To be submitted on the 23rd of May 2013, Thursday.
1.Fiscal policy is carried out primarily by:
A) the Federal government. C) state governments alone.
B) state and local governments working together. D) local governments alone.
2. Fiscal policy refers to the:
A) manipulation of government spending and taxes to stabilize domestic output, employment, and the
price level.
B) manipulation of government spending and taxes to achieve greater equality in the distribution of
income.
C) altering of the interest rate to change aggregate demand.
D) fact that equal increases in government spending and taxation will be contractionary.
3. Contractionary fiscal policy is so named because it:
A) involves a contraction of the nation's money supply.
B) necessarily reduces the size of government.
C) is aimed at reducing aggregate demand and thus achieving price stability.
D) is expressly designed to contract real GDP.
4. Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the
following would be most in accord with appropriate government fiscal policy?
A) an increase in Federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new school buildings
D) an increase in soil conservation subsidies to farmers
5. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of
consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government
purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the
government should:
A) increase tax rates and reduce government spending.
B) discourage personal saving by reducing the interest rate on government bonds.
C) increase government expenditures.
D) encourage private investment by reducing corporate income taxes.
6. An appropriate fiscal policy for a severe recession is:
A) a decrease in government spending. C) appreciation of the dollar.
B) a decrease in tax rates. D) an increase in interest rates.
7. In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:
A) shift the AD curve to the right. C) not affect the AD curve.
B) increase the equilibrium GDP. D) shift the AD curve to the left.
8. A contractionary fiscal policy is shown as a:
A) rightward shift in the economy's aggregate demand curve.
B) rightward shift in the economy's aggregate supply curve.
C) movement along an existing aggregate demand curve.
D) leftward shift in the economy's aggregate demand curve.
9. Refer to the above diagram, in which Qf is the full-employment output. A contractionary fiscal policy
would be most appropriate if the economy's present aggregate demand curve were at:
A) AD0 B) AD1 C) AD2 D) AD3
10. Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy
would be most appropriate if the economy's present aggregate demand curve were at:
A) AD0 B) AD1 C) AD2 D) AD3
11. Refer to the above diagram, in which Qf is the full-employment output. If the economy's present aggregate
demand curve is AD2:
A) the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes.
B) the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes.
C) government should undertake neither an expansionary nor a contractionary fiscal policy.
D) the economy is achieving its full capacity output.
12. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate
demand curve is AD0, it is experiencing:
A) a positive GDP gap. B) a negative GDP gap. C) inflation. D) an adverse supply shock.
13. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate
demand curve is AD3, it is experiencing:
A) a positive GDP gap. B) a negative GDP gap. C) a recession. D) cost-push inflation.
14. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate
demand curve is AD0, it would be appropriate for the government to:
A) reduce government expenditures and taxes by equal-size amounts.
B) reduce government expenditures or increase taxes.
C) increase government expenditures or reduce taxes.
D) reduce unemployment compensation benefits.
15. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate
demand curve is AD3, it would be appropriate for the government to:
A) reduce government expenditures and taxes by equal-size amounts.
B) reduce government expenditures or increase taxes.
C) increase government expenditures or reduce taxes.
D) reduce unemployment compensation benefits.
16. If the government increases its spending during recession to assist the economy, the funds for such
expenditures must come from some source. Which of the following sources would be the most
expansionary?
A) additional taxes on personal incomes C) borrowing from the public
B) creating new money D) additional taxes on corporate profits
17. A major advantage of the built-in or automatic stabilizers is that they:
A) simultaneously stabilize the economy and reduce the absolute size of the public debt.
B) automatically produce surpluses during recessions and deficits during inflations.
C) require no legislative action by Congress to be made effective.
D) guarantee that the Federal budget will be balanced over the course of the business cycle.
18. Which of the following statements is correct?
A) Built-in stability only partially offsets fluctuations in economic activity.
B) Built-in stability works in halting inflation, but it cannot alleviate unemployment.
C) Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.
D) Built-in stability has eliminated the need for discretionary fiscal policy.
billions. The equilibrium level of GDP in this economy:
A) is $400.
B) is greater than $400.
C) is less than $400.
D) cannot be determined from the information given.
20. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in
billions. If GDP is $400:
A) there will be a budget deficit. C) the budget will be balanced.
B) there will be a budget surplus. D) the macroeconomy will be in equilibrium.
21. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in
billions. The budget will entail a deficit:
A) at all levels of GDP. C) at any level of GDP below $400.
B) at any level of GDP above $400. D) only when GDP is stable.
22. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in
billions. In this economy:
A) tax revenues and government spending both vary directly with GDP.
B) tax revenues vary directly with GDP, but government spending is independent of GDP.
C) tax revenues and government spending both vary inversely with GDP.
D) government spending varies directly with GDP, but tax revenues are independent of GDP.
23. Billʹs income is $1,000 and his net taxes are $350. His disposable income is
A) $1,350. B) $650. C) -$350. D) $750.
24. 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.
25. In 2007, the city of Miketown collected $250,000 in taxes and spent $350,000. In 2007, the city of
Miketown had a
A) budget surplus of $100,000. B) budget surplus of 57%.
C) budget deficit of $100,000. D) budget deficit of $200,000.
Bonus Question:
An economist who favors smaller government would recommend:
A) tax cuts during recession and reductions in government spending during inflation.
B) tax increases during recession and tax cuts during inflation.
C) tax cuts during recession and tax increases during inflation.
D) increases in government spending during recession and tax increases during inflation.
