Macroeconomic Models and Fiscal Policy



1. Investment spending in the United States tends to be unstable because
A. profits are highly variable.
B. investment spending is affected by interest rates.
C. capital wears out quickly and must be replaced often.
D. the price level fluctuates rapidly.
2. The amount by which government expenditures exceed revenues during a particular year is the
A. GDP gap.
B. public debt.
C. budget deficit.
D. full-employment.
3. Which one of the following statements about fiscal policy is correct?
A. Fiscal policy refers to the altering of the interest rate to change aggregate demand.
B. Fiscal policy refers to the manipulation of government spending and taxes to achieve greater equality in the distribution of income.
C. Fiscal policy refers to the fact that equal increases in government spending and taxation will be contractionary.
D. Fiscal policy refers to the manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
4. Which one of the following represents the most expansionary fiscal policy?
A. A $10 billion decrease in government spending
B. A $10 billion tax increase
C. A $10 billion increase in government spending
D. A $10 billion tax cut
5. The crowding-out effect of expansionary fiscal policy suggests that
A. saving is increasing at the expense of investment.
B. private investment is increasing at the expense of government spending.
C. imports are replacing domestic production.
D. government spending is increasing at the expense of private investment.
6. In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the _______ effect.
A. Keynes
B. wealth
C. interest-rate
D. multiplier
7. An economist who favored expanded government would recommend
A. tax increases during recession and tax cuts during inflation.
B. tax cuts during recession and tax increases during inflation.
C. tax cuts during recession and reductions in government spending during inflation.
D. increases in government spending during recession and tax increases during inflation.
8. Suppose that the economy is in the midst of a recession. Which one of the following policies would most likely end the recession and stimulate output growth?
A. A Congressional proposal to incur a federal surplus to be used for the retirement of public debt
B. A postponement of a highway construction program
C. A reduction in federal tax rates on personal and corporate income
D. A reduction in agricultural subsidies and veterans’ benefits
9. The group of three economists appointed by the President to provide fiscal policy recommendations is the
A. Joint Economic Committee.
B. Bureau of Economic Analysis.
C. Federal Reserve Board of Governors.
D. Council of Economic Advisers.
10. The relationship between investment and GDP is shown by the _______ schedule.
A. consumption
B. saving
C. investment
D. consumption of fixed capital
11. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is
A. 8 percent.
B. 80 percent.
C. 2 percent.
D. 20 percent.
12. Themost important determinant of consumption and saving is the
A. price level.
B. level of bank credit.
C. level of income.
D. interest rate.
13. The public debt is the amount of money that
A. the federal government owes to taxpayers.
B. the federal government owes to holders of U.S. securities.
C. state and local governments owe to the federal government.
D. Americans owe to foreigners.
14. Which one of the following statements about the interest-rate effect is correct?
A. The interest-rate effect suggests that an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.
B. The interest-rate effect suggests that a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending.
C. The interest-rate effect suggests that an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
D. The interest-rate effect suggests that an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
15. Fiscal policy is carried out primarily by
A. state and local governments working together.
B. local governments alone.
C. the federal government.
D. state governments alone.
16. Which one of the following statements correctly describes the multiplier effect?
A. The multiplier effect means that consumption is typically several times as large as saving.
B. The multiplier effect means that a change in consumption can cause a larger increase in investment.
C. The multiplier effect means that an increase in investment can cause GDP to change by a larger amount.
D. The multiplier effect means that a decline in the MPC can cause GDP to rise by several times that amount.
17. The public debt is held as
A. U.S. securities, corporate bonds, and common stock.
B. Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
C. Federal Reserve Notes.
D. U.S. gold certificates.
18. If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to
A. increase efficiency in the world economy.
B. increase domestic output and employment.
C. reduce the rate of domestic inflation.
D. reduce domestic output and employment.
19. Which one of the following statements about the federal budget deficit is correct?
A. The federal budget deficit is found by subtracting government revenues from the noninvestment-type government spending in a particular year.
B. The federal budget deficit is found by subtracting government tax revenues from government spending in a particular year.
C. The federal budget deficit is found by cumulating the differences between government spending and tax revenues over all years since the nation’s founding.
D. The federal budget deficit is found by subtracting government tax revenues plus government borrowing from government spending in a particular year.
20. Expansionary fiscal policy is so named because it
A. necessarily expands the size of government.
B. involves an expansion of the nation’s money supply.
C. is aimed at achieving greater price stability.
D. is designed to expand real GDP.