Principles Of Economics International Edition 8th Edition By Michael Melvin – Test Bank

Overview

Chapter 11
Fiscal Policy

Multiple Choice

1. According to the Employment Act of 1946, the U.S. government is required to
a. correct negative externalities.
b. restrict the size of the U.S. budget deficit.
c. provide a judiciary system.
d. promote economic growth and stable prices.
e. place responsibility for achieving economic stability on the private sector.
ANS: D PTS: 1 DIF: Easy REF: Ch 11, Introduction
TOP: Employment Act TYP: Factual

2. The term fiscal policy refers to
a. the use of fines to penalize unfair business practices.
b. the purchase and sale of U.S. government securities to regulate the money supply.
c. the adjustment of the GDP for inflation.
d. a policy action by Congress to overrule unpopular budget cuts by the president.
e. the use of government spending and taxation to influence the level of economic growth
and inflation.
ANS: E PTS: 1 DIF: Easy REF: Ch 11, 1
OBJ: Ch 11, 1 TOP: Fiscal policy TYP: Factual

3. Income taxes affect aggregate demand
a. indirectly by changing consumption.
b. indirectly by changing investment spending.
c. indirectly by changing net exports.
d. directly by changing disposable income.
e. directly through government spending.
ANS: A PTS: 1 DIF: Medium REF: Ch 11, 1
OBJ: Ch 11, 1 TOP: Fiscal policy TYP: Factual

4. If the government wants to close a GDP gap, it should
a. raise government spending, thereby shifting the aggregate demand curve to the left.
b. lower taxes, thereby shifting the aggregate demand curve to the right.
c. lower government spending, thereby shifting the aggregate supply curve to the left.
d. raise taxes, thereby shifting the aggregate supply curve to the right.
e. raise both government spending and taxes by the same amount, thereby shifting the
aggregate demand curve to the left.
ANS: B PTS: 1 DIF: Medium REF: Ch 11, 1.a
OBJ: Ch 11, 1 TOP: Aggregate demand TYP: Interpretive

5. Refer to Figure 11-1. Assume that the economy is originally in equilibrium at point A. If government
spending increases, causing AD1 to shift to AD2, the absolute change in the price level will be
a. the same as the change resulting from an equal increase in government spending if
equilibrium had been point B.
b. greater than the change resulting from an equal increase in government spending if
equilibrium had been point B.
c. less than the change resulting from an equal increase in government spending if
equilibrium had been point B.
d. zero.
e. greater than if the economy had been in equilibrium at point B.
ANS: C PTS: 1 DIF: Medium REF: Ch 11, 1.a
OBJ: Ch 11, 1 TOP: Aggregate demand TYP: Applied

6. Refer to Figure 11-1. If the economy is in equilibrium at point C, then, other things equal, an increase
in government spending will
a. decrease the price level.
b. lower real GDP and leave the price level unchanged.
c. lower real GDP and increase the price level.
d. increase the price level and leave real GDP unchanged.
e. have no effect on real GDP or the price level.
ANS: D PTS: 1 DIF: Medium REF: Ch 11, 1.a
OBJ: Ch 11, 1 TOP: Aggregate demand TYP: Applied

7. Refer to Figure 11-1. A decrease in government spending would be most effective in reducing the
price level if the economy were in equilibrium
a. at point A.
b. at point B.
c. when real GDP equals Y1.
d. when real GDP equals Y3.
e. when real GDP equals Y2.
ANS: D PTS: 1 DIF: Medium REF: Ch 11, 1.a
OBJ: Ch 11, 1 TOP: Aggregate demand TYP: Applied

8. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve,
then, other things equal, an increase in government spending will
a. raise real GDP by the amount indicated by the government spending multiplier and leave
the price level unchanged.
b. lower real GDP by an amount equal to the spending increase and reduce inflation.
c. raise the price level and leave real GDP unchanged.
d. raise both real GDP and the price level by a multiple of the initial spending increase.
e. have no effect on real GDP or on the price level, because all private investment will be
crowded out.
ANS: C PTS: 1 DIF: Medium REF: Ch 11, 1.a
OBJ: Ch 11, 1 TOP: Aggregate demand TYP: Interpretive

9. Which of the following statements about taxation is true?
a. A tax cut affects aggregate demand directly.
b. A tax cut raises incomes and expenditures.
c. Cutting taxes by $20 is the same as increasing government spending by $20.
d. A change in taxes does not affect consumption.
e. An increase in taxes by $50 acts to lower aggregate demand by $50.
ANS: B PTS: 1 DIF: Difficult REF: Ch 11, 1.a
OBJ: Ch 11, 1 TOP: Taxes TYP: Factual

10. Which of the following statements is not correct?
a. An increase in government spending raises the equilibrium level of income by a multiple
of the original spending increase.
b. Government spending is part of fiscal policy.
c. A decline in government spending brings about a contraction in the economy.
d. Government spending is a means to close a recessionary gap.
e. An increase in government spending shifts the AD curve downward by a fraction of the
rise in government spending.
ANS: E PTS: 1 DIF: Medium REF: Ch 11, 1.b
OBJ: Ch 11, 1 TOP: Government spending TYP: Factual