Question 1

Which of the following best describes discretionary fiscal policy?

Accepted Answer

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

Question 2

Suppose the government increases its spending on goods and services by $100 billion. If the marginal propensity to consume (MPC) is 0.5, what is the total change in real GDP according to the simple government purchases multiplier formula?

Accepted Answer

The multiplier is $$ \frac{1}{1-0.5} = 2 $$, so the total change in real GDP is $$100 	imes 2 = 200 $$billion.

Question 3

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

Accepted Answer

Unemployment insurance payments increasing automatically when more people lose jobs during a recession.

Question 4

If Congress and the president believe real GDP will be above potential GDP, which fiscal policy should they enact to restore long-run equilibrium?

Accepted Answer

Contractionary fiscal policy: decrease government purchases or increase taxes.

Question 5

Which of the following statements about the multiplier effect is correct?

Accepted Answer

The multiplier effect refers to the process by which a change in autonomous expenditure leads to a larger change in real GDP.

Question 6

Suppose real GDP is $$13 trillion and potential real GDP is 13.5 $$trillion. If the government wants to restore the economy to potential GDP and the government purchases multiplier is 1.5, by how much should government purchases increase?

Accepted Answer

$$ \frac{13.5 - 13}{1.5} = \frac{0.5}{1.5} = 0.33 $$trillion

Question 7

Which of the following would most likely induce Congress and the president to conduct contractionary fiscal policy?

Accepted Answer

A significant increase in inflation.

Question 8

What is the main limitation of using fiscal policy to stabilize the economy compared to monetary policy?

Accepted Answer

Fiscal policy is less effective due to legislative and implementation delays, and possible crowding out of private spending.

Question 9

In the long run, what is the effect of an increase in government purchases on real GDP?

Accepted Answer

It has no effect on real GDP; the reduction in private spending offsets the increase in government purchases.

Question 10

Which of the following best explains why Social Security and Medicare are considered 'fiscal time bombs'?

Accepted Answer

The aging population and rising health care costs are causing projected budget shortfalls.

Question 11

Which formula correctly represents the government purchases multiplier?

Accepted Answer

$$ 	ext{Government purchases multiplier} = \frac{	ext{Change in equilibrium real GDP}}{	ext{Change in government purchases}} $$

Question 12

If the marginal propensity to consume (MPC) increases, what happens to the size of the government purchases multiplier?

Accepted Answer

It increases.

Question 13

Which of the following is NOT a way to address the long-term sustainability of Social Security and Medicare?

Accepted Answer

Increasing the marginal propensity to consume.

Question 14

Which of the following best describes the effect of crowding out in the short run?

Accepted Answer

A temporary increase in government purchases raises the equilibrium interest rate, reducing consumption, investment, and net exports.

Question 15

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

Accepted Answer

A permanent cut in business taxes.

Question 16

Suppose the government enacts a $400 tax credit for working individuals. Which of the following is a likely effect?

Accepted Answer

It increases disposable income, leading to higher consumption spending and a multiplier effect.

Question 17

Which of the following is true about the tax multiplier?

Accepted Answer

It is negative; an increase in taxes decreases equilibrium real GDP.

Question 18

Which of the following best describes supply-side economics?

Accepted Answer

Policies focused on changing taxes to increase incentives to work, save, invest, and start businesses, thereby increasing aggregate supply.

Question 19

If the government runs a budget deficit, how does it finance its activities?

Accepted Answer

By borrowing funds, usually through issuing government bonds.

Fiscal Policy and Its Role in Macroeconomic Stabilization

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