Question 1

Which of the following best describes discretionary fiscal policy?

Accepted Answer

Intentional changes in federal taxes and purchases to achieve macroeconomic policy objectives.

Question 2

Suppose the government increases its purchases by $50 billion and the marginal propensity to consume (MPC) is 0.8. What is the total change in equilibrium real GDP, assuming no taxes or imports?

Accepted Answer

$200 billion

Question 3

Which of the following is an example of an automatic stabilizer?

Accepted Answer

An increase in unemployment insurance payments during a recession.

Question 4

If the government enacts a contractionary fiscal policy, which of the following is most likely to occur in the short run?

Accepted Answer

Aggregate demand decreases, leading to lower inflation and lower real GDP.

Question 5

Which of the following equations represents the government purchases multiplier when the marginal propensity to consume is $$MPC$$?

Accepted Answer

$$\frac{1}{1 - MPC}$$

Question 6

A $100 billion tax cut is enacted. If the marginal propensity to consume is 0.75, what is the total change in equilibrium real GDP?

Accepted Answer

$300 billion increase

Question 7

Which of the following best explains the concept of 'crowding out'?

Accepted Answer

A decline in private expenditures as a result of an increase in government purchases.

Question 8

If the marginal propensity to import (MPI) increases, what happens to the government purchases multiplier in an open economy?

Accepted Answer

It decreases because more spending leaks out as imports.

Question 9

Which of the following is NOT a major source of federal government revenue in the United States?

Accepted Answer

Property taxes

Question 10

Suppose the government increases both government purchases and taxes by $20 billion. If the marginal propensity to consume is 0.8, what is the short-run effect on real GDP?

Accepted Answer

$20 billion increase

Question 11

Which of the following best describes the tax wedge?

Accepted Answer

The difference between the pretax and posttax return to an economic activity.

Question 12

Which of the following is a long-run effect of persistent government budget deficits?

Accepted Answer

A reduction in private investment due to higher interest rates.

Question 13

Which of the following policies is most likely to increase long-run economic growth according to supply-side economics?

Accepted Answer

Simplifying the tax code to reduce compliance costs.

Question 14

If the marginal propensity to consume is 0.75 and the tax rate is 0.2, what is the government purchases multiplier?

Accepted Answer

$$\frac{1}{1 - MPC(1-t)} = \frac{1}{1 - 0.75(1-0.2)} = 2.5$$

Question 15

During a recession, why do most economists argue against balancing the federal budget?

Accepted Answer

Balancing the budget would require cutting spending or raising taxes, which would reduce aggregate demand and worsen the recession.

Question 16

Which of the following best explains why the tax multiplier is smaller (in absolute value) than the government purchases multiplier?

Accepted Answer

A tax cut is partially saved, while government purchases are fully spent.

Question 17

Which of the following is a reason why fiscal policy may be less effective than monetary policy for stabilizing the economy?

Accepted Answer

Fiscal policy is subject to legislative and implementation delays.

Question 18

If the government runs a budget deficit, how does it typically finance this deficit?

Accepted Answer

By selling Treasury securities.

Question 19

Which of the following is an example of a supply-side fiscal policy intended to increase potential GDP?

Accepted Answer

A reduction in the corporate income tax rate to encourage investment.

Question 20

Suppose the consumption function is $$C = 1,000 + 0.75(Y - T)$$, planned investment is $$I = 1,500$$, government purchases are $$G = 1,500$$, and taxes are $$T = 1,000. $$What is the equilibrium level of real GDP ($$Y$$)?

Accepted Answer

$$Y = 13,000$$

Fiscal Policy: Structure, Effects, and Limitations in Macroeconomics

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