fiscal policy test 2

Question 1

The multiplier effect:

Answer 1

means that a dollar spent by an individual or business becomes income for someone else, who spends it and increases GDP

Question 2

If the marginal propensity to save is high:

Answer 2

the multiplier effect will be lower

Question 3

The effective tax rate is:

Answer 3

the percentage of our total income that we actually pay in taxes

Question 4

Which of the follow is NOT a factor affecting MPC/MPS?

Answer 4

level of aggregate demand

Question 5

If the marginal propensity to consume is high:

Answer 5

the multiplier effect will be higher

Question 6

The natural rate of unemployment:

Answer 6

• represents the unemployment goal for the Fed

- is the rate when nothing is wrong in the economy

Question 7

Indicate whether each of the following is an effective or ineffective form of stimulus:

1. government purchases goods and services
2. increased spending on food stamps
3. unemployment insurance
4. one year tax cuts for the wealthy

Answer 7

• effective
• effective
• effective
• ineffective

Question 8

The problem of the federal government using up the scarce resource of capital is called:

Answer 8

crowding out

Question 9

Which of the following is true about a negative externality:

Answer 9

the creator of the negative externality has no motive to stop the behavior

Question 10

Which of the following is true:

Answer 10

a tax credit is subtracted from the amount of tax you owe

Question 11

Which of the following is true: In the case of a positive externality:

Answer 11

• a shortage is likely to occur
• people don’t have an incentive to take action
• the government provides the good or service
• none of these are true

Question 12

The reserve requirement is:

Answer 12

• a way that the Fed can manipulate interest rates
• more than one
• the amount banks must have on hand to transact daily business
• the cash banks must keep in order to pay their fees for the Fed’s services

Question 13

1. increase taxes
2. raise demand
3. cut spending
4. lower demand
5. cut taxes
6. increase spending on infrastructure projects
7. reduce the amount of food stamps

Answer 13

• inflation
• unemployment
• unemployment
• inflation
• unemployment
• unemployment
• inflation

Question 14

List and describe the good and the bad about fiscal policy.

Answer 14

Good things:
1)if it is done fast then it can impact the people fairly
2)it can also be used as a way to slove other problems in the community eg. Obama’s green care project to produce green energy.
Bad things:
1)crowding out: the private investments raise their interest rate very high
2)deficits or debts; the debts can be very high because of how much you owe.
3) the politicans are after their own interests and not that of other people.

Question 15

Which of the following is NOT a problem using GDP to measure economic performance?

Answer 15

it doesn’t measure externalities