Chapter 24.3

Question 1

Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result is intended to be
A) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0.
B) no change in either price level or output, since expansionary fiscal policy is ineffective.
C) that the AS curve will shift to the right until point A is reached.
D) that the AS curve and the AD curve will shift left simultaneously.
E) that the AD curve will shift to the right until point B is reached.

Answer 1

E

Question 2

Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output (Y*), is
A) an increase in personal income taxes.
B) a reduction in government purchases of goods and services.
C) an increase in corporate income taxes.
D) an increase in government purchases.
E) an increase in interest rates to encourage increased saving.

Answer 2

D

Question 3

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for closing the output gap is
A) a decrease in personal income taxes.
B) a decrease in government purchases.
C) an increase in current interest rates.
D) an increase in government purchases.
E) a decrease in corporate income-tax rates

Answer 3

B

Question 4

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output (Y*) is a(n)
A) increase in personal and corporate tax rates.
B) increase in government spending.
C) increase in current consumption.
D) decrease in personal and corporate taxes.
E) decrease in current imports.

Answer 4

A

Question 5

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the
A) AS curve to the left to intersect AD at C.
B) AS curve to the right.
C) potential GDP and the AS curve to the left.
D) AD curve to the right.
E) AD to the left to intersect AS at point A.

Answer 5

E

Question 6

One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that
A) the economy will overshoot potential GDP and a boom will be underway.
B) inflation will not be as stimulated.
C) price level will rise higher than otherwise.
D) the recovery may be more rapid.
E) the recovery will be slower, thereby causing less disruption.

Answer 6

D

Question 7

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be \_\_\_\_\_\_\_\_, and real GDP may \_\_\_\_\_\_\_\_ potential GDP.
A) too weak; stay below
B) too weak; rise above
C) too strong; stay below
D) too strong; rise above
E) appropriate; equal

Answer 7

D

Question 8

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be \_\_\_\_\_\_\_\_, and real GDP may \_\_\_\_\_\_\_\_ potential GDP.
A) too weak; stay below
B) too weak; rise above
C) too strong; stay below
D) too strong; rise above
E) appropriate; equal

Answer 8

A

Question 9

Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions?
A) an expansionary fiscal policy that increases tax rates
B) a contractionary fiscal policy that increases government purchases
C) automatic fiscal stabilizers
D) a contractionary fiscal policy that increases tax rates
E) an expansionary fiscal policy that increases government purchases

Answer 9

E

Question 10

) Refer to Figure 24-6. If the government takes no action to change the short-run macro equilibrium in this economy, then
A) the AD curve will shift downward until it intersects with the AS curve at point E.
B) the AD curve will shift upward until it intersects with the AS curve at point C.
C) the AS curve will shift to the left until it intersects with the AD curve at point D.
D) the AS curve will shift to the right until it intersects with the AD curve at point B.
E) the AS curve can either shift to the right or left depending on the fiscal policy.

Answer 10

D

Question 11

Refer to Figure 24-6. The government could close the existing output gap by
A) increasing the net tax rate.
B) decreasing the net tax rate.
C) decreasing government purchases.
D) decreasing government transfer payments.
E) implementing a contractionary fiscal policy.

Answer 11

B

Question 12

Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________.
A) a recessionary; 100; fiscal contraction
B) a recessionary; 200; fiscal expansion
C) an inflationary; 100; fiscal contraction
D) an inflationary; 200; fiscal contraction
E) an inflationary; 350; fiscal expansion

Answer 12

D

Question 13

Refer to Figure 24-7. If the government takes no action to close the existing output gap, then
A) the AD curve will shift down until it intersects with the AS curve at point D.
B) the AD curve will shift up until it intersects with the AS curve at point B.
C) the AS curve will shift to the left until it intersects with the AD curve at point C.
D) the AS curve will shift to the right until it intersects with the AD curve at point E.
E) the AS curve can either shift to the right or left depending on the fiscal policy.

Answer 13

C

Question 14

Refer to Figure 24-7. The government could close the existing output gap by
A) increasing the net tax rate.
B) decreasing the net tax rate.
C) increasing government purchases.
D) decreasing government transfer payments.
E) implementing an expansionary fiscal policy.

Answer 14

A

Question 15

Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy’s natural adjustment process to operate is that
A) it will reduce the upward pressure on the price level that would otherwise occur.
B) if private-sector expenditures increase on their own, the policy will stabilize real GDP.
C) it will shorten what might otherwise be a long recession.
D) it will reduce the downward pressure on the price level that would otherwise occur.
E) it will close the output gap.

Answer 15

A

Question 16

As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to
A) shift the AD curve to the left by decreasing tax rates.
B) increase potential GDP.
C) shift the AS curve to the right through large increases in government spending.
D) shift the AD curve to the right through large increases in government spending.
E) shift the AS curve to the left by increasing wage rates.

Answer 16

D

Question 17

Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada’s economy?
A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap.
B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap.
C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap.
D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap.
E) Potential GDP fell, which reduced actual national income.

Answer 17

B

Question 18

Income taxes in Canada can be considered to be automatic stabilizers because tax
A) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand.
B) revenues decrease when income increases, thereby intensifying the increase in aggregate demand.
C) structures can be changed when the Minister of Finance brings down a budget.
D) revenues are changed through discretionary fiscal policy to keep the budget balanced.
E) revenues are changed through discretionary fiscal policy to create surpluses in recessions.

Answer 18

A

Question 19

An important automatic fiscal stabilizer in Canada is
A) the exchange rate.
B) the marginal propensity to consume.
C) the marginal propensity to import.
D) the income-tax system.
E) government purchases of goods and services.

Answer 19

D

Question 20

Automatic fiscal stabilizers are most helpful in
A) making discretionary fiscal policy effective.
B) removing persistent output gaps.
C) promoting economic growth.
D) eliminating price fluctuations in the economy.
E) reducing the intensity of business cycles.

Answer 20

E

Question 21

Automatic fiscal stabilization” in the economy refers to
A) the properties of government spending and taxation that cause the simple multiplier to be increased.
B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap.
C) the properties of government spending and taxation that cause the simple multiplier to be reduced.
D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap.
E) all discretionary fiscal policies.

Answer 21

C

Question 22

Net tax revenues that rise with national income act as an automatic stabilizer by \_\_\_\_\_\_\_\_ the marginal propensity to spend and thereby causing the simple multiplier to \_\_\_\_\_\_\_\_.
A) increasing; increase
B) increasing; decrease
C) decreasing; equal one
D) decreasing; decrease
E) decreasing; increase

Answer 22

D

Question 23

Consider the simplest macro model with demand-determined output. Other things being equal, the \_\_\_\_\_\_\_\_ the value of the simple multiplier, the \_\_\_\_\_\_\_\_ stable is real GDP in response to shocks to autonomous spending.
A) larger; more
B) larger; less
C) smaller; more
D) smaller; less
E) both B and C are correct

Answer 23

E

Question 24

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?
A) MPC = 0.8, t = 0.2, m = 0.3
B) MPC = 0.7, t = 0.3, m = 0.2
C) MPC = 0.7, t = 0.1, m = 0.4
D) MPC = 0.9, t = 0.2, m = 0.4
E) MPC = 0.8, t = 0.1, m = 0.2

Answer 24

C

Question 25

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?
A) MPC = 0.8, t = 0.2, m = 0.3
B) MPC = 0.7, t = 0.3, m = 0.2
C) MPC = 0.7, t = 0.1, m = 0.4
D) MPC = 0.9, t = 0.2, m = 0.4
E) MPC = 0.8, t = 0.1, m = 0.2

Answer 25

E

Question 26

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government’s net tax revenues ________ during booms and ________ during recessions.
A) magnify; increase; decrease
B) magnify; decrease; increase
C) dampen; increase; decrease
D) dampen; decrease; increase
E) does not affect; are constant; are constant

Answer 26

C

Question 27

Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP. One disadvantage of this policy is that
A) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable.
B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
C) private investment is crowded out, which may reduce the future growth rate of potential output.
D) the effect of the automatic stabilizer is reduced and the economy will be more unstable.
E) both C and D are correct.

Answer 27

E

Question 28

The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to \_\_\_\_\_\_\_\_ their saving, but in aggregate this behaviour causes a \_\_\_\_\_\_\_\_ recession.
A) decrease; more severe
B) decrease; less severe
C) increase; more severe
D) increase; less severe
E) increase; shorter

Answer 28

C

Question 29

In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________.
A) not important; applies
B) not important; does not apply
C) the only influence; applies
D) the most important influence; does not apply
E) stable and important; applies

Answer 29

B

Question 30

The paradox of thrift does not exist in the long run because
A) not everyone increases saving in the long run.
B) aggregate supply has an impact on real GDP only in the short run.
C) everyone increases consumption in the long run.
D) changes in aggregate demand have no impact on real GDP in the long run.
E) potential output is determined by changes in the price level.

Answer 30

D

Question 31

In the basic AD/AS macro model, the “paradox of thrift” is only a short-run phenomenon because
A) consumers exhibit cyclical consumption behaviour.
B) in the long run output is determined by potential output.
C) savings are transformed into expenditures in the long run.
D) the marginal propensity to consume is fixed in the long run.
E) consumers base their consumption expenditures only on their lifetime income.

Answer 31

B

Question 32

Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because
1) the multiplier effects associated with fiscal policy take a long time;
2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect;
3) there are long and uncertain lags in implementing fiscal policy.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1 and 3

Answer 32

E

Question 33

Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the \_\_\_\_\_\_\_\_ the output gap being suffered, an argument supporting \_\_\_\_\_\_\_\_.
A) larger; fine tuning
B) larger; gross tuning
C) smaller; fine tuning
D) smaller; crowding out
E) larger; crowding out

Answer 33

B

Question 34

Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of
A) an execution lag.
B) fine tuning.
C) gross tuning.
D) a decision lag.
E) automatic fiscal stabilizers.

Answer 34

D

Question 35

Which of the following statements about fiscal policy is the best description of “fine tuning”?
A) The government continuously alters its spending and taxing plans to hold real GDP at potential.
B) The government cuts taxes to remove a large and persistent recessionary gap.
C) The government increases its spending to reduce an inflationary gap.
D) The government decreases tax rates to decrease an inflationary gap.
E) The government uses automatic stabilizers to reduce any output gaps.

Answer 35

A

Question 36

Which of the following statements about fiscal policy is the best example of “gross tuning”?
A) The government continuously alters its spending and taxing plans to hold real GDP at potential.
B) The government cuts taxes to remove a large and persistent recessionary gap.
C) The government increases its spending to reduce an inflationary gap.
D) The government decreases tax rates to decrease an inflationary gap.
E) The government uses automatic stabilizers to reduce any output gaps.

Answer 36

B

Question 37

Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of
A) a decision lag.
B) fine tuning.
C) gross tuning.
D) automatic fiscal stabilizers.
E) an execution lag.

Answer 37

E

Question 38

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.
A) rises to an unsustainable level; real GDP is reduced
B) is crowded out; corporate tax revenue is reduced
C) increases; aggregate demand increases
D) increases; net exports increases
E) is crowded out; potential output is reduced

Answer 38

E

Question 39

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output?
A) The growth rate of potential output may be reduced due to the crowding out of private investment.
B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.
C) Potential output will drop below its starting point because of the crowding out of investment.
D) The growth rate of potential output will rise due to the higher level of aggregate demand.
E) The level of potential output is fixed and will not be affected by fiscal policy.

Answer 39

A

Question 40

In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________.
A) a higher price level; unemployment
B) increased potential output; a higher price level
C) a higher price level; lower real GDP
D) increased real GDP; higher economic growth
E) increased economic activity; lower economic growth

Answer 40

E

Question 41

The growth rate of potential output might be decreased by an expansionary fiscal policy if
A) the budget deficits are persistent.
B) the simple multiplier is small.
C) the policy crowds out private investment.
D) public investment has high productivity.
E) the composition of output is not altered.

Answer 41

C

Question 42

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if
A) the simple multiplier is large.
B) the tax cuts stimulate private investment.
C) firms are operating at their normal capacity.
D) households are not forward looking.
E) the marginal propensity to consume is large.

Answer 42

B

Question 43

The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output ( ) to increase?
A) If the increase in G crowds out private investment.
B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve.
C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production.
D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy.
E) If the increase in G is offset by an equal decrease in C, I, and NX.

Answer 43

C

Question 44

In our macro model, the level of aggregate output is determined in the short run by ________ but in the long run by the level of ________.
A) the output gap; factor productivity
B) the AD curve; interest rates
C) the AS curve; potential output
D) the AD and AS curves; Y*
E) the AD and AS curves; factor utilization

Answer 44

D

Question 45

Fiscal policies typically affect the short-run level of GDP because they cause shifts in the ________ but they will not generally have any long-run effects on real GDP unless they affect ________.
A) AS curve; factor-utilization rates
B) AS curve; factor supplies or factor productivity
C) AD curve; factor-utilization rates
D) AD curve; the unemployment rate
E) AD curve; the level of potential output

Answer 45

E