ECON 232 Chapter 12 Study Quiz 
 
 
 
 
1.

R-1 Ref12090

Refer to the above table. The changes in the budget conditions between 2000 and 2001 best reflect:
A. demand-pull inflation.
B. cost-push inflation.
C. an expansion of real GDP and an automatic increase in tax revenues.
D. a contractionary fiscal policy.


 
2. A tax reduction of a specific amount will be more expansionary, the:
A. smaller is the economy's MPC.
B. larger is the economy's MPC.
C. smaller is the economy's multiplier.
D. less the economy's built-in stability.

 
3. If the economy has a full-employment budget surplus, this means that:
A. the public sector is exerting an expansionary impact on the economy.
B. tax revenues would exceed government expenditures if full employment were achieved.
C. the actual budget is necessarily also in surplus.
D. the economy is actually operating at full employment.

 
4.
R-2 F12125

Refer to the above diagrams. The multiplier associated with fiscal policy that increases aggregate demand from AD1 to AD2 is less in graph b than in a because:
A. inflation occurs in b and not in a.
B. the economy is in the vertical range of aggregate supply in a and not in b.
C. graph a represents a closed economy while b depicts an open economy.
D. graph a represents an open economy while b depicts a closed economy.


 
5. The crowding out effect suggests that:
A. government spending is increasing at the expense of private investment.
B. imports are replacing domestic production.
C. private investment is increasing at the expense of government spending.
D. consumption is increasing at the expense of investment.

 
6. 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.

 
7. Assume the economy is at full employment and that investment spending declines dramatically. Under these conditions government fiscal policy should be directed toward:
A. an equality of tax receipts and government expenditures.
B. an excess of tax receipts over government expenditures.
C. an excess of government expenditures over tax receipts.
D. a reduction of subsidies and transfer payments and an increase in tax rates.

 
8. Fiscal policy will generate some inflation if aggregate demand increases in the horizontal range of aggregate supply.
A. True
B. False

 
9. The greatest impact of a tax cut will occur when government borrows from the public rather than prints money to finance the resulting budget deficit.
A. True
B. False

 
10. In the Employment Act of 1946, the Federal government:
A. applied the unemployment compensation program to intrastate workers.
B. agreed to subsidize unemployed workers to the extent of 50 percent of their average incomes.
C. committed itself to accept some degree of responsibility for the general levels of employment and prices.
D. agreed to hire, through public works programs, any employees who cannot find jobs with private industry.

 
11.
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Refer to the above diagram. Which tax system will generate the largest cyclical deficits?
A. T4
B. T3
C. T2
D. T1


 
12.
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Refer to the above diagram. Which tax system has the least built-in stability?
A. T4
B. T3
C. T2
D. T1


 
13. (Last Word) Which one of the following is one of the leading economic indicators?
A. index of consumer expectations
B. the unemployment rate
C. the consumer price index
D. Federal income tax collections

 
14. All else equal, a contractionary U.S. fiscal policy which reduces domestic interest rates tends to:
A. increase U.S. imports.
B. increase the international value of the dollar.
C. reduce the foreign demand for U.S. dollars.
D. aggravate an existing U.S. trade deficit.

 
15. When the economy is at full employment:
A. one cannot generalize in comparing the actual and the full-employment budgets.
B. the full-employment budget will show a surplus and the actual budget will show a deficit.
C. the actual budget will show a surplus and the full-employment budget will show a deficit.
D. the actual and the full-employment budgets will be equal.

 
16. Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy?
A. a Congressional proposal to incur a Federal surplus to be used for the retirement of public debt
B. a reduction in agricultural subsidies and veterans' benefits
C. a postponement of a highway construction program
D. a reduction in Federal tax rates on personal and corporate income

 
17.

R-4 F12094

Refer to the above diagram. Assume that G and T2 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a:
A. full-employment budget surplus.
B. actual budget deficit.
C. full-employment budget deficit.
D. actual budget surplus.


 
18.
R-5 F12058

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The tax system of this economy is such that:
A. it is regressive.
B. it is progressive.
C. tax revenues equal 50 percent of GDP.
D. it tends to destabilize the economy.


 
19.
R-5 F12058

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.
B. there will be a budget surplus.
C. the budget will be balanced.
D. the macroeconomy will be in equilibrium.


 
20.
Answer the next question(s) on the basis of the following sequence of events involving fiscal policy:

1) The composite index of leading indicators turns downward for three consecutive months; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.
R-6 REF12114

Refer to the above information. The operational lag of fiscal policy is reflected in events:
A. 1 and 2.
B. 2 and 3.
C. 3 and 4.
D. 4 and 5.


 
21. A politically conservative 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.

 
22. Supply-side economists argue that tax cuts will:
A. increase saving and investment.
B. increase incentives to work.
C. enhance entrepreneurial risk-taking.
D. do all of the above.

 
23. A expansionary fiscal policy is shown as a:
A. rightward shift in the economy's aggregate demand curve.
B. movement along an existing aggregate demand curve.
C. leftward shift in the economy's aggregate supply curve.
D. leftward shift in the economy's aggregate demand curve.

 
24.
R-7 F12037

Refer to the above diagram. The Q1 level of real GDP represents:
A. the full-capacity level of real GDP.
B. the full-employment level of real GDP.
C. an inflationary level of real GDP.
D. a recessionary level of real GDP.


 
25.
R-7 F12037

Refer to the above diagram. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to:
A. do nothing since the economy appears to be achieving full-employment real output.
B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2.
C. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level.
D. increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1.


 
26.
R-7 F12037

Refer to the above diagram. The shift of the aggregate demand curve from AD3 to AD2 is consistent with:
A. an expansionary fiscal policy.
B. a major recession.
C. a contractionary fiscal policy.
D. demand-pull inflation.


 
27. Discretionary fiscal policy refers to:
A. any change in government spending or taxes that destabilizes the economy.
B. the authority that the President has to change personal income tax rates.
C. changes in taxes and government expenditures made by Congress to stabilize the economy.
D. the changes in taxes and transfers that occur as GDP changes.

 
28. Which of the following fiscal actions would be the most effective in curbing inflation?
A. incurring a budget deficit by borrowing from the public
B. incurring a budget surplus which is used to retire debt held by commercial banks
C. incurring a budget surplus and impounding that surplus
D. incurring a budget surplus which is used to retire debt held by the public

 
29. Which of the following best describes the idea of a political business cycle?
A. Politicians are more willing to cut taxes and increase government spending than they are to do the reverse.
B. Fiscal policy will result in alternating budget deficits and surpluses.
C. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
D. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.

 
30. When current tax revenues exceed current government expenditures and the economy is achieving full employment:
A. the full-employment budget has neither a deficit nor a surplus.
B. the full-employment budget may have either a deficit or a surplus.
C. the full-employment budget has a surplus.
D. nominal GDP and real GDP are equal.

 

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