Chapter 11

Question 1

ECOChapter11

At an estimated cost of $831 billion, the largest stimulus measure in U.S history; enacted in February 2009

Answer 1

American Recovery and Reinvestment Act

Question 2

ECOChapter11

Structural features of government spending and taxation that reduce fluctuations in disposable income, and thus consumption, over the business cycle

Answer 2

automatic stabilizers

Question 3

ECOChapter11

A group of 18th- and 19th-century economists who believed that economic downturns corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention

Answer 3

classical economists

Question 4

ECOChapter11

A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap

Answer 4

contractionary fiscal policy

Question 5

ECOChapter11

The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth

Answer 5

discretionary fiscal policy

Question 6

ECOChapter11

Law that assigned to the federal government the responsibility for promoting full employment and price stability

Answer 6

Employment Act of 1946

Question 7

ECOChapter11

An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a recessionary gap

Answer 7

expansionary fiscal policy

Question 8

ECOChapter11

Income that individuals expect to receive on average over the long term

Answer 8

permanent income

Question 9

ECOChapter11

Economic fluctuations that occur when discretionary policy is manipulated for political gain

Answer 9

political business cycles

Question 10

ECOChapter11

1. ________ are revenue and spending items in the federal budget that automatically change with the ups and downs of the economy so as to stabilize disposable income, consumption, and real GDP. a. Multipliers b. Discretionary fiscal policies c. Discretionary monetary policies d. Automatic stabilizers

Answer 10

automatic stabilizers

Question 11

ECOChapter11

2. At any given price level, which of the following fiscal policies will decrease real GDP demanded, other things constant? a. Increase in fiscal spending on infrastructure b. Increase in net taxes c. Increase in transfer payments d. Increase in money supply

Answer 11

Increase in fiscal spending on infrastructure

Question 12

ECOChapter11

3. President Obama’s fiscal stimulus plan that helped the U.S. economy to come out of recession in 2009 is an example of an automatic stabilizer.TrueFalse

Answer 12

FALSE

Question 13

ECOChapter11

4. If the spending multiplier is 3 and the desired amount of increase in real GDP is $270 billion, then by how much would government spending have to increase? a. $270 billion b. $90 billion c. $30 billion d. $10 billion

Answer 13

90 billion

Question 14

ECOChapter11

5 If the marginal propensity to consume is 0.75 and the desired amount of increase in real GDP is $240 billion, then by how much would government spending have to increase? a. $240 billion b. $80 billion c. $60 billion d. $30 billion

Answer 14

60 billion

Question 15

ECOChapter11

6 The larger the marginal propensity to consume: a. the larger will be consumers’ savings. b. the more pronounced will be the impact of an expansionary fiscal policy. c. the smaller will be consumer’s consumption. d. the smaller will be the spending multiplier.

Answer 15

the more pronounced will be the impact of an expansionary fiscal policy.

Question 16

ECOChapter11

7 Which of the following correctly describes the simple tax multiplier? a. 1/(1-MPC) b. MPC/(1-MPC) c. -MPC/(1-MPC) d. MPS/MPC

Answer 16

-MPC/(1-MPC)xab

Question 17

ECOChapter11

8 If net taxes are decreased by $500 billion, and the marginal propensity to consume is 0.80, then which of the following correctly describes the increase in real GDP that will be generated by the decrease in net taxes? a. $2 trillion b. $1 trillion c. $500 billion d. $400 billion

Answer 17

$2 trillion

Question 18

ECOChapter11

9 Suppose that an expansionary gap of $500 billion exists in the economy, and the marginal propensity to consume is 0.8. Which of the following correctly describes a discretionary fiscal policy that will be just sufficient to close this expansionary gap? a. Increase government spending by $250 billion. b. Increase taxes by $125 billion. c. Decrease government spending by $250 billion. d. Decrease taxes by $125 billion.

Answer 18

Increase taxes by $125 billion.

Question 19

ECOChapter11

10 If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP by $200 million, then by how much would they have to change taxes? a. -$240 million b. -$200 million c. -$180 million d. -$50 million

Answer 19

-$50 million

Question 20

ECOChapter11

11 The multiplier effect on aggregate demand of a tax cut is less than the multiplier effect of an equal increase in government spending.TrueFalse

Answer 20

TRUE

Question 21

ECOChapter11

12 An expansionary fiscal policy is usually employed by the government to close an expansionary gap in the economy.TrueFalse

Answer 21

FALSE

Question 22

ECOChapter11

13 to close a recessionary gap, the government can: a. employ an expansionary fiscal policy that will shift the aggregate demand curve to the right. b. employ a contractionary fiscal policy that will shift the aggregate demand curve to the right. c. employ a contractionary fiscal policy that will shift the aggregate demand curve to the left. d. employ an expansionary fiscal policy that will shift the aggregate demand curve to the left.

Answer 22

employ an expansionary fiscal policy that will shift the aggregate demand curve to the right.

Question 23

ECOChapter11

14 If the economy is producing output at the potential level of GDP, then: a. an expansionary fiscal policy will increase real GDP in the long run. b. deficit spending by the federal government will increase prices in the long run. c. deficit spending will increase both, the real GDP and the prices in the long run. d. a tax increase will not lower the aggregate demand.

Answer 23

deficit spending by the federal government will increase prices in the long run.

Question 24

ECOChapter11

15 Discretionary fiscal policy in the form of an increase in government spending or a decrease in taxes can be used to close an expansionary gap.TrueFalse

Answer 24

FALSE

Question 25

ECOChapter11

16 If the economy is already producing its potential output, then, in the long run, any change in fiscal policy aimed at stimulating demand will simply increase the price level and have no impact on the output level in the economy.TrueFalse

Answer 25

TRUE

Question 26

ECOChapter11

17 ________ advocated laissez-faire, the belief that natural market forces, such as changes in prices, wages, and interest rates, would resolve expansionary or contractionary gaps. In contrast, ________ argued that prices and wages were not flexible enough for markets to self-adjust, and advocated discretionary fiscal policy. a. Keynes; classical economists b. Chairman Mao; Herbert Hoover c. Keynes; Ronald Reagan d. Classical economists; Keynes

Answer 26

Classical economists; Keynes

Question 27

ECOChapter11

18 If we follow the laissez-faire prescription and allow wages, prices, and interest rates to vary in the economy, then which of the market self-adjustments below would help close a contractionary gap in the absence of government policy intervention? a. Fall in product price b. Increase in product price c. Increase in interest rate d. Fall in wage rate

Answer 27

fall in product price

Question 28

ECOChapter11

19 Which of the following events strained belief in the economy’s ability to self-correct by way of price adjustment, leading to the development of discretionary fiscal policy in the 1930s? a. The American Civil War b. World War I c. The Gulf War d. The Great Depression

Answer 28

The Great Depression

Question 29

ECOChapter11

20 Which of the following correctly describes how an automatic stabilizer would function? a. During an economic expansion, incomes rise, and thus our progressive income tax claims a larger portion of income, slowing growth in disposable income. b. During an economic expansion, net taxes decline, since income grows faster than taxes, and because there is more income being made to support transfer payments to unemployed and disabled people. c. During a recession, progressive income tax claims a larger portion of income than during periods of economic growth, and government spending declines in order to balance the budget. d. During a recession, an increase in the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, reduces consumption and aggregate demand.

Answer 29

During an economic expansion, incomes rise, and thus our progressive income tax claims a larger portion of income, slowing growth in disposable income.

Question 30

ECOChapter11

21 Stagflation refers to a period of staggering economic growth combined with very low inflation rates.TrueFalse

Answer 30

FALSE

Question 31

ECOChapter11

22 If fiscal policy authorities believe that the natural rate of unemployment is lower than it actually is, and pursue fiscal policies to move economic output to what they believe full employment to be, then which of the following is most likely to occur? a. A recession b. Runaway inflation c. Increasing unemployment d. A depression

Answer 31

runaway inflation

Question 32

ECOChapter11

23 Political business cycles are economic fluctuations that occur when discretionary policy is manipulated for public interest.TrueFalse

Answer 32

FALSE

Question 33

ECOChapter11

24 Supply-side macroeconomic policy is based on the idea that an increase in the aggregate supply curve will result from a decrease in business taxes and deregulation, resulting in both an increase in real GDP and an increase in the overall price level.TrueFalse

Answer 33

FALSE

Question 34

ECOChapter11

25 If the federal budget deficit grows too large, then we can safely state that it will be difficult for government to justify implementing contractionary fiscal policies.TrueFalse

Answer 34

FALSE

Question 35

ECOChapter11

26 The American Recovery and Reinvestment Act, a $787 billion package of tax benefits and spending programs aimed at reducing aggregate demand in the U.S economy.TrueFalse

Answer 35

FALSE

Question 36

ECOChapter11

27 As per “cash-for-clunkers” program, car buyers who traded a drivable, registered, and insured clunker for a new one with better gas mileage were paid cash.TrueFalse

Answer 36

TRUE

Question 37

ECOChapter11

28 The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals is called using automatic stabilizers.TrueFalse

Answer 37

FALSE

Question 38

ECOChapter11

29 Which of the following would be a contractionary fiscal policy that would help close an expansionary gap? a. increase in government purchases b. decrease in taxes c. decrease in government purchases d. none of the above are contractionary fiscal policies

Answer 38

decrease in government purchases

Question 39

ECOChapter11

30 The steeper the short-run aggregate supply curve, the more impact a given shift of the aggregate demand curve has on real GDP and the more impact it has on the price level, so the smaller the spending multiplier.TrueFalse

Answer 39

FALSE

Question 40

ECOChapter11

31 To the extent that consumers base spending decisions on their permanent income, attempts to fine-tune fiscal policy with temporary tax changes are more effective.TrueFalse

Answer 40

FALSE

Question 41

ECOChapter11

32 Recessions are not identified for at least ________ months after it begins. a. 3 b. 4 c. 5 d. 6

Answer 41

6

Question 42

ECOChapter11

33 How much of all income tax is paid by the top 10 percent of earners? a. one-third b. two-thirds c. one-fourth d. one-half

Answer 42

two-thirds

Question 43

ECOChapter11

34 Which of the following was one the key factors sending the economy into the Great Recession? a. declining home prices and rising foreclosure rates b. declining interest rates and declining lending c. declining labor participation rates and rising retirement rate d. none of the above were reasons for the Great Recession

Answer 43

declining home prices and rising foreclosure rates

Question 44

ECOChapter11

35 The American Recovery and Reinvestment Act cost an estimated how much? a. $631 million b. $731 million c. $831 million d. $931 million

Answer 44

$831 million

Question 45

ECOChapter11

36 How much did employment fall by during the Great Recession? a. 8 million b. 9 million c. 10 million d. 11 million

Answer 45

8 million

Question 46

ECOChapter11

37 Political business cycles which are the results of economic fluctuations that occur when discretionary policy is manipulated for political gain.TrueFalse

Answer 46

TRUE