Macroeconomics Chapter 11 Test Questions

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“Fiscal Policy” is the federal government’s plan for
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b. spending and taxes, designed to influence the level of aggregate demand.
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Fiscal policy consists of
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d. taxes and government spending.
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The government’s fiscal policy is its plan to influence aggregate demand by changing
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d. taxation and spending.
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45. Historically, the government has used fiscal policy to affect the economy through
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c. aggregate demand.
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46. The use of spending and taxes by the government to influence aggregate demand is known as
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d. fiscal policy.
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47. In 2009, the U.S. economy was experiencing a(n)
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recessionary gap
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Appropriate fiscal policy in the U.S. in 2009 would attempt to
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c. increase aggregate demand.
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49. In 2009, President Obama and Congress stimulated aggregate demand by
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d. decreasing taxes and increasing government spending.
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50. During the deliberations on fiscal stimulus in 2009, the debate over fiscal policy focused on
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a. the multiplier effect of tax cuts versus higher government spending. b. the multiplier effect of different types of tax cuts. c. the incentive effects of tax cuts. d. all of the above D
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. If wealthy U.S. consumers save most of their tax cut, this means that, compared to government spending changes,
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b. tax changes would have a weaker multiplier effect.
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52. Most of the taxes collected by governments tend to
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. rise and fall with the level of GDP.
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53. ____ is the income actually available to the consumers that determines aggregate demand.
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Disposable income
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. At any given price level, equilibrium GDP on the expenditure side occurs when ____.
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c. Y = C + I + G + (X − IM)
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55. Taxes are the difference between
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d. GDP and disposable income.
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56. Personal income taxes and corporate income taxes are examples of ____ taxes.
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a. variable
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7. With regard to GDP, residential property taxes are an example of ____ taxes.
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c. fixed
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58. In contrast to changes in government spending, tax changes affect spending
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d. indirectly.
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59. When you compare the effects of government spending on aggregate demand with the effects of taxes on aggregate demand, the effects of government spending are
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b. larger.
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60. Once the expenditure schedule has been adjusted for tax levels, the determination of equilibrium GDP
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c. proceeds exactly as before.
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61. Taxes reduce total spending
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d. indirectly by reducing disposable income.
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62. The difference between a fixed tax and a variable tax is that
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c. a variable tax changes when GDP changes, but a fixed tax does not change with GDP.
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63. How does an increase in taxes affect the expenditure schedule?
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d. It causes the schedule to shift downward.
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64. How does a tax cut affect the expenditure schedule?
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b. It causes the schedule to shift upward.
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65. Why does a tax change affect aggregate demand?
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d. A tax change alters disposable income and consumption spending.
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66. If income tax rates are increased in an attempt to balance the federal budget, we should expect to see
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c. a decrease in consumption and a decrease in GDP.
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67. If personal income tax rates are decreased in an attempt to stimulate spending, we should expect to see
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a. an increase in consumption and an increase in GDP.
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68. If all variable taxes in the United States were removed and only fixed taxes remained, what would be the effect on the expenditures schedule?
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a. The expenditure schedule will shift upward and become steeper.
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69. If all fixed taxes in the United States were removed and only variable taxes remained, what would be the effect on the expenditures schedule?
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a. The expenditure schedule will shift upwards
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70. If a state government reduces property taxes for residents at the same time that it increases the state income tax, what will happen to the expenditures schedule of the residents of this state?
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d. It becomes steeper.
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71. Which of the following observations is true?
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b. Tax reductions increase equilibrium GDP
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72. Which of the following observations is true?
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b. Tax reduction shifts the consumption schedule upward.
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73. When we add a personal income tax to the macroeconomic model, the
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b. multiplier becomes smaller.
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74. The oversimplified formula for the multiplier yields a number that is too large due to the exclusion of
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a. variable imports. b. changes in the price-level. c. income taxes. d. All of the above. D
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75. When income taxes are included in the basic macroeconomic model, the value of the
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c. multiplier is decreased.
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If the value of the multiplier is smaller, the economy?
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b. becomes more stable because automatic stabilizers have a larger impact.
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77. An increase in taxes shifts the
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d. consumption schedule downward.
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78. When government spending is added to the basic macroeconomic model, the multiplier for G would
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c. be equal to the multiplier for autonomous spending.
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79. The reason that the multiplier is smaller if there are variable taxes is that
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d. part of an increase in income is taken away in taxes.
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80. If personal income taxes are increased, disposable income and consumption
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c. decrease
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81. During the period from 2001 to 2006, there were several major cuts in personal income tax rates. What effect did these have on the value of the multiplier?
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c. They increased the value of the multiplier.
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82. During the 2009-2010 debate on the stimulus package, democrats argued primarily for increased government spending. What effect would this have on the value of the multiplier?
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c. It would increase the value of the multiplier.
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83. For any given change in taxes, the multiplier
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a. will work indirectly through consumption. b. effect will occur in two steps. c. effect will be smaller than for an equivalent dollar change in government spending. d. All of the above are correct. D
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84. The oversimplified formula for the multiplier is misleading because it ignores the effects of
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a. price-level changes. b. the foreign sector. c. variable taxes. d. All of the above are correct
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85. Changes in government spending
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c. are a direct component of the expenditures schedule and have the same multiplier effect as changes in business investment spending.
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86. A change in a fixed tax will cause the consumption schedule to
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c. shift in a parallel manner.
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87. An increase in taxes will cause the consumption schedule to
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b. shift downward.
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88. An automatic stabilizer is a feature of the economy that
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b. reduces its sensitivity to shocks.
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89. Which of the following is one of the main features of our modern economy that helps ensure against a repeat performance of the Great Depression?
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d. personal income tax
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90. President Clinton, at the beginning of his administration, increased personal income taxes on individuals with relatively high incomes. How will this change the consumption schedule?
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b. It will shift and become flatter.
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91. When the economy has an income tax that is variable, the multiplier is
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c. smaller.
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92. Suppose that the U.S. personal income tax was eliminated and replaced with a fixed tax that raised the exact same amount of revenue. The multiplier would be
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a. larger.
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93. Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit. Which action will have the larger effect on equilibrium GDP?
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b. the decrease in spending
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94. In order to maintain a balanced budget, Congress has decided to cut taxes and government spending both by $25 billion. What will happen to GDP?
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c. It will decrease.
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95. The president wishes to increase spending for education by $4 billion but also maintain a balanced budget. Therefore, taxes will also be increased by $4 billion. What will happen to GDP?
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a. It will increase.
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96. In an effort to balance the budget, the government cuts spending rather than increasing taxes. What will happen to the consumption schedule?
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d. It will shift downward.
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7. If the government decides to change the level of government spending, what happens to the value of the multiplier?
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c. It does not change.
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98. How will a cut in a fixed tax affect the consumption schedule?
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b. It will shift upward.
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99. How does the multiplier for a change in government spending compare to the multiplier for a change in taxes?
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c. It is larger.
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100. As a result of the recent financial crisis, some analysts believed that the MPC in the U.S. declined. If this is true, the value of the multiplier is now
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a. smaller.
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101. Government transfer payments act as automatic stabilizers because as labor income decreases, transfer payments
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increase
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government transfer payments
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can be considered negative taxes
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103. If the federal government increases the amount of Social Security benefits for retired persons, then the
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a. consumption schedule will shift upward. b. aggregate demand curve will shift outward. c. effect on equilibrium GDP will be the same as a cut in taxes. d. All of the above are correct.
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104. In the determination of disposable income, transfer payments are treated as if they
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c. are the opposite of taxes.
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105. Transfer payments are income that is
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d. received but not earned.
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106. An increase in Social Security payments to retired persons has what effect on equilibrium income?
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b. GDP will rise.
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107. In macroeconomic analysis, a transfer payment is considered a
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negative tax
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108. How does an increase in government transfer payments affect aggregate demand?
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b. It has the same effect as a tax increase, , which increases AD but with a smaller multiplier than a change in spending.
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109. You are a member of Congress in 2007-2009 when the economy is in a recessionary gap. If your goal is to achieve full employment, you should vote for
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c. increased government purchases, decreased taxes, and an increase in transfer payments.
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110. If Congress votes to increase government purchases and at the same time decrease personal income taxes, they
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b. have voted for the proper policy to counteract a recessionary gap.
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111. The Japanese economy is stuck in a recessionary gap. The proper fiscal policy could include a(n)
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a. decrease in taxes. b. increase in government purchases. c. increase in transfer payments. d. All of the above are correct.
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112. Expansionary fiscal policy can cause a rise in real GDP in combination with
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an increase improve level
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3. If the federal government wishes to move the economy out of a recessionary gap, the appropriate fiscal policy is a(n)
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none of the above
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118. In the middle of a severe recession, Congress passes an increase in the level of unemployment benefits. This would be considered by economist as a
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negative tax
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119. If the economy experiences an unplanned inventory accumulation at the full employment level of GDP, then the economy is in a(n)
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recessionary gap
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120. After September 11, 2001, President George W. Bush believed in the need for a fiscal stimulus. The proper fiscal policy to reflect this could include a(n)
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c. increase in government purchases.
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121. Suppose the federal government is considering alternatives to increase the level of real GDP in order to reduce unemployment. It can only do one of the following. Which will have the smallest impact on the federal budget?
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increasing government spending
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122. Assume that the government is considering different policies to increase total expenditures in order to reduce unemployment. Which of the following would achieve this objective?
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a. decreasing taxes b. increasing government spending c. increasing transfer payments d. All of the above are correct.
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123. Assume that the federal government wishes to counteract inflation with a policy that has the smallest impact on the federal budget. Which of the following would you recommend?
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decrease government purchases
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124. Which of the following is not a method to reduce the inflationary gap?
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increasing government spending
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125. In 2000, many economists believed that the most serious macroeconomic problem confronting the U.S. economy was an inflationary gap. Which policies would be effective in dealing with this problem?
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increase personal income tax
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126. To eliminate an inflationary gap, the expenditure schedule should
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shift downwards
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127. To eliminate an inflationary gap, the aggregate demand curve should
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shift inwards
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128. In an effort to balance the federal budget, an increase in Social Security taxes is passed. What is the most likely effect of this on equilibrium GDP?
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GDP will decrease
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129. When total expenditures exceed the economy’s potential GDP, the proper fiscal policy is to
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decrease government purchases
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130. Contractionary fiscal policy may have some undesirable consequences. Among these is
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higher unemployment
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compared to an economy self-correcting mechanism, active contractionary fiscal policy will
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work more quickly
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132. Which of the following will shift the aggregate demand curve outward?
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tax cuts and government spending increases
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133. An active stabilization policy designed to limit the size of government would
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d. reduce taxes to eliminate a recessionary gap and reduce G to eliminate an inflationary gap.
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134. Policy makers and citizens who want to expand the size of the government sector would favor stabilization policies that
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b. raise G to eliminate a recessionary gap and raise taxes to eliminate an inflationary gap.
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135. President George W. Bush, who favored a smaller government sector,
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c. favored an active fiscal policy just as well as those who favor a larger government sector.
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136. One of the practical issues in the choice of government spending or taxes to change aggregate demand is how large a
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d. government sector we want.
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137. A fiscal policy that reduces taxes or increases government spending will cause a(n)
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b. increase in real GDP and an increase in the price level.
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138. A “conservative” would most likely argue in favor of
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c. tax cuts when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary.
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139. A “liberal” would most likely argue in favor of
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d. spending increases when fiscal expansion is necessary, and tax increases when fiscal restraint is necessary.
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140. A conservative who was opposed to an increase in the size of the government sector but believed in the Keynesian approach to aggregate demand management would most likely favor which of the following expansionary policies?
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b. decrease taxes
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141. Which of the following statements would appeal to someone who favors an expanded public sector as the basis of expansionary fiscal policy?
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c. “The American people want national defense; they want laws to be enforced; they want federal support for education and environmental protection, and they want transfer payments for the elderly and unemployed.”
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142. When policy makers choose between tax policy and spending policy to affect the level of aggregate demand, they tend to choose on the basis of
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a. how large a public sector they want.
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143. For liberals, the United States has a(n)
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d. public sector that is too small.
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144. For conservatives, the United States needs
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b. a smaller public sector and less regulation.
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146. If a “conservative” wanted to increase aggregate demand, which of the following would she tend to favor?
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d. A decrease in taxes, because it makes the public sector smaller.
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147. If a “liberal” wanted to increase aggregate demand, which of the following would she tend to favor?
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a. An increase in government spending, because it will increase the size of the public sector.
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148. If President Obama wanted to decrease aggregate demand, which of the following would he tend to favor?
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b. A decrease in government spending, because it keeps the public sector small.
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149. If a “liberal” wanted to decrease aggregate demand, which of the following would she tend to favor?
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d. An increase in taxes, because it makes the public sector larger.
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150. Ronald Reagan’s presidency could be characterized as a period of
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c. active fiscal policy.
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151. The macroeconomic policy planner’s job is made difficult because of
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c. disagreements over potential GDP.
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152. Which of the following is a correct conclusion regarding the successful implementation of fiscal policy?
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. Successful fiscal policy is difficult to achieve because in the real world the investment, net exports, and consumption schedules are constantly shifting.
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A major complication with fiscal policy to control aggregate demand is the
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d. constantly changing investment and net exports because of other events.
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154. Do policy makers know the exact value of the fiscal multiplier?
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b. No, they are not known with complete accuracy.
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155. Do policy makers know the level of unemployment that is associated with “full employment”?
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d. No, this number is not known with complete accuracy.
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156. Decreasing aggregate demand to eliminate an inflationary gap often creates the problem of
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unemployment
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157. The central idea of supply-side tax cuts is that certain types of tax cuts will increase
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aggregate supply
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158. A proponent of supply-side economics would advocate
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a. reducing income taxes on saving.
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159. A proponent of supply-side economics would advocate
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b. reducing corporate income tax.
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160. One of the objectives of supply-side policies is to
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c. eliminate the trade-off between inflation and unemployment.
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161. The primary goal of supply-side economics is to
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d. reduce inflation and increase growth at the same time.
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162. The main idea behind supply-side tax cuts is that
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b. some tax cuts can increase aggregate supply.
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163. A reduction in the capital gains tax, often advocated by proponents of supply-side economics, is supposed to stimulate increased
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investment spending
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168. The Bush tax cuts
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d. held constant tax rates for the upper brackets and decreased tax rates for lower income taxpayers.
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169. Critics of supply-side economics argue that a major flaw is
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a. the small magnitude of supply-side effects. b. the large size of demand-side effects. c. increased income inequality. d. All of the above.
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70. One objection to supply-side tax cuts is that demand-side changes
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d. are larger than supply-side changes.
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171. Critics of supply-side economics argue that
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b. supply-siders exaggerate the effects of tax cuts.
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172. If the demand-side effects of supply-side tax cuts are greater than the supply-side effects, then we can expect the result to be a(n)
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c. increase in output and prices.
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173. Critics of supply-side economics argue that tax cuts favored by supply-siders will have the greatest effect on
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c. aggregate demand.
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174. Supply-side tax cuts designed to increase investment spending are attractive in theory, but in practice
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b. are less useful, because they take a long time to increase the capital stock.
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175. Capital gains tax cuts inevitably benefit
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d. high-income stock owners.
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176. Supply-side tax cuts tend to benefit the rich because tax cuts
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d. on capital gains tend to benefit those with larger financial assets.
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177. Tax cuts associated with supply-side economics often lead to increased
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b. federal budget deficits.
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178. Federal budget deficits are often increased by supply-side policies because of their reliance on
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income tax cuts
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179. Supply-side tax cuts are more likely to have the intended beneficial effect on
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investment spending
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180. Reductions in the personal income tax, often advocated by supply-siders to increase labor supply and effort, can be expected to also
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b. increase consumption spending
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181. There is some agreement between the beliefs of President George W. Bush in 2001 on the effectiveness of tax cuts with the beliefs of former President
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reagan
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182. Which of the following conclusions about supply-side tax initiatives is accepted by most economists?
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d. Tax reductions aimed at stimulating business investment are likely to have a greater impact than tax reductions aimed at getting people to work longer hours or save more.
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183. The Reagan tax cuts of the 1980s
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increased the budget defiecit
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184. Most economists seem to agree that cutting taxes
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b. to stimulate investment is more effective than cutting taxes to stimulate work.
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185. In the short run, tax cuts that are intended to increase aggregate supply have
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c. a much greater effect on aggregate demand than on aggregate supply.
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186. A Keynesian economist would expect a supply-side tax cut to shift
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b. only the aggregate demand curve outward.
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187. As a general rule, when an income tax is added to the basic macroeconomic model, what happens to the consumption schedule?
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c. It will become flatter.
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188. When government increases a fixed tax, consumption schedule
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a. shifts downward in a parallel manner.
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197. Government can raise GDP by $1,000 billion by:
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a. raising government purchases b. reducing taxes c. increasing transfer payments d. All of the above.
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198. Which of the following factors has the most quantitative importance on the oversimplified multiplier formula?
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c. it ignores income taxes

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