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Unformatted text preview: Principles of Macroeconomics, 9e ­ TB1 (Case/Fair/Oster) Chapter 9 1 The Governme nt and Fiscal Policy 9.1 Gov 1 M ul ti pl e C h o i c e 1) Fiscal policy refers to A) the techniques used by a business firm to reduce its tax liability. B) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's money supply. C) the spending and taxing policies used by the government to influence the economy. D) the government's ability to regulate a firm's behavior in the financial markets. Answer: C Diff: 1 Topic: Government in the Economy Skill: Definition 2) Which of the following is NOT a category of fiscal policy? A) government policies regarding the purchase of goods and services B) government policies regarding taxation C) government policies regarding money supply in the economy D) government policies regarding transfer payments and welfare benefits Answer: C Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 3) What determines tax revenues? A) the income tax rate B) the rate of interest C) the money supply in the economy D) the rate of inflation Answer: A Diff: 2 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 4) Which of the following is INCORRECT regarding tax revenues? A) they increase during recessions B) they change with changes in the tax rate C) they are a revenue source in the government's budget D) they increase the rate of interest Answer: A Diff: 2 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 5) During recessions, government spending usually A) decreases because unemployment payments decrease. B) increases because unemployment payments increase. C) decrease because unemployment payments increase. D) increases because unemployment payments decrease. Answer: B Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 6) Disposabl e income A) increases when net taxes increase. B) increases when income increases. C) decreases when saving increases. D) increases when saving decreases. Answer: B Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 7) Bill's income is $1,000 and his net taxes are $350. His disposable income is A) $1,350. B) $650. C) -$350. D) $750. Answer: B Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 8) When the government sector is included in the income-expenditure model, the equation for aggregate income is A) Y = C + S - T. B) Y = C + I. C) Y = C + I + G. D) Y = C + S + I. Answer: C Diff: 1 Topic: Government in the Economy Skill: Definition 9) The difference between what a government spends and what it collects in taxes in a year is A) net revenue. B) net taxes. C) the government budget deficit or surplus. D) the government debt. Answer: C Diff: 1 Topic: Government in the Economy Skill: Definition 10) In 2007, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2007, the city of Canfield had a A) budget surplus of $450,000. B) budget surplus of $50,000. C) budget deficit of $50,000. D) budget surplus of $5,000. Answer: B Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 11) In 2007, Miketown collected $250,000 in taxes and spent $350,000. In 2007, the city of Miketown had a the city of A) budget surplus of $100,000. B) budget surplus of 57%. C) budget deficit of $100,000. D) budget deficit of $200,000. Answer: C Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 12) After nt is added to the income-expenditure model, the formula for the aggregate consumption function is governme A) C = a - b(Y - T). B) C = a - b(T - Y). C) C = a + b(Y + T). D) C = a + b(Y T). Answer: D Diff: 2 Topic: Government in the Economy Skill: Definition 13) The consumption function is C = 100 + .6Yd. If income is $1,000 and net taxes are $300, consumption equals aggregate A) 800. B) 520. C) 580. D) 700. Answer: B Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 14) The consumption function is C = 800 + .8Yd. If income is $2,000 and net taxes are $500, consumption equals aggregate A) 2,000. B) 1,500. C) 2,150. D) 2,050. Answer: A Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 15) The consumption function is C = 100 + .8Yd. If income is $600 and net taxes are zero, consumption equals aggregate A) zero. B) 460. C) 580. D) 360. Answer: C Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 16) The consumption function is C = 1,000 + .9Yd. If income is $3,600 and net taxes are $600, consumption aggregate equals A) 3,400. B) 3,700. C) 2,400. D) 4,000. Answer: B Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 17) If output is less than planned aggregate expenditure, there will be A) an unplanned increase in inventories. B) an unplanned decrease in inventories. C) no change in inventories. D) a planned increase in inventories. Answer: B Diff: 2 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking Refer to the information provided in Table 9.1 below to answer the questions that follow. Table 9.1 18) Refer to Table 9.1. At an output level of $1,200 billion, the level of aggregate expenditure is A) $1,000 billion. B) $1,200 billion. C) $1,300 billion. D) $1,400 billion. Answer: C Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 19) Refer to Table 9.1. At an output level of $1,200 billion, there is an unplanned inventory change of A) positive $10 billion. B) zero. C) negative $100 billion. D) positive $100 billion. Answer: C Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 20) Refer to Table 9.1. At an output level of $2,000 billion, the level of aggregate expenditure is A) $1,500 billion. B) $1,800 billion. C) $1,900 billion. D) $2,000 billion. Answer: C Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 21) Refer to Table 9.1. At an output level of $2,000 billion, there is an unplanned inventory change of A) positive $100 billion. B) positive$10 billion. C) negative $100 billion. D) zero. Answer: A Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 22) Refer to Table 9.1. The equilibrium level of output is ________ billion. A) $800 B) $1,200 C) $1,600 D) $2,000 Answer: C Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 23) Refer to Table 9.1. At an output level of $800 billion, disposable income equals ________ billion. A) $800 B) $700 C) $600 D) $500 Answer: B Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 24) Refer to Table 9.1. At an output level of $2,000 billion, the value of saving A) cannot be determined from the given information. B) is $300 billion. C) is $200 billion. D) is $100 billion. Answer: B Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 25) Refer to Table 9.1. At the equilibrium level of income, leakages equal ________ billion. A) $0 B) $100 C) $200 D) $300 Answer: D Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 26) Refer to Table 9.1 At an output level of $1,200 billion, there is a tendency for output A) to fall. B) to increase. C) to remain constant. D) to either increase or decrease. Answer: B Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 9.2 below to answer the questions that follow. Table 9.2 27) Refer to Table 9.2. At an output level of $1,500 billion, the level of aggregate expenditure is ________ billion. A) $1,300 B) $1,400 C) $1,500 D) $1,600 Answer: B Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 28) Refer to Table 9.2. At an output level of $1,500 billion, there is an unplanned inventory A) decrease of $200 billion. B) change of $0. C) increase of $100 billion. D) increase of $150 billion. Answer: C Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 29) Refer to Table 9.2. At an output level of $2,500, the level of aggregate expenditure is ________ billion. A) $1,500 B) $2,000 C) $2,300 D) $2,200 Answer: D Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 30) Refer to Table 9.2. At an output level of $2,500, there is an unplanned inventory A) increase of $300 billion. B) decrease of $200 billion. C) change of $0. D) increase of $200 billion. Answer: A Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 31) Refer to Table 9.2. The equilibrium level of output is ________ billion. A) $1000 B) $1,500 C) $2,000 D) $2,500 Answer: A Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 32) Refer to Table 9.2. At an output level of $1,500, disposable income A) is $1,000. B) is $1,200. C) is $1,400. D) cannot be determined from this information. Answer: C Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 33) Refer to Table 9.2. At an output level of $2,500, the level for saving A) is $300. B) is $400. C) is $500. D) cannot be determined from this information. Answer: B Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 34) Refer to Table 9.2 At the equilibrium level of income, leakages equal ________ billion. A) $0 B) $300 C) $500 D) $200 Answer: D Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 35) Refer to Table 9.2. At an output level of $2,500, there is a tendency for output A) to increase. B) to remain constant. C) to either increase or decrease. D) to fall. Answer: D Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills The Italian economy can be characterized by Equation 9.1. EQUATION 9.1: C = 300 + .8Yd G = 400 T = 200 I = 200 36) Refer to Equation 9.1. The equilibrium level of output for the Italian economy is A) $2,850. B) $3,700. C) $3,145. D) $3,800. Answer: B Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 37) Refer to Equation 9.1. At the equilibrium level of output in Italy, consumption equals A) $3,100. B) $3,250. C) $3,400. D) $3,625. Answer: A Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 38) Refer to Equation 9.1. At the equilibrium level of output in Italy, saving equals A) $450. B) $400. C) $550. D) $500. Answer: B Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 39) Refer to Equation 9.1. At the equilibrium level of output in Italy, leakages equal A) $650. B) $600. C) $750. D) $700. Answer: B Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills The Canadian economy can be characterized by Equation 9.2. EQUATION 9.2: C = 500 + .5Yd Taxes = 600 Equilibrium Output = $4,000 40) Refer to Equation 9.2. At equilibrium, the sum of investment and government purchases in Canada is A) $1,800. B) $1,500. C) $1,750. D) cannot be determined from the given information Answer: A Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 41) Refer to Equation 9.2. At equilibrium, government purchases in Canada is A) $1,500. B) $1,000. C) $1,250. D) cannot be determined from the given information Answer: D Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 42) Refer to Equation 9.2. At equilibrium, saving in Canada equals A) $1,200. B) $1,600. C) $1,350. D) $1,250. Answer: A Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 43) Refer to Equation 9.2. At equilibrium leakages in Canada equal A) $1,750. B) $1,800. C) $2,100. D) $1,700. Answer: B Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 44) Assuming there is no foreign trade in the economy, the economy is in equilibrium when A) S + T = C + I. B) I + G = S + T. C) IT = S + G. D) G + T = S + I. Answer: B Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 45) Assuming there is no foreign trade in the economy, equilibrium is achieved when government purchases equal A) saving minus net taxes minus consumption. B) saving plus net taxes minus investment. C) net taxes plus investment minus saving. D) net taxes minus investment minus saving. Answer: B Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking Refer to the information provided in Figure 9.1 below to answer the questions that follow. Figure 9.1 46) Refer to Figure 9.1. The equilibrium level of aggregate expenditure is $________ billion. A) 3,000 B) 2,000 C) 4,000 D) 1,500 Answer: B Diff: 1 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 47) Refer to Figure 9.1. The MPC in this economy is A) 0.4. B) 0.6. C) 0.5. D) cannot be determined from the given information Answer: C Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 48) Refer to Figure 9.1. At equilibrium, injections A) can be greater than $1,000 billion. B) equal $1,500 billion. C) equal leakages. D) equal $2,000 billion. Answer: C Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 49) Refer to 9.1. At equilibrium, the part of consumption that is dependent on income equals $________ billion. Figure A) $1,500 B) $1,000 C) $2,000 D) cannot be determined from the given information Answer: B Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 50) Refer to 9.1. Suppose that the consumption function is C = 400 + 0.5Yd and taxes are $200 billion, at equilibrium Figure the value of injections are A) $700 billion. B) $500 billion. C) $650 billion. D) $350 billion. Answer: A Diff: 3 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 51) Refer to 9.1. Suppose that the consumption function is C = 400 + 0.5Yd and taxes are $200 billion, at equilibrium Figure the value of autonomous consumption is A) $400 billion. B) $300 billion. C) $100 billion. D) $200 billion. Answer: A Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 52) Refer to 9.1. Suppose that the consumption function is C = 400 + 0.5Yd and taxes are $200 billion, at equilibrium, Figure what is the value of consumption? A) $1,350 B) $2,000 C) $1,300 D) $1,150 Answer: C Diff: 2 Topic: Government in the Economy Skill: Analytic AACSB: Analytic Skills 53) If planned injections exceed leakages, output will A) decrease. B) increase. C) remain constant. D) either increase or decrease. Answer: B Diff: 2 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 54) For the economy to be in equilibrium, A) government purchases must equal tax revenue and saving must equal investment. B) government purchases must equal the sum of tax revenue, saving and investment. C) government purchases plus investment must equal saving plus tax revenue. D) investment plus tax revenue must equal government purchases plus saving. Answer: C Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al s e 1) The economy is in equilibrium when aggregate output equals consumption spending. Answer: FALSE Diff: 1 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 2) For the economy to be in equilibrium, the following condition must be satisfied: G + I = S + T. Answer: TRUE Diff: 1 Topic: Government in the Economy Skill: Definition 3) When investment is greater than planned investment, output grows. Answer: FALSE Diff: 2 Topic: Government in the Economy Skill: Conceptual AACSB: Reflective Thinking 4) Disposabl e income is income less net taxes. Answer: TRUE Diff: 1 Topic: Government in the Economy Skill: Definition 9.2 Fisc 1 M ul ti pl e C h o i c e 1) If the nt wants to reduce unemployment, government purchases should be ________ and/or taxes should be governme ________. A) increased; increased B) decreased; decreased C) decreased; increased D) increased; decreased Answer: D Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 2) The as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will President cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the of Vulcan MPC in Vulcan is 0.6. Which of the following would be the best advice to give to the Vulcan president? hires you A) reduce government purchases by $4 billion B) increase taxes by $10 billion C) reduce government purchases by $10 billion D) increase taxes by $2.5 billion Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 3) The as an economic consultant. He is concerned that the output level in Atlantis is too low and that this will leader of cause prices to fall. He feels that it is necessary to increase output by $200 billion. He tells you that the Atlantis MPC in Atlantis is 0.8. Which of the following would be the best advice to give to the Atlantis president? hires you A) reduce government spending by $100 billion B) decease taxes by $50 billion C) increase government spending by $200 billion D) increase government spending by $100 billion Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 9.3 below to answer the questions that follow. Table 9.3 All Numbers are in $ Million 4) Refer to Assuming constant MPC, at income of $1,000 million, consumption is $________ million, and at income Table 9.3. of $1,300 million, consumption is $________ million. A) 600; 860 B) 640; 900 C) 680; 920 D) 720; 960 Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 5) Refer to Assuming constant MPC, at income of $1,200 million, saving is $________ million, at income of $1,600 Table 9.3. million, saving is $________ million. A) 150; 230 B) 160; 240 C) 170; 250 D) 180; 260 Answer: B Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 6) Refer to Table 9.3. The MPC in this economy is ________ and the MPS is ________. A) 0.5; 0.5 B) 0.7; 0.5 C) 0.9; 0.1 D) 0.8; 0.2 Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 7) Refer to Table 9.3. The equilibrium level of aggregate output is $________ million. A) 1,200 B) 1,300 C) 1,400 D) 1,500 Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 8) Refer to Table 9.3. Which of the following variables is NOT considered autonomous? A) Saving B) Planned investment C) Planned government spending D) none of the above Answer: A Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 9) Refer to Suppose the economy is in equilibrium and the government increases spending by $50 million, the new Table 9.3. equilibrium output is $________ million A) 1,650 B) 1,450 C) 1,750 D) 1,350 Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 10) Refer to Suppose the economy is in equilibrium and the government raises taxes from $200 million to $220 Table 9.3. million, equilibrium output will ________ by $________ million. A) decrease; 20 B) increase; 20 C) decrease; 80 D) increase; 80 Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 9.4 below to answer the questions that follow. Table 9.4 All Figures in Billions of Dollars 11) Refer to Table 9.4. The equilibrium level of income is A) $3,400 billion. B) $3,800 billion. C) $2,000 billion. D) $3,600 billion. Answer: A Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 12) Refer to Table 9.4. The MPS A) is .8. B) is .1. C) is .2 D) cannot be determined from the available information. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 13) Refer to Table 9.4. The value of the government spending multiplier A) is 10. B) is .9. C) is 5. D) cannot be determined from the available information. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 14) Refer to The economy is at the equilibrium level of output. If government spending increases to a level of $400 Table 9.4. billion, the new equilibrium level of output is A) $5,400 billion. B) $2,100 billion. C) $6,040 billion. D) $6,600 billion. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 15) Refer to The economy is at the equilibrium level of output. If government spending decreases by $100 billion, the Table 9.4. new equilibrium level of output is A) $3,100 billion. B) $2,400 billion. C) $1,450 billion. D) $1,550 billion. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 16) Refer to Table 9.4. If taxes are reduced from $100 billion to $50 billion, the new equilibrium level of output is A) $4,050 billion. B) $1,600 billion. C) $3,850 billion. D) $2,100 billion. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 17) Refer to If taxes are reduced from $100 billion to $50 billion and government spending is reduced from $200 Table 9.4. billion to $150 billion, the new equilibrium level of income A) is $3,350 billion. B) is $3,550 billion. C) is $1,600 billion. D) cannot be determined from this information. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 18) The government purchases multiplier is A) the difference between the old equilibrium level of output and the new equilibrium level of output. B) the ratio of the change in government purchases to the change in the equilibrium level of output. C) the ratio of the change in the equilibrium level of output to a change in government purchases. D) the difference between the new and old levels of government purchases. Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Definition 19) If the MPC is .75, the government spending multiplier is A) 2.5. B) 4. C) 3. D) 1.75. Answer: B Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 20) If the MPC is .5, the tax multiplier is A) -2.5. B) -2. C) -1. D) -1.666. Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 21) If the nt spending multiplier is 2 and government purchases increase by $200 billion, output will increase by governme A) $100 billion. B) $400 billion. C) $1,600 billion. D) $500 billion. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 22) If the nt spending multiplier is 5 and government spending decreases by $200 billion, output will ________ by governme $________ billion. A) increase; 200 B) decrease; 1,000 C) decrease; 40 D) decrease; 200 Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills The economy of Bananaland can be characterized by Equation 9.3. EQUATION 9.3: C = 2,000 + .75Yd T = 200 G = 400 I = 500 23) Refer to Equation 9.3. The equilibrium level of income in Bananaland is A) 4,800. B) 11,000. C) 10,000. D) 5,600. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 24) Refer to Equation 9.3. If government spending in Bananaland increases by $50, equilibrium output increases by A) $100. B) $200. C) $400. D) $800. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Figure 9.3 below to answer the questions that follow. Figure 9.3 25) Refer to Figure 9.3. At equilibrium, autonomous planned expenditures equal $________ billion. A) 200 B) 100 C) 500 D) 300 Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 26) Refer to Figure 9.3. The expenditure multiplier is A) 4. B) 5. C) 2.5. D) 2. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 27) Refer to 9.3. If autonomous planned expenditure increases by $20 billion, equilibrium aggregate output ________ Figure to $________ billion. A) decreases; 360 B) increases; 550 C) increases; 600 D) increases; 640 Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Figure 9.4 below to answer the questions that follow. Figure 9.4 28) Refer to Figure 9.4. Along aggregate expenditure AE1, the MPC is A) .6. B) .7. C) .8. D) .9. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 29) Refer to Figure 9.4. What is the value of Point A? A) $3,500 billion. B) $6,000 billion. C) $7,000 billion. D) cannot be determined from the given information Answer: A Diff: 3 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 30) Refer to Figure 9.4. What is the value of Point B? A) $7,000 billion B) $3,500 billion C) $6,000 billion D) cannot be determined from the given information Answer: B Diff: 3 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 31) Refer to Figure 9.4. What is the value of the expenditure multiplier? A) 8 B) 10 C) 5 D) 20 Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 32) Refer to Figure 9.4. Along AE1, injections equal leakages when aggregate output equals $________ billion. A) 1,500 B) 3,000 C) 2,500 D) 2,000 Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 33) Refer to 9.4. If aggregate expenditures are represented by AE2 and government spending increases by $20 billion, Figure equilibrium aggregate output increases by $________ billion. A) 100 B) 200 C) 400 D) 800 Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 34) Governm spending increases by $40 billion and the equilibrium level of output increases by $200 billion. The ent government spending multiplier A) is 5. B) is 4. C) is 6. D) cannot be determined from this information, because the MPC is not given. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 35) Assume an economy is in equilibrium at an output level of $1,500 billion. If government spending increases by $200 billion, then at the output level of $1,500 billion, there is A) an unplanned rise in inventories. B) an unplanned fall in inventories. C) an unplanned inventory change of zero. D) either an unplanned increase or decrease in inventories depending on the value of the MPC. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 36) Assume an economy is in equilibrium at an output level of $600 billion. If government purchases decrease by $75 billion, then at the output level of $600 billion, there is A) an unplanned increase in inventories. B) an unplanned inventory change of zero. C) unplanned increase or decrease in inventories depending on the value of the MPC. either an D) an unplanned decrease in inventories. Answer: A Diff: 2 Topic: FiscalPolicy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 37) A decrease in lump-sum taxes will A) make the consumption function flatter. B) make the consumption function steeper. C) shift the consumption function downward. D) shift the consumption function upward. Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 38) The tax multiplier is A) the ratio of the change in taxes to the change in the equilibrium level of output. B) the MPC multiplied by the MPS. C) the difference in taxes multiplied by the change in the equilibrium level of output. D) the ratio of the change in the equilibrium level of output to the change in taxes. Answer: D Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Definition 39) If the MPC is 0.7, the tax multiplier is A) -2.22. B) -1.22. C) -2.33. D) -3.33. Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 40) If the MPS is 0.4, the tax multiplier is A) -2.5. B) -1.67. C) -1.5. D) -2.33. Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 41) If the MPS is 0.5, the tax multiplier is A) -5. B) -2. C) -1. D) -0.5. Answer: C Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 42) Taxes are reduced by $70 billion and income increases by $280 billion. The value of the tax multiplier is A) -4. B) -20. C) -10. D) -5. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 43) Taxes are reduced by $15 billion and income increases by $75 billion. The value of the tax multiplier is A) -4. B) 9. C) -10. D) -5. Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 44) If the tax multiplier is -9 and taxes are reduced by $100 billion, output A) falls by $100 billion. B) falls by $900 billion. C) increases by $900 billion. D) increases by $100 billion. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 45) If the tax multiplier is -12 and taxes are increased by $6 billion, output A) falls by $2 billion. B) falls by $72 billion. C) increases by $2 billion. D) increases by $72 billion. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Figure 9.5 below to answer the questions that follow. Figure 9.5 46) Refer to Figure 9.5. Which of the following equations best represents the aggregate expenditure function? A) AE = 1,600 + . 4Y. B) AE = 400+ . 75Y. C) AE = 1,200 + . 8Y. D) AE = 1,000 + . 5Y. Answer: B Diff: 3 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 47) Refer to Figure 9.5. At aggregate output of $2,400 billion, unplanned inventories equal $________ billion. A) 200 B) 800 C) -800 D) -400 Answer: A Diff: 3 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 48) Refer to 9.5. The government spending multiplier equals ________ and the tax multiplier equals ________. Figure A) 2.5; -1.5 B) 4; -3 C) 5; -4 D) 9; -8 Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 49) Refer to 9.5. If the economy is in equilibrium and the government increases spending by $100 billion, equilibrium Figure aggregate expenditures increase to $________ billion. A) 1,700 B) 1,800 C) 2,000 D) 2,400 Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 50) Refer to 9.5. If the economy is in equilibrium and the government decreases spending by $200 billion, Figure equilibrium aggregate output decreases to $________ billion. A) 1,400 B) 1,200 C) 1,000 D) 800 Answer: D Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 51) Refer to 9.5. If the economy is in equilibrium and the government increases taxes by $50 billion, equilibrium Figure aggregate output ________ to $________ billion. A) increases; 2,000 B) decreases; 1,550 C) decreases; 1,450 D) decreases; 1,400 Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 52) Refer to 9.5. If the economy is in equilibrium and the government increases spending by $100 billion and Figure increases taxes by $100 billion, equilibrium aggregate output A) does not change. B) increases by $100 billion. C) increases by less than $100 billion. D) increases by more than $100 billion. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 53) If the government spending multiplier is 10, then the tax multiplier A) is -5. B) is -4. C) is -9. D) cannot be determined because the MPS is not given. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 54) If the tax multiplier is -8.42, then the government purchases multiplier A) is 8.42. B) is 9.42. C) is 1.58. D) cannot be determined because the MPS is not given. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 55) If nt spending is increased by $300, taxes are reduced by $300, and the MPS is .5, equilibrium output will governme change by A) $300. B) $0. C) $900. D) an amount that cannot be determined from this information. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 56) If nt purchases are increased by $100, taxes are reduced by $100, and the MPC is .8, equilibrium output governme will change by A) -$400. B) $1,800. C) $900. D) an amount that cannot be determined from this information. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 57) If nt spending is increased by $550 and taxes are increased by $550, the equilibrium level of income will governme A) decrease by $550. B) not change. C) increase by $550. D) increase by $1,100. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 58) If nt purchases are decreased by $800 and taxes are decreased by $800, the equilibrium level of income will governme A) decrease by $800. B) increase by $800. C) not change. D) decrease by $1600. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 59) Assume that the MPC is .75. If government spending increases by $400, equilibrium output ________; and if taxes increase by $400, equilibrium output ________. A) increases by $1,600; decreases by $1,600 B) increases by $1,600; decreases by $1,200 C) increases by $1,200; decreases by $1,600 D) increases by $400; decreases by $400 Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 60) Assume that the MPC is .9. If government purchases increase by $100, equilibrium output ________; and if taxes increase by $100, equilibrium output ________. A) increases by $1,000; decreases by $1,000 B) increases by $900; decreases by $1,000 C) increases by $1,000; decreases by $900 D) increases by $400; decreases by $400 Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 61) You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The Chairperson of the CEA tells you that she believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. She wants to know what policy to pursue to increase aggregate output by $300 billion. The best estimate she has for the MPC is .8. Which of the following policies should you recommend? A) Increase government purchases by $60 billion. B) Increase government purchases by $150 billion. C) Cut taxes by $60 billion. D) Cut taxes by $60 billion and to increase government purchases by $60 billion. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 62) You are Economic Analogies (BEA) as an economic consultant. The Chairperson of the BEA tells you that he hired by believes the current unemployment rate is too low. The unemployment rate can be increased if aggregate the output decreases. He wants to know what policy to pursue to decrease aggregate output by $100 billion. Bureau of The best estimate he has for the MPC is .9. Which of the following policies should you recommend? A) Decrease government spending by $10 billion. B) Decrease government spending by $100 billion. C) Increase taxes by $100 billion. D) Cut taxes by $60 billion and to increase government spending by $60 billion. Answer: A Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 63) You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The chairperson of the CEA tells you that she believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. She wants to know what policy to pursue to increase aggregate output by $300 billion. The best estimate she has for the MPC is .8. Which of the following policies should you recommend? A) Increase government purchases by $75 billion. B) Reduce taxes by $75 billion. C) Reduce taxes by $75 billion and to increase government purchases by $75 billion. D) Reduce the budget deficit by $300 billion. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 64) You are Economic Analogies (BEA) as an economic consultant. The chairperson of the BEA tells you that he hired by believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate the output increases. He wants to know what policy to pursue to increase aggregate output by $500 billion. Bureau of The best estimate he has for the MPC is .7. Which of the following policies should you recommend? A) Decrease government spending by $75 billion. B) Reduce taxes by $214.3 billion. C) Reduce taxes by $314.3 billion and to decrease government spending by $500 billion. D) Reduce the budget deficit by $300 billion. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 65) You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The chairperson of the CEA tells you that she believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. She wants to know what policy to pursue to increase aggregate output by $300 billion. The best estimate she has for the MPC is .8. Which of the following policies should you recommend? A) Increase government spending by $300 billion and reduce taxes by $300 billion. B) Reduce government spending by $300 billion and increase taxes by $300 billion. C) Increase both government spending and taxes by $300 billion. D) Decrease both government spending and taxes by $300 billion. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 66) You are Economic Analogies (BEA) as an economic consultant. The chairperson of the BEA tells you that he hired by believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate the output increases. He wants to know what policy to pursue to increase aggregate output by $500 billion. Bureau of The best estimate he has for the MPC is .75. Which of the following policies should you recommend? A) Reduce government spending by $500 billion and reduce taxes by $500 billion. B) Increase both government spending and taxes by $500 billion. C) Increase government spending by $500 billion and reduce taxes by $500 billion. D) none of the above Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Analytic AACSB: Analytic Skills 67) As the size of the MPC increases, the value of the balanced-budget multiplier A) increases. B) decreases. C) remains constant. D) could either increase or decrease. Answer: C Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 68) Suppose beginning of 2007 the federal debt was $9 trillion. During 2007, the government balanced its budget. At that in the the end of 2007, the federal debt A) increased. B) stayed the same. C) decreased. D) was eliminated. Answer: B Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al s e 1) If autonomous spending increases, the aggregate expenditure function becomes steeper. Answer: FALSE Diff: 1 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 2) If the nt increases taxes by $4 billion and increases spending by $4 billion, equilibrium output increases by $4 governme billion. Answer: TRUE Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 3) A tax cut billion will have less effect on the economy than an increase in government purchases of $12 billion. of $12 Answer: TRUE Diff: 2 Topic: Fiscal Policy at Work: Multiplier Effects Skill: Conceptual AACSB: Reflective Thinking 9.3 The Fed eral Bud get 1 M ul ti pl e C h o i c e 1) The total amount owed by the federal government to the public is the A) federal budget deficit. B) federal debt. C) net tax revenue. D) fiscal drag. Answer: B Diff: 1 Topic: The Federal Budget Skill: Definition 2) What is the largest expenditure source in the government's budget? A) consumption B) transfer payments C) net interest payments D) net subsidies Answer: B Diff: 1 Topic: The Federal Budget Skill: Fact 3) What is the largest source of revenue in the government's budget? A) social insurance B) indirect business taxes C) corporate taxes D) personal taxes Answer: D Diff: 1 Topic: The Federal Budget Skill: Fact 4) A government's debt is reduced when it A) balances is budget. B) sells more bonds. C) runs a deficit. D) runs a surplus. Answer: D Diff: 2 Topic: The Federal Budget Skill: Conceptual AACSB: Reflective Thinking 5) When a government runs a deficit A) its debt increases. B) it must raise taxes C) its debt decreases. D) it must cut spending. Answer: A Diff: 1 Topic: The Federal Budget Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al s e 1) The amount the government owes to the public is the deficit. Answer: FALSE Diff: 1 Topic: The Federal Budget Skill: Definition 2) If tax receipts are less than government expenditures the government is running a deficit. Answer: TRUE Diff: 1 Topic: The Federal Budget Skill: Conceptual AACSB: Reflective Thinking 3) If the government runs a deficit, then the government debt increases. Answer: TRUE Diff: 2 Topic: The Federal Budget Skill: Conceptual AACSB: Reflective Thinking 4) Defense spending is the largest part of the U.S. government spending. Answer: FALSE Diff: 2 Topic: The Federal Budget Skill: Fact 5) The government budget is balanced when tax receipts equal government spending. Answer: TRUE Diff: 1 Topic: The Federal Budget Skill: Conceptual AACSB: Reflective Thinking 9.4 The 1 M ul ti pl e C h o i c e 1) Which of the following is a CORRECT sequence of events during a recession? A) unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises C) unemployment rises, income falls, tax revenue rises, unemployment benefits fall, and the budget deficit falls D) unemployment rises, income rises, tax revenue rises, unemployment benefits rise, and the budget deficit rises Answer: B Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Analytic AACSB: Analytic Skills 2) Which of the following is a CORRECT sequence of events during an expansion? A) unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit falls B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises C) unemployment rises, income falls, tax revenue rises, unemployment benefits fall, and the budget deficit falls D) unemployment falls, income rises, tax revenue rises, unemployment benefits fall, and the budget deficit falls Answer: D Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Analytic AACSB: Analytic Skills 3) The of automatic stabilizers means that the federal deficit is ________ than it otherwise would be in a presence recession and ________ than it otherwise would be in an expansion. A) larger; smaller B) smaller; larger C) smaller; smaller D) larger; larger Answer: A Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 4) During a recession, automatic stabilizers cause the federal deficit to A) decrease. B) either increase or decrease. C) remain unchanged. D) increase. Answer: D Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 5) An example of an automatic stabilizer is A) the food stamp program. B) changing the tax laws to increase the marginal tax rates. C) the indexation of social security benefits to the consumer price index. D) the interest the government pays on loans. Answer: A Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 6) If the economy is in a recession, the full-employment deficit is ________ the actual deficit. A) larger than B) equal to C) smaller than D) equal to or larger than Answer: C Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 7) If the s full-employment output is $6 trillion, actual output is $3.5 trillion, and the budget deficit is $20 billion, economy' the deficit in this case is known as a A) natural employment deficit. B) cyclical deficit. C) structural deficit. D) debt deficit. Answer: B Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 8) If the s full-employment output is $9 trillion, actual output is $9 trillion, and the budget deficit is $20 billion, economy' the deficit in this case is known as a A) natural employment deficit. B) cyclical deficit. C) structural deficit. D) fiscal deficit. Answer: C Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 9) Assume United States the actual deficit is $300 billion. If the United States were at full employment, the deficit that in the would be $100 billion. The structural deficit in the United States is A) $100 billion. B) $200 billion. C) $300 billion. D) $400 billion. Answer: A Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 10) Assume Atlantis the actual deficit is $200 billion. If the Atlantis were at full employment, the deficit would be that in the $50 billion. The structural deficit in the Atlantis is A) $100 billion. B) $200 billion. C) $50 billion. D) $150 billion. Answer: C Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 11) In which case will the government collect more tax revenue? A) 40% tax rate and $40,000 average income B) 90% tax rate and $10,000 average income C) 20% tax rate and $90,000 average income D) 4% tax rate and $80,000 average income Answer: C Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Analytic AACSB: Analytic Skills 12) If taxes are a function of income, then the AE function is A) flatter than if taxes are a lump-sum amount. B) steeper than if taxes are a lump-sum amount. C) vertical. D) downward sloping. Answer: A Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 13) Related to Economics in Practice on p. 174 [486]: The value of the rebate checks issued by the government in 2008 the will impact the economy and be affected by the A) government spending multiplier. B) tax multiplier. C) money multiplier. D) balanced- budget multiplier. Answer: B Diff: 1 Topic: The Economy's Influence on the Government Budget: Economics in Practice Skill: Conceptual AACSB: Reflective Thinking 14) Related to Economics in Practice on p. 174 [486]: As a direct stimulus for the economy, tax rebates will generally the have ________ increasing government spending. A) a greater impact than B) a smaller impact than C) an equal impact to D) no impact, as opposed to Answer: B Diff: 2 Topic: The Economy's Influence on the Government Budget: Economics in Practice Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al s e 1) During , automatic stabilizers work to reduce government expenditures and increase government revenues. recessions Answer: FALSE Diff: 2 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 2) The structural deficit is the deficit at full employment. Answer: TRUE Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Definition 3) In an expansion the U.S. federal government deficit automatically grows. Answer: FALSE Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 4) Automati c stabilizers include those elements of government spending that automatically grow during a recession. Answer: TRUE Diff: 1 Topic: The Economy's Influence on the Government Budget Skill: Conceptual AACSB: Reflective Thinking 9.5 App 1 M ul ti pl e C h o i c e 1) The formula for the government spending multiplier is A) 1/(1 + MPC). B) 1/MPS. C) 1/MPC. D) 1/(1 + MPS). Answer: B Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Definition 2) If the MPS is 0.2, the tax multiplier is A) -4. B) -1.11. C) -9. D) -5. Answer: A Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Analytic AACSB: Analytic Skills 3) If the MPS is 0.1, the government spending multiplier is A) 10. B) 1.11. C) 5. D) 2. Answer: A Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Analytic AACSB: Analytic Skills 4) The formula for the tax multiplier is A) -(MPS/MPC). B) MPS/MPC. C) -(MPC/MPS). D) -1/MPS. Answer: C Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Definition 5) If the MPC is 0.9, the tax multiplier is A) -9. B) -10. C) -1.10. D) 10. Answer: A Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Analytic AACSB: Analytic Skills 6) The balanced-budget multiplier A) equals 0. B) is greater than 0 but less than 1. C) is greater than 1. D) equals 1. Answer: D Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Definition 2 Tr ue /F al s e 1) As the MPC decreases, the government spending multiplier increases. Answer: FALSE Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Conceptual AACSB: Reflective Thinking 2) The budget multiplier works whenever the government increases spending and increases taxes by the same balanced- amount. Answer: TRUE Diff: 1 Topic: Appendix A: Deriving the Fiscal Policy Multipliers Skill: Conceptual AACSB: Reflective Thinking 9.6 App 1 M ul ti pl e C h o i c e 1) Assume that taxes depend on income. The MPC is 0.8 and t is 0.25. The government spending multiplier is A) 1.67. B) 2.5. C) 5. D) 10. Answer: B Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 2) Assume that taxes depend on income. The MPC is 0.9 and t is 0.3. The government spending multiplier is A) 10. B) 2.7. C) 1.17. D) 1.42. Answer: B Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 3) Assume depend on income. The MPC is 0.5 and t is 0.2. If government spending increases by $10 billion, the that taxes equilibrium level of output will increase by A) $16.7 billion. B) $25 billion. C) $50 billion. D) $100 billion. Answer: A Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 4) Assume depend on income. The MPC is 0.8 and t is 0.4. If government purchases increase by $100 billion, the that taxes equilibrium level of output will increase by A) $16.7 billion. B) $215.9 billion. C) $57.5 billion. D) $192.31 billion. Answer: D Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 5) If taxes depend on income and the MPC is 0.6 and t is 0.3, the tax multiplier is A) -1.72. B) -1.03. C) -2.0. D) -2.24. Answer: B Diff: 1 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 6) Assume depend on income and the MPC is 0.6 and t is 0.3. An increase in taxes of $10 billion will decrease that taxes equilibrium income by A) $17.2 billion. B) $10.3 billion. C) $20.0 billion. D) $22.4 billion. Answer: B Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 7) If taxes income, then the magnitude of the government spending multiplier ________ it would be if taxes were a depend on lump-sum amount. A) could be either larger than or smaller than B) is larger than C) is equal to what D) is smaller than Answer: D Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Conceptual AACSB: Reflective Thinking 8) If taxes income, then the absolute value of the tax multiplier ________ it would be if taxes were a lump -sum depend on amount. A) could be either larger than or smaller than B) is larger than C) is equal to what D) is smaller than Answer: D Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Conceptual AACSB: Reflective Thinking 9) As the tax rate increases, the government spending multiplier A) increases. B) decreases. C) does not change. D) could either increase or decrease depending on the value of the MPC. Answer: B Diff: 1 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Conceptual AACSB: Reflective Thinking 10) As the tax rate increases, the absolute value of the tax multiplier A) increases. B) decreases. C) does not change. D) could either increase or decrease depending on the value of the MPC. Answer: B Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al s e 1) When taxes depend on income, a higher tax rate implies a higher government spending multiplier. Answer: FALSE Diff: 1 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Conceptual AACSB: Reflective Thinking 2) When the MPC is 0.8 and t is 0.4, then the government spending multiplier is about -1.54. Answer: FALSE Diff: 2 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 3) If the MPS is 0.25 and t is 0.4, then the tax multiplier is about -2.96. Answer: FALSE Diff: 3 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 4) If the MPS is 0.4 and t is 0.3, then the tax multiplier is about -1.03. Answer: TRUE Diff: 3 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Analytic AACSB: Analytic Skills 5) When the tax rate increases, the absolute value of the tax multiplier falls. Answer: TRUE Diff: 1 Topic: Appendix B: The Case in Which Tax Revenues Depend on Income Skill: Conceptual AACSB: Reflective Thinking ...
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