Untitled 9

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The spending and taxing policies used by the government to influence the economy refer to
A) fiscal policy.
B) ad hoc policy
C) monetary policy.
D) trade policy
1)
Answer: A
2) Which of the following is a category of fiscal policy?
A) government policies regarding taxation
B) government policies regarding the purchase of goods and services
C) government policies regarding transfer payments and welfare benefits
D) all of the above
2)
Answer: D
3) The ________ and the ________ determine tax revenues.
A) income tax rate; income of households
B) value of transfer payments; money supply
C) money supply; income tax rate
D) income of households; value of transfer payments
3)
Answer: A
4) Which of the following is CORRECT regarding tax revenues?
A) they do not change with changes in the tax rate
B) they decrease during economic slowdowns
C) they are the only revenue source in the government's budget
D) they increase during recessions
4)
Answer: B
5) Disposable income
A) decreases when income decreases.
C) increases when saving decreases.
B) decreases when net taxes decrease.

D) all of the above
5)
Answer: A
6) Ryan's income is $1,700 and his net taxes are $700. His disposable income is
A) $2,400.
B) $1,700.
C) $1,000.
D) $700.
6)
Answer: C
7) [Y = C + I + G] when ________ in the income-expenditure model.
A) government is included
B) investment is excluded
C) net imports are included
D) net exports are included
Answer: A
7)
8) The government budget deficit or surplus is the difference between what a government ________
and what it ________ in a year.
A) spends; collects in taxes
B) pays for imports; spends on exports
C) spends on programs; gives away in foreign aid
D) earns from transfers; pays in transfers
8)
Answer: A
9) In 2010, the city of Sylvester collected $800,000 in taxes and spent $200,000. In 2010, the city of
Sylvester had a
A) budget surplus of $200,000.
B) budget surplus of $1,000,000.
C) budget surplus of $600,000.
D) budget deficit of $200,000.
9)
Answer: C
10) In 2010, the city of Springfield collected $375,000 in taxes and spent $450,000. In 2010, the city of
Springfield had a
A) budget deficit of $75,000.
B) budget surplus of $75,000.
C) budget deficit of $125,000.
D) budget surplus of $825,000.
10)
Answer: A
11) Planned aggregate expenditure increases when ________ in the income-expenditure model.
A) consumption is excluded
B) the government sector is excluded
C) the government sector is included
D) investment is excluded
11)
Answer: C
12) The formula for the aggregate consumption function is [C = a + b(Y - T)] ________ the
income-expenditure model.
A) when consumption is left out of
B) after government is added to
C) after net exports are added to
D) after government is subtracted from
12)
Answer: B
13) The aggregate consumption function is C = 100 + 0.5Yd. If income is $2,000 and net taxes are $400,
consumption equals
A) 900.
B) 1,300.
C) 3,300.
D) 4,900.
13)
Answer: A
14) The aggregate consumption function is C = 200 + 0.9Yd. If income is $1,500 and net taxes are $300,
consumption equals
A) 1,280.
B) 1,820.
C) 2,000.
D) 2,180.
14)
Answer: A
15) The aggregate consumption function is C = 150 + 0.75Yd. If income is $500 and net taxes are zero,
consumption equals
A) 275.
B) 350.
C) 525.
D) 650.
15)
Answer: C
16) The aggregate consumption function is C = 1,200 + 0.4Yd. If income is $3,000 and net taxes are $400,
consumption equals
A) 1,760.
B) 2,240.
C) 2,560.
D) 2,760.
Answer: B
2
16)
17) If output is greater than planned aggregate expenditure, there will be

A) an unplanned increase in inventories.
B) a planned increase in inventories.
C) an unplanned decrease in inventories.
D) no change in inventories.
17)
Answer: A
Refer to the information provided in Table 9.1 below to answer the questions that follow.
Table 9.1
All Numbers are in $ Billion
Output Consumption
Net
Investment Government
(Income) Spending
Taxes
Spending
Spending
600
500
50
200
200
1,200
1,000
50
200
200
1,800
1,500
50
200
200
2,400
2,000
50
200
200
3,000
2,500
50
200
200
18) Refer to Table 9.1. At an output level of $1,200 billion, the level of aggregate expenditure is
A) $1,100 billion.
B) $1,250 billion.
C) $1,400 billion.
D) $1,450 billion.
18)
Answer: C
19) Refer to Table 9.1. At an output level of $1,200 billion, there is an unplanned inventory change of
A) positive $100 billion.
B) positive $200 billion.
C) negative $200 billion.
D) zero.
19)
Answer: C
A) $2,100 billion.
B) $2,350 billion.
C) $2,400 billion.
D) $2,450 billion.
20)
Answer: C
21) Refer to Table 9.1. At an output level of $2,400 billion, there is an unplanned inventory change of
A) positive $100 billion.
B) negative $200 billion.
C) positive $200 billion.
D) zero.
21)
Answer: D
22) Refer to Table 9.1. The equilibrium level of output is ________ billion.
A) $3,000
B) $2,400
C) $1,800
D) $1,200
22)
Answer: B
23) Refer to Table 9.1. At an output level of $600 billion, disposable income equals
A) zero.
B) $100 billion.
C) $300 billion.
D) $500 billion.
23)
Answer: D
24) Refer to Table 9.1. At an output level of $3,000 billion, the value of saving is ________ billion.
A) $400
B) $450
C) $500
D) $550
Answer: B
24)
25) Refer to Table 9.1. At the equilibrium level of income, leakages equal ________ billion.
A) $0
B) $200
C) $400
D) $600
25)
Answer: C
26) Refer to Table 9.1 At an output level of $2,400 billion, there is a tendency for output
A) to remain constant.
B) to fall.
C) to either increase or decrease.
D) to increase.
26)
Answer: A
Table 9.2
Output
(Income)
Y
500
1,000
1,500
2,000
2,500
Planned
Net Consumption Investment Government
Taxes
Spending
Spending
Purchases
T
C
I
G
100
300
300
100
100
600
300
100
100
900
300
100
100
1,200
300
100
100
1,500
300
100
________ billion.
A) $1,300
B) $1,400
C) $1,500
D) $1,600
27)
Answer: A
28) Refer to Table 9.2. At an output level of $1,500 billion, there is an unplanned inventory
A) change of $0.
B) increase of $100 billion.
C) decrease of $200 billion.
D) increase of $200 billion.
28)
Answer: D
29) Refer to Table 9.2. At an output level of $2,500, the level of aggregate expenditure is ________
billion.
A) $1,200
B) $1,400
C) $1,700
D) $1,900
29)
Answer: D
30) Refer to Table 9.2. At an output level of $2,500, there is an unplanned inventory
A) change of $0.
B) decrease of $400 billion.
C) increase of $400 billion.
D) increase of $600 billion.
30)
Answer: D
31) Refer to Table 9.2. The equilibrium level of output is ________ billion.
A) $1,000
B) $1,500
C) $2,000
D) $2,500
31)
Answer: A
32) Refer to Table 9.2. At an output level of $1,500, disposable income is
A) $300.
B) $600.
C) $900.
Answer: C
D) $1,200.
32)
33) Refer to Table 9.2. At an output level of $2,500, the level for saving
A) is $600.
B) is $900.
C) is $1,200.
D) cannot be determined from this information.
33)
Answer: B
34) Refer to Table 9.2 At the equilibrium level of income, leakages equal ________ billion.
A) $0
B) $100
C) $200
D) $400
34)
Answer: D
35) Refer to Table 9.2. At an output level of $2,000, there is a tendency for output
A) to increase.
B) to either increase or decrease.
C) to remain constant.
D) to fall.
35)
Answer: D
The Norwegian economy can be characterized by Equation 9.1.
EQUATION 9.1:
C = 100 + 0.8Yd
G = 500
T = 200
I = 200
36) Refer to Equation 9.1. The equilibrium level of output for the Norwegian economy is
A) 2,850.
B) 3,200.
C) 4,000.
D) 4,800.
36)
Answer: B
37) Refer to Equation 9.1. At the equilibrium level of output in Norway, consumption equals
A) 2,220.
B) 2,500.
C) 3,140.
D) 3,300.
37)
Answer: B
38) Refer to Equation 9.1. At the equilibrium level of output in Norway, saving equals
A) 1,660.
B) 850.
C) 630.
D) 500.
38)
Answer: D
39) Refer to Equation 9.1. At the equilibrium level of output in Norway, leakages equal
A) 880.
B) 830.
C) 750.
D) 700.
Answer: D
39)
The Peruvian economy can be characterized by Equation 9.2.

EQUATION 9.2:
C = 400 + 0.6Yd
Taxes = 600
Equilibrium Output = $4,000
40) Refer to Equation 9.2. At equilibrium, the sum of investment and government purchases in Peru is
A) 2,040.
B) 1,560.
C) 1,440.
D) cannot be determined from the given information
40)
Answer: B
41) Refer to Equation 9.2. At equilibrium, government purchases in Peru is
A) 2,040.
B) 1,560.
C) 1,440.
D) cannot be determined from the given information
41)
Answer: D
42) Refer to Equation 9.2. At equilibrium, saving in Peru equals
A) 960.
B) 1,440.
C) 1,560.
D) 2,040.
42)
Answer: A
43) Refer to Equation 9.2. At equilibrium leakages in Peru equal
A) 2,040.
B) 1,560.
C) 1,440.
D) 960.
43)
Answer: B
44) The economy is in equilibrium when [I + G = S + T], assuming there is
A) no foreign trade.
B) positive net exports.
C) negative net exports.
D) no government or taxes.
44)
Answer: A
45) Assuming there is no foreign trade in the economy, equilibrium is achieved when ________ equal
[saving + net taxes - investment].
A) investment expenditures
B) consumption expenditures
C) net exports
D) government purchases
Answer: D
45)
Refer to the information provided in Figure 9.1 below to answer the questions that follow.
Figure 9.1
46) Refer to Figure 9.1. Aggregate expenditures = aggregate output at $ ________ billion.
A) 1,500
B) 2,000
C) 3,000
D) 4,000
46)
Answer: B
47) Refer to Figure 9.1. In this economy, 0.5 represents the
A) MPS.
B) MPC.
C) multiplier.
D) both A and B
47)
Answer: D
48) Refer to Figure 9.1. Injections = leakages
A) at equilibrium.
C) when output = investment.
B) when consumption = saving.

D) when income = zero.
48)
Answer: A
49) Refer to Figure 9.1. At equilibrium, $1,000 billion represents
A) the part of consumption that is dependent on income.
B) the part of consumption that is not dependent on income.
C) equilibrium income.
D) both A and B are correct
49)
Answer: D
50) Refer to Figure 9.1. Suppose that the consumption function is C = 200 + 0.4Yd and taxes are $200
billion, at equilibrium the value of injections are
A) $1,080 billion.
B) $840 billion.
C) $720 billion.
D) $650 billion.
50)
Answer: A
billion, at equilibrium the value of autonomous consumption is
A) $400 billion.
B) $300 billion.
C) $200 billion.
D) $100 billion.
Answer: B
51)
billion, at equilibrium, what is the value of consumption?
A) $1,100
B) $1,250
C) $1,350
D) $1,800
52)
Answer: A
53) If planned injections are less than leakages, output will
A) remain constant.
B) increase.
C) decrease.
D) either increase or decrease.
53)
Answer: C
54) For the economy to be in equilibrium, government purchases plus ________ must equal saving plus
________.
A) tax revenue; investment
B) investment; tax revenue
C) tax revenue; consumption
D) consumption; investment
54)
Answer: B
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
55) The economy is in equilibrium when aggregate output equals aggregate expenditures.
Answer:
True
False
56) For the economy to be in equilibrium, the following condition must be satisfied: G + S = C + I.
Answer:
True
True
True
57)
False
58) Disposable income is income plus net taxes.

Answer:
56)
False
57) When planned investment is greater than investment, output falls.

Answer:
55)
58)
False
59) If the government wants to increase employment, government purchases should be ________
and/or taxes should be ________.
A) increased; decreased
B) decreased; decreased
C) decreased; increased
D) increased; increased
59)
Answer: A
60) The Prime Minister of Richlandia hires you as an economic consultant. He is concerned that the
output level in Richlandia is too low and that this will cause unemployment to rise. He feels that it
is necessary to increase output by $20 billion. He tells you that the MPC in Richlandia is 0.75.
Which of the following would be the best advice to give to the Richlandian Prime Minister?
A) increase government purchases in Richlandia by $5 billion
B) reduce taxes in Richlandia by $10 billion
C) increase government purchases in Richlandia by $15 billion
D) reduce taxes in Richlandia by $4 billion
Answer: A
60)
61) The King of Rococo hires you as an economic consultant. He is concerned that the output level in
Rococo is too high and that this will cause prices to rise. He feels that it is necessary to reduce
output by $100 billion. He tells you that the MPC in Rococo is 0.9. Which of the following would be
the best advice to give to the King of Rococo?
A) increase government spending in Rococo by $100 billion
B) increase taxes in Rococo by $100 billion
C) reduce government spending in Rococo by $10 billion
D) reduce government spending in Rococo by $90 billion
61)
Answer: C
Table 9.3
All Numbers are in $ Million
Planned
Output
Net
Planned Government
(Income) Taxes Consumption Savings Investment Spending
1,000
200
680
120
200
200
1,100
200
__
140
200
200
1,200
200
840
160
200
200
1,300
200
920
__
200
200
1,400
200
__
200
200
200
1,500
200
1,080
__
200
200
1,600
200
1,160
240
200
200
62) Refer to Table 9.3. Assuming constant MPC, at income of $1,100 million, consumption is $________
million, and at income of $1,400 million, consumption is $________ million.
A) 760; 1,000
B) 720; 960
C) 740; 980
D) 780; 1,020
62)
Answer: A
63) Refer to Table 9.3. Assuming constant MPC, at income of $1,300 million, saving is $________
million, at income of $1,500 million, saving is $________ million.
A) 195; 235
B) 180; 220
C) 170; 210
D) 190; 230
63)
Answer: B
64) Refer to Table 9.3. The government spending multiplier in this economy is
A) 2.
B) 4.
C) 5.
D) 10.
64)
Answer: C
65) Refer to Table 9.3. The equilibrium level of aggregate income is $________ million.
A) 1,200
B) 1,300
C) 1,400
D) 1,500
65)
Answer: C
66) Refer to Table 9.3. Which of the following variables is considered autonomous?
A) saving
B) planned government spending
C) planned investment
D) both B and C
Answer: D
66)
67) Refer to Table 9.3. Suppose the economy is in equilibrium and the government increases spending
by $100 million, the new equilibrium output is $________ million
A) 1,600
B) 1,800
C) 1,900
D) 2,400
67)
Answer: C
68) Refer to Table 9.3. Suppose the economy is in equilibrium and the government raises taxes from
$200 million to $250 million, equilibrium output will ________ by $________ million.
A) decrease; 200
B) decrease; 50
C) increase; 200
D) increase; 50
68)
Answer: A
Table 9.4
All Figures in Billions of Dollars
Output Net Taxes Consumption

(Income)
Spending
(C = 100 + 0.9Yd)
2,600
100
2,350
2,800
100
2,530
3,000
100
2,710
3,200
100
2,890
3,400
100
3,070
3,600
100
3,250
3,800
100
3,430
Savings
Planned
Investment
Purchases
150
150
150
150
150
150
150
150
170
190
210
230
250
270
69) Refer to Table 9.4. The equilibrium level of income is

A) $2,000 billion.
B) $3,400 billion.
C) $3,600 billion.
Government
Spending
200
200
200
200
200
200
200
D) $3,800 billion.
69)
Answer: C
70) Refer to Table 9.4. The MPC is
A) 0.9.
B) 0.8.
C) 0.75.
D) 0.5.
C) -5.
D) -4.
70)
Answer: A
71) Refer to Table 9.4. The value of the tax multiplier is
A) -10.
B) -9.
71)
Answer: B
72) Refer to Table 9.4. The economy is at the equilibrium level of output. If government spending
increases by $200 billion, the new equilibrium level of output is
A) $5,600 billion.
B) $4,600 billion.
C) $4,400 billion.
D) $4,000 billion.
72)
Answer: A
73) Refer to Table 9.4. The economy is at the equilibrium level of output. If government spending
decreases by $50 billion, the new equilibrium level of output is
A) $3,100 billion.
B) $2,400 billion.
C) $1,550 billion.
D) $1,450 billion.
Answer: A
10
73)
74) Refer to Table 9.4. If taxes are reduced from $100 billion to $50 billion, the new equilibrium level of
output is
A) $4,050 billion.
B) $3,850 billion.
C) $2,100 billion.
D) $1,600 billion.
74)
Answer: A
75) Refer to Table 9.4. If taxes are reduced by $50 billion and government spending is reduced by $50
billion, the new equilibrium level of income
A) is $3,550 billion.
B) is $3,350 billion.
C) is $1,600 billion.
D) cannot be determined from this information.
75)
Answer: A
76) The ratio of the change in the equilibrium level of output to a change in government purchases is
the
A) government surplus-to-deficit ratio.
B) output expenditure equilibrium.
C) government purchases multiplier.
D) government deficit ratio.
76)
Answer: C
77) If the MPC is 0.4, the government spending multiplier is
A) 25.
B) 2.5.
C) 1.67.
D) 0.6.
77)
Answer: C
78) If the MPC is 0.75, the tax multiplier is
A) -2.5.
B) -3.
C) -4.
D) -5.
78)
Answer: B
79) If the government spending multiplier is 10 and government purchases decrease by $20 billion,
output will decrease by
A) $2 billion.
B) $20 billion.
C) $40 billion.
D) $200 billion.
79)
Answer: D
80) If the government spending multiplier is 6 and government spending increases by $30 billion,
output will ________ by $________ billion.
A) increase; 5
B) decrease; 5
C) increase; 180
D) decrease; 180
80)
Answer: C
The economy of Kiwiland can be characterized by Equation 9.3.
EQUATION 9.3:
C = 1,000 + 0.5Yd
T = 200
G = 400
I = 500
81) Refer to Equation 9.3. The equilibrium level of income in Kiwiland is

A) 900.
B) 1,800.
C) 2,700.
Answer: D
11
D) 3,600.
81)
82) Refer to Equation 9.3. If government spending in Kiwiland increases by 400, equilibrium output
increases by
A) 400.
B) 800.
C) 1,600.
D) 2,000.
82)
Answer: B
Figure 9.3
83) Refer to Figure 9.3. At equilibrium, ________ equal $300 billion.

A) break even income
B) autonomous consumption
C) autonomous saving
D) autonomous planned expenditures
83)
Answer: D
84) Refer to Figure 9.3. The tax multiplier is
A) -4.
B) -2.5.
C) -2.
D) -1.5.
84)
Answer: D
85) Refer to Figure 9.3. If autonomous planned expenditure increases by $________ billion, equilibrium
aggregate output increases to $750 billion.
A) 20
B) 50
C) 100
D) 200
Answer: C
12
85)
Figure 9.4
86) Refer to Figure 9.4. Along aggregate expenditure AE1, the MPS will be
A) 0.4.
B) 0.3.
C) 0.2.
86)
D) 0.1.
Answer: C
87) Refer to Figure 9.4. The value of Point A is
A) $3,000 billion.
C) $5,000 billion.
B) $4,000 billion.
D) the same as the value of Point B.
87)
Answer: D
88) Refer to Figure 9.4. The value of Point B is
A) $3,000 billion.
C) $5,000 billion
B) $4,000 billion
D) the same as the value of Point A.
88)
Answer: D
89) Refer to Figure 9.4. What is the value of the tax multiplier?
A) -9
B) -8
C) -4
D) -2
89)
Answer: C
90) Refer to Figure 9.4. Along AE1, ________ when aggregate output equals $2,000 billion.
A) leakages < injections
B) leakages = zero
C) leakages = injections
D) leakages > injections
90)
Answer: C
91) Refer to Figure 9.4. If aggregate expenditures are represented by AE2 and government spending
increases by $100 billion, equilibrium aggregate output increases by $________ billion.
A) 100
B) 300
C) 500
D) 800
Answer: C
13
91)
92) Government spending increases by $80 billion and the equilibrium level of output increases by
$320 billion. The government spending multiplier
A) is 4.
B) is 5.
C) is 6.
D) cannot be determined from this information, because the MPC is not given.
92)
Answer: A
93) Assume an economy is in equilibrium at an output level of $2,000 billion. If government spending
decreases by $500 billion, then at the output level of $2,000 billion, there is
A) an unplanned fall in inventories.
B) an unplanned inventory change of zero.
C) an unplanned rise in inventories.
D) either an unplanned increase or decrease in inventories depending on the value of the MPC.
93)
Answer: C
94) Assume an economy is in equilibrium at an output level of $1,600 billion. If government purchases
increase by $200 billion, then at the output level of $1,600 billion, there is
A) an unplanned inventory change of zero.
B) an unplanned increase in inventories.
C) an unplanned decrease in inventories.
D) either an unplanned increase or decrease in inventories depending on the value of the MPC.
94)
Answer: C
95) An increase in lump-sum taxes will
A) shift the consumption function upward.
B) make the consumption function steeper.
C) make the consumption function flatter.
D) shift the consumption function downward.
95)
Answer: D
96) The ratio of the change in the equilibrium level of output to the change in taxes is the
A) tax rebate ratio.
B) tax revenue calculator.
C) tax multiplier.
D) government tax deficit.
96)
Answer: C
97) If the tax multiplier is -2.22, the MPC is
A) 0.82.
B) 0.78.
C) 0.69.
D) 0.31.
97)
Answer: C
98) If the tax multiplier is -4, the MPS is
A) 0.2.
B) 0.3.
C) 0.4.
D) 0.5.
C) -2.5.
D) -4.
98)
Answer: A
A) -0.6.
B) -1.5.
Answer: B
14
99)
100) Taxes are increased by $50 billion and income decreases by $300 billion. The value of the tax
multiplier is
A) -3.
B) -5.
C) -6.
D) -15.
100)
Answer: C
101) Taxes are reduced by $10 billion and income increases by $200 billion. The value of the tax
multiplier is
A) -20.
B) -5.
C) -2.
D) -0.5.
101)
Answer: A
102) If the tax multiplier is -4 and taxes are reduced by $35 billion, output
A) increases by $140 billion.
B) increases by $8.75 billion.
C) falls by $8.75 billion.
D) falls by $140 billion.
102)
Answer: D
103) If the tax multiplier is -15 and taxes are increased by $150 billion, output
B) falls by $2,250 billion.
C) increases by $2,250 billion.
D) falls by $10 billion.
103)
Answer: B
Figure 9.5
104) Refer to Figure 9.5. [400 + 0.75Y] best represents the

A) saving function.
C) government spending multiplier.
B) aggregate expenditure function.

D) tax multiplier.
104)
Answer: B
105) Refer to Figure 9.5. At aggregate output of $________ billion, unplanned inventories equal $200
billion.
A) 2,400
B) 3,000
C) 3,200
D) 3,600
105)
Answer: A
106) Refer to Figure 9.5. The MPC equals ________ and the MPS equals ________.
A) 0.8; 0.2
B) 0.75; 0.25
C) 0.5; 0.5
Answer: B
15
D) 0.9; 0.1
106)
107) Refer to Figure 9.5. If the economy is in equilibrium and the government increases spending by
$200 billion, equilibrium aggregate expenditures increase to $________ billion.
A) 1,800
B) 2,000
C) 2,400
D) 3,200
107)
Answer: C
108) Refer to Figure 9.5. If the economy is in equilibrium and the government decreases spending by
$100 billion, equilibrium aggregate output decreases to $________ billion.
A) 1,500
B) 1,400
C) 1,200
D) 800
108)
Answer: C
109) Refer to Figure 9.5. If the economy is in equilibrium and the government increases taxes by $100
billion, equilibrium aggregate output ________ to $________ billion.
A) decreases; 1,500
B) decreases; 1,000
C) increases; 1,700
D) decreases; 1,300
109)
Answer: D
110) Refer to Figure 9.5. If the economy is in equilibrium and the government increases spending by
$200 billion and increases taxes by $200 billion, equilibrium aggregate output
B) increases by more than $200 billion.
C) does not change.
D) increases by less than $200 billion.
110)
Answer: A
111) If the government spending multiplier is 2, then the tax multiplier
A) is -2.
B) is -1.
C) is -0.5.
D) cannot be determined because the MPS is not given.
111)
Answer: B
112) If the tax multiplier is -5.25, then the government purchases multiplier
A) is 6.25.
B) is 4.75.
C) is 0.75.
D) cannot be determined because the MPS is not given.
112)
Answer: A
113) If government spending is increased by $500, taxes are reduced by $200, and the MPS is 0.2,
equilibrium output will change by
A) $1,500.
B) $1,700.
C) $3,300.
D) $3,500.
113)
Answer: C
114) If government purchases are increased by $30, taxes are reduced by $30, and the MPC is 0.75,
equilibrium output will change by
A) $900.
B) $210.
C) $30.
D) zero.
114)
Answer: B
115) If government spending is increased by $1,000 and taxes are increased by $1,000, the equilibrium
level of income will
A) increase by $2,000.
B) decrease by $1,000.
C) increase by $1,000.
D) not change.
Answer: C
16
115)
116) If government purchases are decreased by $375 and taxes are decreased by $375, the equilibrium
level of income will
A) increase by $375.
B) not change.
C) decrease by $375.
D) decrease by $750.
116)
Answer: C
117) Assume that the MPC is 0.8. If government spending increases by $200, equilibrium output
________; and if taxes increase by $200, equilibrium output ________.
A) increases by $800; decreases by $600
B) increases by $1,600; decreases by $1,200
C) increases by $1,000; decreases by $800
D) increases by $1,000; decreases by $1,000
117)
Answer: C
118) Assume that the MPC is 0.8. If government purchases increase by $500, equilibrium output
________; and if taxes increase by $500, equilibrium output ________.
A) increases by $2,500; decreases by $2,000
B) increases by $2,000; decreases by $1,000
C) increases by $4,000; decreases by $3,000
D) increases by $1,600; decreases by $1,200
118)
Answer: A
119) You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The
Chairperson of the CEA tells you that she believes the current unemployment rate is too high. The
unemployment rate can be reduced if aggregate output increases. She wants to know what policy
to pursue to increase aggregate output by $500 billion. The best estimate she has for the MPC is 0.5.
Which of the following policies should you recommend?
A) increase government purchases by $200 billion
B) increase government purchases by $250 billion
C) cut taxes by $200 billion and to increase government purchases by $200 billion
D) cut taxes by $200 billion
119)
Answer: B
120) You are hired by the Bureau of Economic Analogies (BEA) as an economic consultant. The
Chairperson of the BEA tells you that he believes the current unemployment rate is too low. The
unemployment rate can be increased if aggregate output decreases. He wants to know what policy
to pursue to decrease aggregate output by $50 billion. The best estimate he has for the MPC is 0.9.
A) decrease government spending by $5 billion
B) increase taxes by $5 billion
C) decrease government spending by $50 billion
D) cut taxes by $10 billion and to increase government spending by $5 billion
120)
Answer: A
chairperson of the CEA tells you that she believes the current unemployment rate is too high. The
A) reduce taxes by $100 billion
B) reduce the budget deficit by $400 billion
C) reduce taxes by $100 billion and increase government purchases by $50 billion
D) increase government purchases by $100 billion
Answer: A
17
121)
chairperson of the BEA tells you that he believes the current unemployment rate is too high. The
unemployment rate can be reduced if aggregate output increases. He wants to know what policy to
pursue to increase aggregate output by $200 billion. The best estimate he has for the MPC is 0.6.
A) increase taxes by $133.33 billion
B) increase government spending by $80 billion
C) reduce the budget deficit by $200 billion
D) reduce taxes by $150 billion and decrease government spending by $100 billion
122)
Answer: B
chairperson of the CEA tells you that she believes the current unemployment rate is too high. The
A) increase both government spending and taxes by $800 billion
B) decrease both government spending and taxes by $800 billion
C) reduce government spending by $800 billion and increase taxes by $800 billion
D) increase government spending by $800 billion and reduce taxes by $800 billion
123)
Answer: A
chairperson of the BEA tells you that he believes the current unemployment rate is too high. The
unemployment rate can be reduced if aggregate output increases. He wants to know what policy to
pursue to increase aggregate output by $700 billion. The best estimate he has for the MPC is 0.8.
A) increase government spending by $700 billion and taxes by $600 billion
B) increase both government spending and taxes by $700 billion
C) reduce government spending by $350 billion and reduce taxes by $250 billion
D) increase government spending by $350 billion and reduce taxes by $700 billion
124)
Answer: B
125) As the size of the MPC decreases, the value of the balanced-budget multiplier
A) decreases.
B) increases.
C) remains constant.
D) could either increase or decrease.
125)
Answer: C
126) Suppose that in the beginning of 2010 the federal debt was $11 trillion. During 2010, the
government balanced its budget. At the end of 2010, the federal debt
A) increased.
B) decreased.
C) stayed the same.
D) was eliminated.
126)
Answer: C
127) Related to the Economics in Practice on p. 477: If Congress decided to extend the duration of
unemployment benefits, which of the following would most likely be TRUE?
A) The federal deficit would decrease.
B) The incentive for the unemployed to search for jobs would decrease.
C) The total value of transfer payments would decrease.
D) The average length of time people spent collecting unemployment benefits would decrease.
Answer: B
18
127)
128) Related to the Economics in Practice on p. 477: In 2010, Congress debated whether to extend the
duration of unemployment benefits. One argument in favor of extending the duration of benefits is
________, and one argument against the extension is ________.
A) this would increase the incentive for the unemployed to search for jobs; this would cause
interest rates to rise
B) this would help keep inflation rates low; this would expand the trade deficit
C) this would financially help those people who have been unable to find employment; this
would add to an already growing federal deficit
D) this would decrease the federal deficit; this would prolong unemployment
128)
Answer: C
129) If autonomous spending increases, the aggregate expenditure function becomes flatter.
Answer:
True
False
130) If the government increases taxes by $20 billion and decreases spending by $20 billion, equilibrium
output increases by $20 billion.
Answer:
True
True
130)
False
131) A tax cut of $5 billion will have a greater effect on the economy than an increase in government
purchases of $5 billion.
Answer:
129)
131)
False
132) The federal debt is the
A) yearly federal tax revenues minus the yearly federal expenses.
B) total amount owed to the public by the federal government.
C) same as the federal deficit.
D) amount towed to the federal government by other countries.
132)
Answer: B
133) Transfer payments are the ________ in the government's budget.
A) smallest expenditure source
B) largest revenue source
C) smallest revenue source
D) largest expenditure source
133)
Answer: D
134) Personal taxes are the ________ in the government's budget.
A) smallest expenditure source
B) smallest revenue source
C) largest revenue source
D) largest expenditure source
134)
Answer: C
135) A government's debt is increased when it
A) buys more bonds.
C) runs a surplus.
B) runs a deficit.
D) balances is budget.
Answer: B
19
135)
136) When a government runs a surplus

A) it must raise taxes
C) it must cut spending.
B) its debt decreases.

D) its debt increases.
136)
Answer: B
137) The amount the government owes to the public is the federal debt.
Answer:
True
False
138) If tax receipts are greater than government expenditures the government is running a surplus.
Answer:
True
True
True
True
140)
False
141) The government budget is balanced when tax receipts equal transfer payments.
Answer:
139)
False
140) Transfer payments are the largest part of the U.S. government spending.
Answer:
138)
False
139) If the government runs a surplus, then the government debt increases.
Answer:
137)
141)
False
142) During a recession, unemployment ________, tax revenue ________, and the budget deficit
________.
A) rises; rises; falls
B) rises; falls; rises
C) falls; rises; rises
D) falls; falls; rises
142)
Answer: B
143) During an economic expansion, income ________, unemployment benefits ________ and the budget
deficit ________.
A) rises; fall; falls
B) rises; rise; falls
C) rises; fall; rises
D) falls; rise; rises
143)
Answer: A
144) The presence of ________ means that the federal deficit is larger than it otherwise would be in a
recession, and smaller than it otherwise would be in an expansion.
A) the tax multiplier
B) unplanned inventory changes
C) net exports
D) automatic stabilizers
144)
Answer: D
145) During an expansion, automatic stabilizers cause the federal deficit to
A) remain unchanged.
B) either increase or decrease.
C) decrease.
D) increase.
145)
Answer: C
146) The food stamp program is an example of
A) a federal tax.
C) an automatic stabilizer.
B) private equity.
D) a federal quota.
Answer: C
20
146)
147) If the economy is in a recession, the actual deficit is ________ than the full employment deficit.
A) equal to or larger than
B) larger than
C) equal to
D) smaller than
147)
Answer: B
148) If the economy's full-employment output is $12 trillion, actual output is $10 trillion, and the budget
deficit is $2 trillion, the deficit in this case is known as a
A) debt deficit.
B) natural employment deficit.
C) structural deficit.
D) cyclical deficit.
148)
Answer: D
149) If the economy's full-employment output is $12 trillion, actual output is $12 trillion, and the budget
deficit is $40 billion, the deficit in this case is known as a
A) fiscal deficit.
B) natural employment deficit.
C) structural deficit.
D) cyclical deficit.
149)
Answer: C
150) Assume that in the United States the actual deficit is $750 billion. If the United States were at full
employment, the deficit would be $150 billion. The structural deficit in the United States is
A) $150 billion.
B) $600 billion.
C) $750 billion.
D) $900 billion.
150)
Answer: A
151) Assume that in Agraria the actual deficit is $300 billion. If Agraria was at full employment, the
deficit would be $100 billion. The structural deficit in Agraria is
A) $100 billion.
B) $200 billion.
C) $300 billion.
D) $400 billion.
151)
Answer: A
152) In which case will the government collect more tax revenue?
A) 50% tax rate and $50,000 average income
B) 5% tax rate and $200,000 average income
C) 10% tax rate and $120,000 average income
D) 70% tax rate and $20,000 average income
152)
Answer: A
153) If taxes are a lump sum amount, then the AE function is
A) flatter than if taxes are a function of income.
B) downward sloping.
C) steeper than if taxes are a function of income.
D) vertical.
153)
Answer: C
154) Related to the Economics in Practice on p. 493: At the June 2010 G-20 summit, President Obama
pressed other members to move cautiously with their plans to tighten their fiscal policies.
Tightening fiscal policies would include which of the following actions?
A) decreasing tax rates
B) decreasing government spending
C) increasing interest rates
D) increasing the money supply
Answer: B
21
154)
155) Related to the Economics in Practice on p. 493: At the June 2010 G-20 summit, President Obama
pressed other members to continue some level of stimulus spending as a way of sustaining
economic growth. Many European leaders were cautious about additional spending, looking
instead to reduce spending as part of austerity measures. Reduced government spending is a
component of
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) contractionary fiscal policy.
D) contractionary monetary policy.
155)
Answer: C
156) During recessions, automatic stabilizers work to reduce government expenditures and reduce
government revenues.
Answer:
True
False
157) The cyclical deficit is the deficit at full employment.

Answer:
True
157)
False
158) In a recession the U.S. federal government deficit automatically falls.

Answer:
True
158)
False
159) Automatic stabilizers include those elements of government spending that automatically grow
during an expansion.
Answer:
True
156)
159)
False
160) [1/MPS] is the formula for
A) the consumption function.
C) saving.
B) the government spending multiplier.

D) the MPC.
160)
Answer: B
161) If the MPS is 0.4, the government spending multiplier is
A) 0.6.
B) 2.5.
C) 4.
D) 5.
161)
Answer: B
162) If the MPS is 0.1, the tax multiplier is
A) 10.
B) -5.
C) -9.
D) -10.
C) -4.
D) -1.2.
162)
Answer: C
A) -8.
B) -5.
163)
Answer: C
164) [-(MPC/MPS)] is the formula for the
A) government spending multiplier.
C) saving function.
B) consumption function.
D) tax multiplier.
Answer: D
22
164)
165) The value of the balanced-budget multiplier is

A) greater than 1.
C) 0.
B) 1.
D) greater than 0 but less than 1.
165)
Answer: B
166) As the MPC increases, the government spending multiplier increases.
Answer:
True
166)
False
167) The balanced-budget multiplier works whenever the government increases spending and
decreases taxes by the same amount.
Answer:
True
167)
False
168) Assume that taxes depend on income. The MPC is 0.5 and t is 0.5. The government spending
multiplier is
A) 1.33.
B) 2.
C) 2.5.
D) 4.
168)
Answer: A
169) Assume that taxes depend on income. The MPC is 0.8 and t is 0.2. The government spending
multiplier is
A) 1.25.
B) 2.78.
C) 4.
D) 4.17.
169)
Answer: B
170) Assume that taxes depend on income. The MPC is 0.75 and t is 0.2. If government spending
increases by $10 billion, the equilibrium level of output will increase by
A) $16.7 billion.
B) $25 billion.
C) $50 billion.
D) $100 billion.
170)
Answer: B
171) Assume that taxes depend on income. The MPC is 0.8 and t is 0.5. If government purchases increase
by $100 billion, the equilibrium level of output will increase by
A) $57.5 billion.
B) $167 billion.
C) $192.31 billion.
D) $215.9 billion.
171)
Answer: B
172) If taxes depend on income and the MPC is 0.8 and t is 0.4, the tax multiplier is
A) -1.54.
B) -1.92.
C) -2.5.
D) -2.7.
172)
Answer: A
173) Assume that taxes depend on income and the MPC is 0.8 and t is 0.4. An increase in taxes of $10
billion will decrease equilibrium income by
A) $15.4 billion.
B) $19.2 billion.
C) $25 billion.
D) $27 billion.
Answer: A
23
173)
174) If taxes were a lump-sum amount, then the magnitude of the government spending multiplier
________ it would be if taxes depend on income.
A) is smaller than
B) is equal to what
C) is larger than
D) could be either larger than or smaller than
174)
Answer: C
175) If taxes were a lump-sum amount, then the absolute value of the tax multiplier ________ it would
be if taxes depend on income.
A) is equal to what
B) is smaller than
C) is larger than
D) could be either larger than or smaller than
175)
Answer: C
176) As the tax rate decreases, the government spending multiplier
A) increases.
B) does not change.
C) decreases.
D) could either increase or decrease depending on the value of the MPC.
176)
Answer: A
177) As the tax rate decreases, the absolute value of the tax multiplier
A) decreases.
B) does not change.
C) increases.
D) could either increase or decrease depending on the value of the MPC.
177)
Answer: C
178) When taxes depend on income, a lower tax rate implies a lower government spending multiplier.
Answer:
True
False
179) When the MPC is 0.8 and t is 0.4, then the government spending multiplier is about -2.07.
Answer:
True
True
True
True
181)
False
182) When the tax rate decreases, the absolute value of the tax multiplier increases.
Answer:
180)
False
181) If the MPS is 0.8 and t is 0.3, then the tax multiplier is about -1.03.
Answer:
179)
False
180) If the MPS is 0.4 and t is 0.1, then the tax multiplier is about -1.36.
Answer:
178)
False
24
182)

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Exam

B) decreases when net taxes decrease.

17) If output is greater than planned aggregate expenditure, there will be

The Peruvian economy can be characterized by Equation 9.2.

B) when consumption = saving.

58) Disposable income is income plus net taxes.

57) When planned investment is greater than investment, output falls.

Output Net Taxes Consumption

69) Refer to Table 9.4. The equilibrium level of income is

81) Refer to Equation 9.3. The equilibrium level of income in Kiwiland is

83) Refer to Figure 9.3. At equilibrium, ________ equal $300 billion.

104) Refer to Figure 9.5. [400 + 0.75Y] best represents the

B) aggregate expenditure function.

136) When a government runs a surplus

B) its debt decreases.

157) The cyclical deficit is the deficit at full employment.

158) In a recession the U.S. federal government deficit automatically falls.

B) the government spending multiplier.

165) The value of the balanced-budget multiplier is

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