SStudent ID: 21784984 Exam: 050474RR – MACROECONOMIC MODELS AND FISCAL POLICY

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Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer.

1. Expansionary fiscal policy is so named because it A. involves an expansion of the nation’s money supply. B. necessarily expands the size of government. C. is aimed at achieving greater price stability.

D. is designed to expand real GDP.

2. The crowding-out effect of expansionary fiscal policy suggests that A. government spending is increasing at the expense of private investment. B. saving is increasing at the expense of investment. C. imports are replacing domestic production.

D. private investment is increasing at the expense of government spending.

3. Which one of the following statements best describes the idea of a political business cycle? A. Politicians are more willing to cut taxes and increase government spending than they are to do the reverse. B. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections. C. Fiscal policy will result in alternating budget deficits and surpluses.

D. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.

4. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is

A. 20 percent. B. 2 percent. C. 8 percent. D. 80 percent.

5. Which one of the following statements about the standardized budget is correct? A. The standardized budget refers to the inflationary impact that the automatic stabilizers have in a full-employment economy.

B. The standardized budget refers to the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.

C. The standardized budget refers to that portion of a full-employment GDP that isn’t consumed in the year it’s produced.

D. The standardized budget refers to the size of the federal government’s budgetary surplus or deficit when the economy is operating at full employment.

6. The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will

A. shift the aggregate supply curve leftward. B. shift the aggregate demand curve leftward. C. decrease U.S. exports and increase U.S. imports. D. increase U.S. exports and decrease U.S. imports.

7. Which one of the following statements about fiscal policy is correct? A. Fiscal policy refers to the altering of the interest rate to change aggregate demand.

B. Fiscal policy refers to the manipulation of government spending and taxes to achieve greater equality in the distribution of income.

C. Fiscal policy refers to the manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

D. Fiscal policy refers to the fact that equal increases in government spending and taxation will be contractionary.

8. Which one of the following statements correctly describes the multiplier effect? A. The multiplier effect means that consumption is typically several times as large as saving. B. The multiplier effect means that a decline in the MPC can cause GDP to rise by several times that amount. C. The multiplier effect means that an increase in investment can cause GDP to change by a larger amount. D. The multiplier effect means that a change in consumption can cause a larger increase in investment.

9. Investment spending in the United States tends to be unstable because A. capital wears out quickly and must be replaced often. B. profits are highly variable. C. investment spending is affected by interest rates.

D. the price level fluctuates rapidly. 10. Suppose that the economy is in the midst of a recession. Which one of the following policies would

most likely end the recession and stimulate output growth? A. A postponement of a highway construction program B. A Congressional proposal to incur a federal surplus to be used for the retirement of public debt C. A reduction in federal tax rates on personal and corporate income D. A reduction in agricultural subsidies and veterans’ benefits

11. Which one of the following statements about the federal budget deficit is correct? A. The federal budget deficit is found by subtracting government revenues from the noninvestment-type government spending in a

particular year.

B. The federal budget deficit is found by cumulating the differences between government spending and tax revenues over all years since the nation’s founding.

C. The federal budget deficit is found by subtracting government tax revenues plus government borrowing from government spending in a particular year.

D. The federal budget deficit is found by subtracting government tax revenues from government spending in a particular year.

12. An economist who favored expanded government would recommend A. tax increases during recession and tax cuts during inflation. B. tax cuts during recession and tax increases during inflation. C. tax cuts during recession and reductions in government spending during inflation.

D. increases in government spending during recession and tax increases during inflation.

13. Which one of the following represents the most contractionary fiscal policy? A. A $30 billion increase in government spending B. A $30 billion tax cut C. A $30 billion tax increase

D. A $30 billion decrease in government spending 14. The group of three economists appointed by the President to provide fiscal policy recommendations is

the A. Federal Reserve Board of Governors. B. Council of Economic Advisers. C. Bureau of Economic Analysis. D. Joint Economic Committee.

15. John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

A. The economic expansion of the 1920s B. The Bank Panic of 1907 C. The spectacular economic growth during World War II D. The Great Depression

16. A private closed economy includes A. households, businesses, and international trade, but not government. B. households, businesses, and government, but not international trade. C. households only. D. households and businesses, but not government or international trade.

17. If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to A. reduce the rate of domestic inflation. B. increase efficiency in the world economy. C. increase domestic output and employment.

D. reduce domestic output and employment.

18. Which one of the following is the best example of public investment? A. Funding of regulatory agencies B. Construction of highways C. Government expenditures on food stamps

D. Salaries of Senators and Representatives

19. Which one of the following statements about lump-sum taxes is correct? A. A lump-sum tax means that the same amount of tax revenue is collected at each level of GDP. B. A lump-sum tax means that tax revenues vary directly with GDP. C. A lump-sum tax means that tax revenues vary inversely with GDP. D. A lump-sum tax means that the tax applies only to one time period.

20. The public debt is held as A. Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds. B. U.S. securities, corporate bonds, and common stock. C. U.S. gold certificates. D. Federal Reserve Notes.