Eco ch 12 – Flashcards
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Rising unemployment and decreased business confidence could be signs that the economy is at the start of a(n):
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A. recession.
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Democrats often argue in favor of what to push the economy toward economic recovery, as they did during the recession that began in 2008?
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B. Increase government spending
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Republicans often argue in favor of what to push the economy toward economic recovery, as they did during the recession that began in 2008?
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A. Tax cuts
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The American Recovery and Reinvestment Act of 2009:
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D. All of these are true.
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By 2012, the dollar value of the debt had climbed:
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A. past 100 percent of GDP.
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According to this book, The American Recovery and Reinvestment Act of 2009:
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C. remains hotly debated whether it was successful or not.
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Which model is used to evaluate the effects of macroeconomic policy such as tax cuts?
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A. Aggregate demand and aggregate supply
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The model of aggregate demand and aggregate supply can be used to:
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D. All of these are true.
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Government decisions about the level of taxation and public spending are called:
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A. fiscal policy.
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Fiscal policy is:
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A. government decisions about the level of taxation and public spending
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Fiscal policy most directly affects the economy by increasing or decreasing:
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A. aggregate demand.
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Fiscal policy affects aggregate demand:
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D. All of these are true.
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One way fiscal policy affects aggregate demand is:
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A. directly through government spending.
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An example of fiscal policy would be government:
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D. All of these are examples of fiscal policy.
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If the government were to increase its spending, it would expect
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A. aggregate demand to shift to the right.
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If the government were to decrease its spending, it would expect:
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A. aggregate demand to fall, and thus GDP to fall.
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If the government wished to shift aggregate demand to the right, it might:
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A. increase government spending.
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If the government wished to shift aggregate demand to the left, it might
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A. decrease military spending.
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Consumption depends on:
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B. disposable income.
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Disposable income is:
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D. All of these are true.
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If the government increases the income tax rate, consumers
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A. have less to spend and will reduce their consumption.
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If the government decreases the income tax rate, then:
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C. aggregate demand will shift right.
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If the government increases the income tax rate:
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A. disposable income decreases.
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If the government decreases the income tax rate, they assume it will affect which component of GDP?
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A. C
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If the government increases the income tax rate, they assume:
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A. C will decrease, shifting aggregate demand to the left.
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We use the term expansionary fiscal policy when the overall effect of decisions about taxation and spending is to:
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A. increase aggregate demand.
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If the fiscal policy makers aim to increase aggregate demand, they will likely enact:
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A. expansionary fiscal policy.
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Increased government spending is an example of:
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A. expansionary fiscal policy.
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Government decreasing taxes is an example of:
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A. expansionary fiscal policy.
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If the government undertakes expansionary fiscal policy, it might
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B. decrease income taxes.
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If the government undertakes expansionary fiscal policy, it:
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B. must want to encourage economic activity.
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Contractionary fiscal policy is enacted when the overall effect of decisions about taxation and spending is to:
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A. reduce aggregate demand.
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When fiscal policy makers wish to reduce aggregate demand, they could enact:
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A. contractionary fiscal policy.
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If the government were to reduce its spending, it would be enacting:
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A. contractionary fiscal policy.
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If the government were to increase taxes, it would be enacting:
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A. contractionary fiscal policy.
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If the government enacts contractionary fiscal policy, it could:
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D. All of these are contractionary.
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If the government enacts contractionary fiscal policy, it:
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D. All of these are true.
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One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is:
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A. the automatic adjustment can take a very long time.
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Economist John Maynard Keynes is famous for saying, "In the long run, we are all dead." He is referring to:
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A. the length of time it can take the economy to recover to potential GDP without policy intervention.
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Economist John Maynard Keynes once said, "In the long run, we are all dead." Keynes was likely:
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A. in favor of using fiscal policy.
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When the government enacts fiscal policy, it:
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D. All of these are true.
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Keynesian policy:
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A. refers to policies that actively shift aggregate demand in an effort to reach full employment.
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One of the main difficulties with implementing fiscal policy is:
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D. All of these are true.
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When government decides to use fiscal policy:
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D. None of these is true.
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A difficulty with effective fiscal policy is:
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D. All of these are true.
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Lags in the policy-making process come from:
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D. All of these are true.
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A lack of understanding regarding the current state of the economy creates:
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A. an information lag.
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The process of deciding on and passing fiscal policy legislation creates:
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B. a formulation lag
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The amount of time it takes for fiscal policy to have an impact on the economy creates
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C. an implementation lag.
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Fiscal policy that the government actively chooses to adopt is called:
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B. discretionary fiscal policy.
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Taxes and government spending that affect fiscal policy without specific action from policymakers are called:
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A. automatic stabilizers.
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Automatic stabilizers are the:
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A. taxes and government spending that affect fiscal policy without specific action from policymakers.
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When output deviates from potential GDP, automatic stabilizers work to push the economy
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A. in the same direction that correctly timed and formulated discretionary policy would
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The existing tax rates on income in the United States:
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D. All of these are true.
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When an economy is in a recession, discretionary fiscal policy would call for ________, and the automatic stabilizers would ____________.
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A. lowering tax rates; lower tax revenues
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When an economy is in an economic boom, discretionary fiscal policy would call for _____________, and the automatic stabilizers would _____________.
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C. increasing tax rates; increase tax revenues
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Johnny has been working a lot of overtime during the most current economic boom. As a result, his income is high enough for him to move from the 10 percent tax bracket to the 15 percent tax bracket. So, Johnny pays a higher percentage of a higher income to the government this year. The increased amount paid to the government is an example of:
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B. automatic stabilizers slowing the economy.
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Maude is complaining about how much she pays in taxes now that the economy is finally doing really well. Even though she's in the same tax bracket as she was last year, she's paying $500 more in taxes this year, just because she earned more overtime pay this year. Maude's increased tax payment to the government is an example of:
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D. automatic stabilizers
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During times of economic boom, the spending on unemployment insurance
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A. likely falls, since more people are working.
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Increased government spending on unemployment insurance during a recession is an example of:
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A. an automatic stabilizer.
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An example of an automatic stabilizer is:
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D. All of these are examples of automatic stabilizers.
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During a severe recession, the government decides to lower its tax rates to give consumers relief, and allow them to pay less in taxes. This is an example of:
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A. discretionary fiscal policy.
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With the economy booming, the government starts to worry about the increasing rate of inflation, and decides to cut its spending on highway maintenance and defer it to sometime in the future. This is an example of:
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B. discretionary fiscal policy.
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When the U.S. economy hits a recession, fiscal policy:
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A. automatically becomes expansionary because average tax rates go down and spending on welfare programs goes up.
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In a booming economy, fiscal policy automatically becomes:
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A. contractionary as tax rates rise and welfare payments fall.
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In a booming economy, discretionary fiscal policy:
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A. can be added to the automatic contractionary effects of policies already in place.
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Ricardian equivalence predicts:
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D. All of these are true.
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The idea that if governments cut taxes but not spending, people will not change their behavior, and expansionary policy will have little expansionary effect is known as:
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A. Ricardian equivalence.
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Ricardian equivalence will fail to hold if:
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A. people increase their spending when they receive a tax rebate check.
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The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence:
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C. fails to hold, and people increase their spending.
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If Ricardian equivalence holds, one way to get the expansionary effects of a tax cut to occur is:
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D. None of these will create the expansionary effects of a tax cut.
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In 2008, consumers were mailed a stimulus check in response to the recession. The result showed that Ricardian equivalence:
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B. failed to hold, as most people spent a substantial share of the money.
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The multiplier:
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A. measures the effect of government spending or tax cuts on national income.
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The effect of government spending or tax cuts on national income is measured by the:
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A. multiplier.
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The multiplier effect occurs when:
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A. spending by one person causes others to spend more too, increasing the impact of the initial spending on the economy.
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The multiplier effect suggests that:
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A. spending $1 increases GDP by more than $1.
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In order to accurately capture the multiplier effect, it is important to know:
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B. what proportion of their income people spend.
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The multiplier effect suggests that:
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D. All of these are true.
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The amount by which consumption increases when after-tax income increases by $1 is called the:
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A. marginal propensity to consume.
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The marginal propensity to consume:
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D. All of these are true.
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If the marginal propensity to consume was 0.75, it would mean that:
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A. $0.75 of an additional $1 of individuals' after-tax income is spent on consumption.
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If the marginal propensity to consume was 0.9, it would mean that:
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A. consumers spend $9 out of every $10 of additional disposable income.
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The government-spending multiplier tells us:
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A. the amount by which GDP increases when government spending increases by $1.
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The government-spending multiplier:
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D. All of these are true.
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The government spending multiplier:
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A. grows larger as the marginal propensity to consume increases.
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The government spending multiplier is calculated as:
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A. 1/(1 - MPC).
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If the marginal propensity to consumer is 0.8, the government spending multiplier must be:
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A. 5.
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If the MPC = 0.75, then the government spending multiplier must be:
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B. 4.
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If the MPC is 0.5, then the government spending multiplier must be:
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B. 2.
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If the MPC were to increase from 0.75 to 0.8, then the government spending multiplier would:
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A. increase from 4 to 5.
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If the government increased its spending by $100, and the GDP increased $400 as a result, the MPC must be:
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B. 0.75.
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If the government increased its spending by $200, and the GDP increased $1,000 as a result, the MPC must be:
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A. 0.80.
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If the government decreased its spending by $250, and the GDP decreased $1,000 as a result, the MPC must be:
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B. 0.75.
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If the government decreased its spending by $400, and the GDP decreased $1,000 as a result, the MPC must be:
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A. 0.60.
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If the MPC is 0.8, and the government spends an additional $100b, the overall effect on GDP will be:
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B. $500b.
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If the MPC is 0.6, and the government spends an additional $50b, the overall effect on GDP will be:
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D. an increase of $125b.
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If the MPC is 0.75, and the government cuts spending by $100b, the overall effect on GDP will be: A. a decrease of $400b.
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A. a decrease of $400b.
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If the MPC is 0.9, and the government cuts spending by $200b, the overall effect on GDP will be:
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A. a decrease of $2,000b.
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If the MPC is 0.6, and the government increases its spending by $300b, the overall effect on GDP will be: B. an increase of $750b.
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B. an increase of $750b.
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If the MPC is 0.5, and the government cuts spending by $400b, the overall effect on GDP will be:
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C. a decrease of $800b.
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If the government wishes to increase GDP by $1,000b, and the MPC is 0.6, it should increase its spending by:
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B. $400b.
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If the government wishes to increase GDP by $1,200b, and the MPC is 0.8, it should:
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A. increase its spending by $240b.
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If the government wishes to increase GDP by $1,200b, and the MPC is 0.75, it should:
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A. increase its spending by $300b.
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If the government wishes to decrease GDP by $2,000b, and the MPC is 0.6, it should:
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D. decrease its spending by $800b.
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The taxation multiplier tells us:
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B. tells us the amount GDP decreases when taxes increase by $1.
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The taxation multiplier:
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A. is calculated as -MPC/(1 - MPC).
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For any MPC, the taxation multiplier is:
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A. smaller in absolute value than the government spending multiplier.
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The taxation multiplier is calculated as:
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C. -MPC/(1 - MPC).
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If the marginal propensity to consume is 0.8, the taxation multiplier must be:
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D. -4.
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If the MPC = 0.75, then the taxation multiplier must be:
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C. -3.
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If the MPC is 0.5, then the taxation multiplier must be:
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B. -1.
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If the MPC were to increase from 0.75 to 0.8, then the taxation multiplier would:
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B. decrease from -3 to -4.
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If the government decreased taxes by $100, and the GDP increased $400 as a result, the MPC must be:
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B. 0.8.
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If the government cut taxes by $200, and the GDP increased $1,800 as a result, the MPC must be:
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A. 0.90.
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If the government increased taxes by $250, and the GDP decreased $1,000 as a result, the MPC must be:
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D. 0.80.
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If the government increased taxes by $400, and the GDP decreased $600 as a result, the MPC must be:
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A. 0.60.
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If the MPC is 0.8, and the government cuts taxes by $100b, the overall effect on GDP will be:
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A. $400b.
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If the MPC is 0.6, and the government cuts taxes by $50b, the overall effect on GDP will be:
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D. an increase of $75b.
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If the MPC is 0.75, and the government cuts taxes by $100b, the overall effect on GDP will be:
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B. an increase of $300b.
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If the MPC is 0.6, and the government increases taxes by $300b, the overall effect on GDP will be:
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C. a decrease of $450b.
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If the MPC is 0.5, and the government cuts taxes by $400b, the overall effect on GDP will be:
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B. an increase of $400b.
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If the government wishes to increase GDP by $900b, and the MPC is 0.6, it should decrease taxes by:
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A. $600b.
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If the government wishes to increase GDP by $1,200b, and the MPC is 0.8, it should:
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D. decrease taxes by $300b.
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If the government wishes to increase GDP by $1,200b, and the MPC is 0.75, it should:
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D. decrease taxes by $400b.
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If the government wishes to decrease GDP by $2,100b, and the MPC is 0.6, it should:
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A. increase taxes by $1,400b.
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The government budget involves:
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D. All of these are true.
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Transfer payments:
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D. All of these are true.
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Payments from government accounts to individuals for programs that do not involve a purchase of goods or services are called:
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B. transfer payments.
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A budget deficit is:
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A. the amount of money a government spends beyond the net revenue it brings in.
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A budget surplus is:
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B. the amount of net revenue a government brings in beyond what it spends.
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The total amount of money that a government owes is called:
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C. national debt.
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Economists usually suggest that the best way to examine the deficit is by expressing it:
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A. as a percentage of GDP.
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During a recession, government deficits can grow because:
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D. All of these are true.
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A major distinction to be made is that deficits count government spending shortfalls ___________, and public debt counts _______________.
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A. in a year; the total amount owed from all years
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Which country in the world has a debt larger than 100 percent of its GDP in 2010?
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B. Italy
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Which country in the world has a debt larger than 100 percent of its GDP in 2010?
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D. All of these countries owe more than 100 percent of their GDP.
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As of 2010, which country in the world is the only one to be debt-free?
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A. Brunei
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Giving the government freedom to deficit spend when necessary is:
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A. seen as an economic benefit to public debt.
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A direct cost of public debt is:
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A. the interest the government has to pay to the people it has borrowed from.
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The direct cost of debt depends on:
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A. the interest rate.
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If interest rates increase, the government debt becomes:
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A. more expensive to pay.
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An indirect cost of government debt is:
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A. it can distort the credit market and slow economic growth.