A)
B)
C)
D)
46) Which of the following did not directly contribute to the U.S. budget deficit in 2009? 46)
A) the large US trade deficit with China
B) the U.S. recession in 2007-2009
C) the large stimulus package in 2009
D) the large expenses associated with the wars in Iraq and Afghanistan
Answer: A
Explanation: A)
B)
C)
D)
47) Using data from 2009, rank the federal government revenue sources from largest to smallest: 47)
A) individual income tax, corporate tax, estate tax, social insurance tax
B) estate tax, individual income tax, corporate tax, social insurance tax
C) individual income tax, estate tax, social insurance tax, corporate tax
D) individual income tax, social insurance tax, corporate tax, estate tax
Answer: D
Explanation: A)
B)
C)
D)
48) The Kennedy administration endorsed substantial tax cuts because: 48)
A) the unemployment rate was considered to be above its natural rate.
B) tax rates were very high, compared to tax rates today.
C) the economy was considered to be below its full employment level.
D) all of the above
Answer: D
Explanation: A)
B)
C)
D)
12
49) Which of the following government policies is not considered a fiscal policy? 49)
A) government policies regarding money supply in the economy
B) government policies regarding taxation
C) government policies regarding transfer payments and welfare benefits
D) government policies regarding the purchase of goods and services
Answer: A
Explanation: A)
B)
C)
D)
50) A government policy that leads to an increase in aggregate demand is called: 50)
A) an expansionary policy. B) a fiscal policy.
C) an aggregate demand policy. D) an economic growth policy.
Answer: A
Explanation: A)
B)
C)
D)
51) The length of time from when households receive tax rebate checks to the time they spend the 51)
checks is part of the:
A) inside-outside lag. B) inside lag.
C) identification lag. D) outside lag.
Answer: D
Explanation: A)
B)
C)
D)
52) Long-term budget deficits are bad for the economy for all the following reasons except: 52)
A) they decrease investment spending.
B) they make costlier for businesses to raise funds in financial markets.
C) they are likely to lead to deflation.
D) they slow future economic growth.
Answer: C
Explanation: A)
B)
C)
D)
13
54) A means tested program calculates the benefits of the recipient based on 54)
A) the government's budget. B) the government's income.
C) the recipient's income. D) the recipient's tax payments.
Answer: C
Explanation: A)
B)
C)
D)
55) As a large proportion of the population retire in the next few years, what would happen to the 55)
federal revenue?
A) It would decrease, as social security tax revenues decrease.
B) It would decrease, as estate and excise taxes decrease.
C) It would increase, as corporate tax revenues increase.
D) It would increase, as social security payments increase.
Answer: A
Explanation: A)
B)
C)
D)
56) Which of the following is a federal and state health program that benefits the elderly? 56)
A) Medicare B) Medicaid C) Defense D) Social Security
Answer: A
Explanation: A)
B)
C)
D)
58) As the national debt of the United States becomes larger, which component of the Federal Spending 58)
would increase the most?
A) Net Interest B) Defense Spending
C) Discretionary Spending D) Entitlements and Mandatory Spending
Answer: A
Explanation: A)
B)
C)
D)
14
59) Federal discretionary spending consists of: 59)
A) all the programs authorized by Congress on an annual basis.
B) all the spending that Congress authorized by prior laws.
C) interest payments on government debt held by the public.
D) all of the above
Answer: A
Explanation: A)
B)
C)
D)
61) If the government wants to reduce unemployment, government spending should be ________ 61)
and/or taxes should be ________.
A) decreased; increased B) increased; increased
C) decreased; decreased D) increased; decreased
Answer: D
Explanation: A)
B)
C)
D)
62) The length of time that Congress takes to formulate a tax bill to help the economy is part of the: 62)
A) inside lag. B) outside lag.
C) inside-outside lag. D) identification lag.
Answer: A
Explanation: A)
B)
C)
D)
15
64) According to economic studies, the 2001 tax rebates under the presidency of G. W. Bush did not 64)
increase aggregate demand because:
A) consumers saved, instead of spending, the rebates.
B) the cost of the war in Iraq required an immediate increase in taxes.
C) the tax rebates were not large enough to have a significant impact on aggregate demand.
D) the Republican-controlled Congress rolled back the tax rebates the following year.
Answer: A
Explanation: A)
B)
C)
D)
Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
65) According to the application, some economists suggest that in order to reduce the burden of 65)
entitlement programs on future generations, the government should:
A) make people save and invest for the future.
B) eliminate social security.
C) print money to help pay for the costs.
D) make retiring illegal.
Answer: A
Explanation: A)
B)
C)
D)
66) According to the application, the reason why Yu Juo advocated a tax cut if a famine occurs is 66)
because:
A) a tax cut allows people to buy more food.
B) a tax cut increases the government's mandatory spending.
C) a tax cut raises inflation and causes people to buy less.
D) a tax cut increases economic activity.
Answer: D
Explanation: A)
B)
C)
D)
16
68) The largest category of entitlements and mandatory federal spending is: 68)
A) Medicare. B) Medicaid.
C) mean-tested farm price supports. D) Social Security.
Answer: D
Explanation: A)
B)
C)
D)
69) Which of the following is not included in "Entitlement and mandatory spending?" 69)
A) Medicare B) Social Security C) Defense D) Medicaid
Answer: C
Explanation: A)
B)
C)
D)
Figure 10.1
70) Refer to Figure 10.1 to answer this question. Suppose that the economy were at point A, and the 70)
government decreases government spending. In the short run , the economy will move to point:
A) E. B) C. C) D. D) B.
Answer: D
Explanation: A)
B)
C)
D)
17
71) As the population of the United States becomes older, which component of the Federal Spending 71)
would increase the most?
A) Net Interest B) Discretionary Spending
C) Entitlements and Mandatory Spending D) Defense Spending
Answer: C
Explanation: A)
B)
C)
D)
72) The tax cuts enacted during the first term of President Reagan were proposed to: 72)
A) decrease the supply of labor. B) increase aggregate demand.
C) improve economic incentives. D) decrease the supply of output.
Answer: C
Explanation: A)
B)
C)
D)
73) In 2009, federal spending was about ________ percent of GDP. 73)
A) 14.7 B) 33 C) 71 D) 25
Answer: D
Explanation: A)
B)
C)
D)
18
76) In fiscal policy, the outside lags: 76)
A) take a long time because macroeconomic data take time to gather and can be unreliable.
B) take a long time because changes in taxes and government spending require approval from
Congress and the president.
C) usually take a much shorter time than inside lags.
D) A and B are both correct.
Answer: C
Explanation: A)
B)
C)
D)
77) During the Kennedy Era, the highest tax rate for an individual was 77)
A) 33 percent. B) 10 percent. C) 91 percent. D) 40 percent.
Answer: C
Explanation: A)
B)
C)
D)
79) The tax cuts enacted during the first term of President Reagan were designed primarily to: 79)
A) decrease the supply of output. B) increase aggregate demand.
C) increase the supply of output. D) decrease aggregate demand.
Answer: C
Explanation: A)
B)
C)
D)
19
81) The temporary tax surcharge enacted during the early years of the Vietnam War failed to decrease 81)
consumer spending because consumers based their spending on:
A) future income, not current income. B) current income.
C) past income, not current income. D) permanent income, not current income.
Answer: D
Explanation: A)
B)
C)
D)
83) The Kennedy administration was not concerned about the possible negative effect of large tax cuts 83)
because:
A) the tax cuts were initially designed to be temporary.
B) the ensuing federal deficit would disappear as government programs would be cut too.
C) the assassination of President Kennedy became a much more serious issue.
D) the ensuing federal deficit was projected to disappear as higher tax revenues would follow
from faster GDP growth.
Answer: D
Explanation: A)
B)
C)
D)
84) The permanent income view of consumption spending postulate that households base their 84)
spending on:
A) their current income. B) their highest level of income.
C) their average long-run income. D) future income.
Answer: C
Explanation: A)
B)
C)
D)
20
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