Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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A lower income tax rate __________ consumption, causing a(n) __________in
aggregate spending.
a. | stimulates; increase | b. | stimulates; decrease | c. | depresses;
increase | d. | depresses; decrease |
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2.
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Fiscal policy is concerned with
a. | government spending and taxation only | b. | government spending and money
only | c. | money and taxation only | d. | government spending, taxation, and
money | e. | money only |
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3.
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Which of the following might be considered the most expansionary set of fiscal
policies?
a. | increase in government purchases, increase in taxes, and decrease in transfer
payments | b. | decrease in government purchases, increase in taxes, and decrease in transfer
payments | c. | increase in government purchases, decrease in taxes, and increase in transfer
payments | d. | increase in government purchases, increase in taxes, and increase in transfer
payments | e. | decrease in government purchases, decrease in taxes, and decrease in transfer
payments |
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4.
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The central idea of fiscal policy is that
a. | planned deficits are undertaken during an expansionary gap and planned surpluses
undertaken during a contractionary gap | b. | the balanced budget approach is the proper
criterion for stabilizing the economy | c. | actual deficits should equal actual surpluses
during a contractionary gap. | d. | deficits are planned during contractionary gap
and surpluses are utilized to restrain an expansionary gap | e. | the key to fighting
inflation is planning budget deficits |
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5.
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Keynesian theory and policies were developed to show why
a. | prolonged periods of unemployment were impossible | b. | prolonged periods of
inflation were impossible | c. | unemployment could persist for long
periods | d. | the interest rate ensures that saving equals investment | e. | flexible prices and
wages ensure that a modern economy will enjoy prolonged periods of low unemployment and low
inflation |
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6.
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The difference between the classical approach and the Keynesian approach to
fiscal policy is
a. | Keynesians believe that natural forces in the economy would tend toward full
employment | b. | Keynesians believe that natural forces in the economy would not tend toward full
employment, but they were distrustful of government's ability to stimulate the
economy | c. | classical economists believe that the economy would not achieve its potential GDP but
that any action of the government would make matters worse | d. | Keynesians believe
that it may be necessary that government increase aggregate demand so as to stimulate output and
employment, if the economy is to achieve its potential output | e. | both the classical
economists and Keynesians were equally distrustful of government intervention in the
economy |
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7.
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Lower government spending, without changing taxes, will __________ aggregate
spending and shift the AD curve to the __________.
a. | increase; left | b. | decrease; left | c. | increase;
right | d. | decrease; right |
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8.
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Two economists, Smith and Jones, are discussing the currently high unemployment
rate. Smith says that something ought to be done quickly because the economy may not be able to
restore itself to full employment. Jones says that it is better to take a "hands-off"
approach. Which of the following is most likely to be true?
a. | Smith and Jones are both Keynesian economists with a few differences of
opinion. | b. | Smith and Jones are both classical economists with a few differences of
opinion. | c. | Jones is probably a Keynesian economist, and Smith is a classical
economist. | d. | Smith is probably a Keynesian economist, and Jones a classical
economist. | e. | none of the above. |
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9.
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John Maynard Keynes believed that wages may be inflexible in the downward
direction. Consequently, an economy
a. | could get stuck in long-run equilibrium. | b. | could get stuck in a
recessionary gap. | c. | could get stuck in an inflationary
gap. | d. | would always produce more than Natural Real GDP. | e. | b and
c |
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10.
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According to Keynes, the private sector (by itself)
a. | can always move the economy out of a recessionary gap. | b. | cannot always move
the economy out of a recessionary gap. | c. | can never move the economy out of a
recessionary gap. | d. | can only move the economy out of a recessionary
gap if the SRAS curve drops. | e. | can only move the economy out of a recessionary
gap if the SRAS curve rises. |
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11.
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When disposable income rises, consumption spending will also rise by
a. | the full dollar increase in income. | b. | more than the increase in
income. | c. | less than the increase in income. | d. | the same percentage increase as income
increased. |
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12.
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Which group of economists is likely to argue that the government should manage
aggregate demand through fiscal policy in order to solve the problems of inflation and
unemployment?
a. | Marxist economists | b. | Keynesian economists | c. | Classical
economists | d. | Mercantilist economists |
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