Purdue University North Central

Economics 210 - Review Questions Chapter 12 - Fiscal Policy

(1) The essence of the Keynesian theory of unemployment is that:

(a) unemployment results from inadequate aggregate demand for goods and services in the economy.

(b) unemployment is but a temporary deviation from long run full employment.

(c) short run unemployment problems are self-correcting in a market economy.

(d) a “do nothing” approach is best to cure the unemployment problem.

(2) All things being equal, which of the following changes in the aggregate demand curve would best characterize a cutback in exports?

(a) A rightward shift.

(b) A leftward shift.

(c) A movement along the aggregate demand curve downward to the right.

(d) A movement along the aggregate demand curve upward to the left.

(3) Fiscal policy is most effective in changing the level of real output without causing inflation when the aggregate supply curve is:

(a) horizontal.

(b) vertical.

(c) upward sloping.

(d) The slope of the aggregate supply curve does not relate to the effectiveness of fiscal policy.

(4) When the economy expands beyond full employment and inflationary pressures build, the government can reduce these pressures with higher taxes and reducing expenditures. This policy involves:

(a) aggregate supply shifting to the left.

(b) aggregate supply shifting to the right.

(c) aggregate demand shifting to the left.

(d) aggregate demand shifting to the right.

(5) If the economy is experiencing equilibrium output less than full employment, which of the following would be a correct fiscal policy action?

(a) A tax increase.

(b) A reduction in social security payments.

(c) An increase in government expenditures.

(d) A decrease in government expenditures.

(6) Assume a Marginal Propensity to Consume (MPC) of 0.75. The change in total spending for the economy as a result of a $100 billion increase in government spending would be:

(a) $25 billion.

(b) $100 billion.

(c) $400 billion.

(d) $750 billion.

(7) If the MPC is 0.8, a $100 billion tax increase will reduce consumption initially (in the first round) by:

(a) $20 billion.

(b) $80 billion.

(c) $100 billion.

(d) $500 billion.

(8) If the MPC is 0.9, a $1 billion tax increase will eventually lower total spending by:

(a) $900 million.

(b) $ 1 billion.

(c) $10 billion.

(d) $9 billion.

(9) The government is definitely pursuing an expansionary policy if:

(a) it increases it spending an reduces its taxes.

(b) it increases its spending and increases it taxes.

(c) it reduces its spending and reduces its taxes.

(d) it reduces its spending and increases its taxes.

(10) The tax cut initiated by President Bush during 2001 resulting in the following primary impact on the US economy?

(a) Aggregate demand curve shifts to the right.

(b) Aggregate demand curve shifts to the left.

(c) Aggregate supply curve shifts to the right.

(d) Aggregate supply curve shifts to the right.

(11) Which of the following economies has the largest multiplier?

(a) Economy A with a marginal propensity to save of 0.25.

(b) Economy B with a marginal propensity to consume of 0.75.

(c) Economy C with a marginal propensity to consume of 0.80.

(d) Economy D with a marginal propensity to consume of 0.90.

Consider Figure 1 in answering Question (12).

Figure 1

(12) In Figure 1, which fiscal policy action would increase aggregate demand from AD(1) to AD(2)?

(a) A decrease in government spending.

(b) A decrease in taxes.

(c) A decrease in government spending matched by an increase in taxes.

(d) None of the above.