Chapter
Managing Aggregate Demand: Fiscal Policy
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1. The oversimplified formula for the multiplier is misleading because it
a. ignores the effects of price-level changes.
b. ignores the effects of the foreign sector.
c. ignores the effects of variable taxes.
d. All of the above are correct.
2. In the figure below, to achieve equilibrium at potential GDP the government could
a. increase taxes.
b. decrease transfer payments.
c. increase government purchases.
d. None of the above is correct.
3. To eliminate an inflationary gap, the aggregate demand curve should
a. shift outward.
b. become vertical.
c. become horizontal.
d. shift inward.
4. In an effort to balance the federal budget, an increase in Social Security taxes is passed. What is the most likely effect of this on equilibrium GDP?
a. GDP will increase.
b. GDP will decrease.
c. GDP will not change but prices will rise.
d. GDP will not change but employment will increase.
5. Which of the following individuals would most likely favor an increase in government spending, as opposed to a tax cut, as the basis for expansionary fiscal policy?
a. "There must be a constant philosophical prejudice against any intervention by the state into our lives, for by definition such intervention abridges liberty." -William Simon.
b. "The bastards [read politicians] can't spend what they don't have." -Howard Jarvis.
c. "The family that takes its mauve and cerise, air-conditioned, power-steered, power-braked automobile through cities that are badly paved, made hideous by litter, [and] blighted buildings . . . to picnic beside a polluted stream amid the stench of refuse may properly reflect on the curious unevenness of their blessings." -J.K. Galbraith
d. "Public expenditures are made for the primary benefit of the middle class and financed with taxes on the poor and rich." -Director's Law.
6. Which of the following is a correct conclusion regarding the successful implementation of fiscal policy?
a. Successful fiscal policy would be easy to achieve if Congress would stay out of the economy and permit natural market forces to restore full-employment equilibrium.
b. Successful fiscal policy is difficult to achieve because in the real world the investment, net exports, and consumption schedules are constantly shifting.
c. Successful fiscal policy is much easier to achieve today because econometric models make economic forecasting much easier.
d. As the income-expenditure model suggests, fiscal policy planners can move GDP to any level they please by changing tax and spending levels.
7. Which graph in the figure below best reflects a Keynesian view of the impact of a $500-per-person tax cut?
a. 1
b. 2
c. 3
d. 4
8. Supply-side tax cuts tend to benefit the rich because
a. tax cuts on income tend to benefit high income earners more than low income earners.
b. tax cuts on saving benefit high income earners who do most of the personal saving.
c. tax cuts for capital formation tend to benefit those with the means to accumulate capital.
d. tax cuts on capital gains tend to benefit those with larger financial assets.
e. All of the above are correct.
9. Most economists seem to agree that
a. cutting taxes on saving has more impact than cutting taxes to increase investment.
b. cutting taxes to stimulate investment is more effective than cutting taxes to stimulate work.
c. cutting taxes to increase work is more effective than cutting taxes to stimulate investment.
d. cutting taxes to increase work incentives is more effective than cutting taxes on saving.
10. One complication faced by President Clinton's policy planners was that
a. Republicans focused more on plans to increase spending than on tax cuts.
b. the need to balance the budget took precedence over other objectives.
c. aggregate supply refused to budge even with the enactment of a full package of tax cuts.
d. aggregate demand would increase and lead to inflation if taxes were increased.
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