Reference no: EM13854518

1. Which of the following is an expansionary fiscal policy?
a. increase in taxes
b. increase in government spending
c. decrease in taxes
d. decrease in government spending
e. Both increase in taxes and decrease in government spending
f. Both increase in government spending and decrease in taxes

2. The government of a country is considering two options to restore full-employment equilibrium for an economy stuck in a recession: Option (1): Allow the economy to self-adjust to full employment;

Option (2): Administer an expansionary fiscal policy to restore full employment. If we compare the full-employment equilibrium achieved by either option 1 or option 2, which of the following is true?

a. A - Employment level in option 1 equilibrium will be higher than that in option 2 equilibrium.
b. B - Price level in option 1 equilibrium will be higher than that in option 2 equilibrium.
c. C - Employment level in option 1 equilibrium will be lower than that in option 2 equilibrium.
d. D - Price level in option 1 equilibrium will be lower than that in option 2 equilibrium.
e. Both A and B
f. Both C and D

3. The government of Fredonia increases its spending by $100 million to fight a recession during 2007. If the government's budget was balanced prior to the recession, which of the following is most likely to happen by the end of 2007? Assume that this policy has not yet had any positive effect by the end of 2007.

a. The government will have a budget deficit of exactly $100 million.
b. The government will have a budget deficit of less than $100 million.
c. The government will have a budget deficit of more than $100 million.
d. The government will have a balanced budget.

4. If an economy is experiencing an unemployment rate less than the natural rate, which of the fiscal policies would you suggest in order to restore the economy to full employment?

a. A - increase taxes
b. B - decrease government spending
c. C - decrease taxes
d. either A or B
e. either B or C

5. During a recession, the government spends $100 million to stimulate the economy. If the marginal propensity to consume is 0.8, what will be the potential increase in income in the economy as a result of the government's increase in the spending level?

a. $100 million
b. $125 million
c. $500 million
d. $80 million

6. Which of the following lags associated with fiscal policy are expected to be alleviated by automatic stabilizers such as unemployment benefits?

a. A - recognition lags
b. B - implementation lags
c. C - impact lags
d. Both A and B
e. Both B and C
f. Both A and C

7. Which of the following function as an automatic stabilizer during business cycles?

a. Social Security payments
b. unemployment compensation
c. tax rebate checks
d. all of these

8. The multiplier effect of fiscal policy predicts that an increase in government spending by $100 billion will increase total income by $400 billion if the marginal propensity to consume is 0.75. If we account for PARTIAL crowding out, then the increase in income will be

a. less than $400 billion.
b. more than $400 billion.
c. exactly $400 billion.
d. $0 billion.

9. Consider equilibrium in the loanable funds market with savings and investment equal to $150 million. The government increases its spending by $100 million and finances the deficit through borrowing in the loanable funds market. If the equilibrium quantity of loanable funds increases to $170 million, assuming complete crowding out, consumption must fall by and the new
level of investment must be

a. $20 million; $170 million
b. $20 million; $70 million
c. $20 million; $80 million
d. $50 million; $100 million

10. According to the new classical critique of fiscal policy, an increase in government spending today will lead to in current savings.
a. a decrease
b. an increase
c. no change
d. either an increase or a decrease

11. Which of the following is caused by supply-side fiscal policy, but not by demand-side fiscal policy?
a. the level of full-employment output.
b. the price level.
c. the level of real GDP.
d. both the level of full-employment output and the price level.
e. both the price level and the level of real GDP.

12. The main goal of supply-side fiscal policy is
a. to shift LRAS.
b. to change the level of full-employment output.
c. to offset economic fluctuations.
d. both to shift LRAS and to change the level of full-employment output.
e. both to change the level of full-employment output and to offset economic fluctuations.
f. to shift LRAS, to change the level of full-employment output, and to offset economic fluctuations.

13. For relatively lower tax rates, an increase in tax rates will tax revenue.
a. increase
b. decrease
c. not affect
d. either increase or decrease

14. Lower income tax rates will affect
a. AD.
b. LRAS.
c. either AD or LRAS (or both).
d. none of these.

15. Refer to the table below, which lists the U.S. federal income tax rates for the different income brackets. If the highest point on the Laffer curve corresponds to a tax rate of 30%, then which of the following statements must be false?

a. Increasing tax rates across all income tax brackets will cause a greater impact on tax revenue per return for the first income bracket than the third bracket.
b. Decreasing tax rates across all income tax brackets will not necessarily lead to higher tax revenue per return for all income brackets.
c. Increasing tax rates for the fifth and sixth income brackets will lead to lower tax revenue from those income brackets.
d. Increasing tax rates across all income tax brackets will cause a greater negative impact on tax revenue per return for the fifth income bracket than the sixth bracket.

16. Use the marginal income tax rates shown here to calculate the average tax rate on an income of $100,000.

Average tax rate on $100,000 of income is
a. 21.46%
b. 24.27%
c. 28.00%

17. Using the data shown in the table below, the debt-to-GDP ratio for Greece in 2001 was and the debt-to-GDP ratio for Greece in 2011 was

a. 170.3%; 103.7%
b. 103.7%; 170.3%
c. 96.4%; 58.7%
d. 58.7%; 96.4%
e. 1.037%; 1.703%