Question 1

Which of the following best describes an automatic stabilizer in fiscal policy?

Accepted Answer

A government program that automatically increases spending or decreases taxes during a recession without new legislative action.

Question 2

Suppose the government increases its purchases by $$200 billion, and the marginal propensity to consume (MPC) is 0.75. What is the total change in real GDP, assuming no crowding out and using the simple government spending multiplier formula $$\frac{1}{1-MPC}$?

Accepted Answer

$$800$$ billion

Question 3

Which of the following is a likely short-run effect of a large expansionary fiscal policy enacted during a recession, such as the American Recovery and Reinvestment Act of 2009?

Accepted Answer

An increase in real GDP and a reduction in unemployment, but also a larger federal budget deficit.

Question 4

If the government enacts a contractionary fiscal policy by increasing taxes, what is the expected effect on aggregate demand and the price level in the short run?

Accepted Answer

Aggregate demand decreases, causing the price level to rise more slowly than it otherwise would have.

Question 5

Which of the following best explains the concept of 'crowding out' in the context of fiscal policy?

Accepted Answer

An increase in government purchases raises interest rates, which reduces private investment and consumption.

Question 6

Suppose real GDP is $$15$$ trillion and potential real GDP is $$16$$ trillion. If the government wants to close this gap using fiscal policy and the government purchases multiplier is $$2$$, by how much should government purchases increase?

Accepted Answer

$$0.5$$ trillion

Question 7

Which of the following is NOT a limitation of using fiscal policy to stabilize the economy?

Accepted Answer

Fiscal policy can be implemented instantly without any delays.

Question 8

A permanent reduction in the corporate income tax rate is most likely to have which of the following long-run effects?

Accepted Answer

Increase potential GDP by encouraging investment and productivity growth.

Question 9

If the marginal propensity to consume (MPC) is $$0.8$$, what is the value of the government spending multiplier?

Accepted Answer

$$5$$

Question 10

Which of the following statements about the U.S. federal budget deficit is correct?

Accepted Answer

Budget deficits tend to increase during recessions due to automatic stabilizers and falling tax receipts.

Question 11

Which of the following best describes the tax wedge?

Accepted Answer

The difference between the pre-tax and post-tax return to an economic activity.

Question 12

Suppose the government sends $$1,000 in $$transfer payments to a household, and the household spends $$800 of it. $$What is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.8$$

Question 13

Which of the following is most likely to increase the growth rate of real GDP in the long run?

Accepted Answer

A permanent cut in business taxes that increases incentives to invest.

Question 14

If the government increases transfer payments, what is the expected effect on household disposable income and consumption?

Accepted Answer

Disposable income and consumption both increase, leading to a positive multiplier effect.

Question 15

Which of the following best explains why the recession of 2007–2009 was especially severe compared to other postwar recessions?

Accepted Answer

It followed a financial crisis, which research shows leads to deeper and longer recessions.

Question 16

Which of the following is an example of discretionary fiscal policy?

Accepted Answer

Congress passes a new law to increase infrastructure spending.

Question 17

If the government increases its purchases by $$100$$ billion and the government purchases multiplier is $$1.5$$, but $$20\% of $$the increase is offset by crowding out, what is the net change in real GDP?

Accepted Answer

$$120$$ billion

Question 18

Which of the following is a reason why estimating the size of fiscal multipliers is difficult?

Accepted Answer

Many factors affect aggregate demand and short-run aggregate supply simultaneously.

Question 19

Which of the following best describes the effect of a decrease in tax rates on the multiplier effect?

Accepted Answer

It increases the size of the multiplier effect, since more of any increase in income becomes disposable income.

Question 20

Which of the following is a supply-side fiscal policy intended to increase long-run economic growth?

Accepted Answer

Reducing the marginal tax rate on labor income to increase incentives to work.

Fiscal Policy and Economic Growth: Principles of Macroeconomics (ECON 1104)

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