Question 1

Which of the following best defines discretionary fiscal policy?

Accepted Answer

Intentional actions by the federal government to change spending or taxes to achieve macroeconomic objectives.

Question 2

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

Accepted Answer

$250 billion

Question 3

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

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 4

If the government enacts a contractionary fiscal policy when real GDP is above potential GDP, what is the likely effect?

Accepted Answer

Aggregate demand will decrease, reducing inflationary pressures.

Question 5

Given the consumption function $$C = 2000 + 0.75(Y - T)$$, planned investment $$I = 2000$$, government purchases $$G = 2500$$, and taxes $$T = 2000$$, what is the equilibrium level of real GDP ($$Y$$)?

Accepted Answer

$$Y = 20,000$$

Question 6

Which of the following best describes the crowding out effect?

Accepted Answer

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

Question 7

If the government increases both purchases and taxes by $10 billion, and the MPC is 0.75, what is the short-run effect on real GDP?

Accepted Answer

Real GDP increases by $10 billion.

Question 8

Which of the following is NOT a limitation of fiscal policy as a tool for stabilizing the economy?

Accepted Answer

Immediate effect on aggregate demand with no lag.

Question 9

Suppose the government cuts taxes by $100 billion and the MPC is 0.75. What is the total change in equilibrium real GDP?

Accepted Answer

$300 billion

Question 10

Which of the following statements about the long-run effects of fiscal policy is correct?

Accepted Answer

Supply-side fiscal policies can increase potential GDP by improving incentives to work, save, and invest.

Question 11

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 to imports.

Question 12

Which of the following is the correct formula for the government purchases multiplier when the marginal propensity to consume is $$MPC$$?

Accepted Answer

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

Question 13

Which of the following is a likely consequence if the federal government runs persistent budget deficits that increase the national debt relative to GDP?

Accepted Answer

It may crowd out private investment, reducing long-run growth.

Question 14

Which of the following best describes the tax wedge?

Accepted Answer

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

Question 15

If the government increases transfer payments, what is the immediate effect on aggregate demand?

Accepted Answer

Aggregate demand increases due to higher disposable income and consumption.

Question 16

Which of the following is true about the effectiveness of the 2009 stimulus package according to the Congressional Budget Office (CBO)?

Accepted Answer

It reduced the severity of the recession but did not bring the economy back to full employment.

Question 17

Which of the following is NOT a source of federal government revenue?

Accepted Answer

State sales taxes

Question 18

Suppose the government increases its purchases by $100 billion, the MPC is 0.75, and the marginal propensity to import (MPI) is 0.1. What is the government purchases multiplier in this open economy?

Accepted Answer

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

Question 19

Which of the following is a reason why tax cuts may have a smaller multiplier effect than increases in government purchases?

Accepted Answer

A portion of tax cuts is saved rather than spent, reducing the impact on aggregate demand.

Chapter 16: Fiscal Policy – Macroeconomics Study Notes

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