# Macro Chapter 10 -13 Multiple Choice Revised

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```					       Macro Chapter 10 Multiple Choice
1.The simple multiplier equals
a. the marginal propensity to consume
b. the marginal propensity to save
c. the reciprocal of the marginal propensity to save
d. the reciprocal of the marginal propensity to consume
e. one minus the marginal propensity to consume

2.If the marginal propensity to save is 1/8, the value of the simple multiplier is
a. 8
b. 1/8
c. 2
d. 1/2
e. 4
3.If the marginal propensity to consume is 4/5, the value of the simple multiplier is
a. 4
b. 1/5
c. 4/5
d. 5/4
e. 5
4.Increases in the marginal propensity to consume, other things constant,
a. increase the value of the multiplier
b. decrease the value of the multiplier
c. never change the value of the multiplier
d. shift the aggregate expenditure curve downward
e. cause a downward movement along an aggregate expenditure curve
5.If the marginal propensity to consume is 3/4, the simple multiplier is
a. 3
b. 7
c. 4
d. 25
e. 3/10
6.If the simple multiplier is 8, the marginal propensity to consume is
a. 1/8
b. 1/4
c. 4/5
d. 7/8
e. 8
7.If the simple multiplier is 10, the marginal propensity to save is
a. 1/10
b. 9/10
c. 1/9
d. 10/9
e. 9
8.Suppose that planned autonomous investment increases by \$200 billion and that the marginal
propensity to consume equals 0.80. The equilibrium level of real GDP will increase by
a. \$40 billion
b. \$160 billion
c. \$200 billion
d. \$250 billion
e. \$1,000 billion
9.Which is true regarding the marginal propensity to consume and the multiplier?
a. The lower the MPC, the higher the multiplier.
b. The higher the MPC, the lower the multiplier.
c. The MPC equals the multiplier.
d. The sum of the MPC and the multiplier equals 1.
e. The lower the MPC, the lower the multiplier.
10.If an increase in planned investment of \$70 billion causes equilibrium output demanded to rise by
\$280 billion, the value of the marginal propensity to consume is
a. 4
b. 4/3
c. 1/3
d. 1/4
e. 3/4

11.In an economy without a government and without international transactions, aggregate expenditure at
each level of income is equal to
a. consumption plus saving
b. planned investment plus saving
c. disposable income plus the price level
d. consumption plus planned investment
e. planned investment minus saving

12.Which of the following is not a part of planned aggregate spending?
a. consumption
b. investment
c. government expenditures
d. net exports
e. saving
13.Which of the following best describes aggregate expenditure?
a. C + I + G + (X - M)
b. C + S + G + (X - M)
c. C + I + G + (X + M)
d. C + I + T + (X - M)
e. C + I + T + (X + M)
14.If planned spending exceeds planned output, the result is
a. unintended inventory increases
b. a reduction in GDP
c. a decrease in imports
d. an increase in government purchases
e. unintended inventory reductions
15.The economy will expand if
a. leakages exceed injections
b. injections exceed leakages
c. leakages equal injections
d. expenditures are less than output
e. saving exceeds investment
16.The economy will contract (shrink) if
a. leakages exceed injections
b. injections exceed leakages
c. injections equal leakages
d. expenditures exceed output
e. investment exceeds saving
17.In the income-expenditure framework, if planned aggregate expenditures are greater than real GDP,
a. the price level will fall
b. consumption must fall
c. inventories will increase
d. inventories will decrease
e. consumption will decrease
18.In the income-expenditure framework, if planned aggregate expenditures are less than real GDP,
a. then saving must be larger than consumption
b. the price level will increase
c. inventories will increase
d. inventories will decrease
e. consumption will decrease
19.When current real production of goods and services (real GDP) is greater than planned aggregate
expenditure
a. inventories of goods and services are rising
b. firms will increase production to replenish depleted inventories
c. businesses and households will increase planned aggregate spending because it is in their
interest to promote employment
d. the price level will automatically rise to restore equilibrium in the economy
e. leakages must equal planned injections
20.If the full employment level of income is \$1200 billion and the present level of income is \$1000
billion
a. an inflationary gap exists
b. autonomous expenditure is too low for a full employment equilibrium
c. autonomous expenditure is too high for a full employment equilibrium
d. a decrease in autonomous expenditure is required
e. government purchases of goods and services should be reduced
21.If people spend 2/3 of any extra income they receive, new autonomous spending of \$10 causes
equilibrium to increase by
a. \$6.67
b. \$16.67
c. \$15.00
d. \$30.00
e. \$45.00
22.The simple multiplier
a. when divided by consumption spending equals saving
b. is defined as 1.0 divided by the marginal propensity to save
c. is defined as 1.0 divided by the marginal propensity to consume
d. is equal to the MPS plus the MPC
e. is equal to the MPS minus the MPC
23.That fraction of a change in disposable income that is consumed is called
a. autonomous consumption
b. induced consumption
c. the multiplier
d. the marginal propensity to consume
e. the marginal propensity to save
24. If the mps is 0.25, the simple multiplier is
a. 25
b. 75
c. 5
d. 3/4
e. 4
25.If investment increases by \$100 and, as a result, GDP ultimately increases by \$200, the multiplier
equals
a. 1
b. 2
c. 3
d. 4
e. 5
26.If the spending multiplier is greater than 1.0, a \$200 billion increase in autonomous investment will
cause
a. equilibrium investment to increase by less than \$200 billion
b. equilibrium investment to decrease by more than \$200 billion
c. equilibrium real GDP demanded to increase by more than \$200 billion
d. equilibrium real GDP demanded to decrease by less than \$200 billion
e. equilibrium saving to decrease by more than \$200 billion
27.If the marginal propensity to consume equals 0.9, the multiplier is
a. 1
b. 2
c. 5
d. 10
e. 12
28. The smaller the marginal propensity to save, other things constant,
a. the smaller the marginal propensity to consume
b. the larger the multiplier
c. the smaller the multiplier
d. the flatter the consumption function
e. the steeper the saving function
29.The smaller the marginal propensity to save, other things constant,
a. the smaller the marginal propensity to consume
b. the larger the marginal propensity to consume
c. the smaller the multiplier
d. the flatter the consumption function
e. the steeper the saving function
30.The larger the marginal propensity to save, other things constant,
a. the smaller the marginal propensity to consume
b. the larger the marginal propensity to consume
c. the larger the multiplier
d. the steeper the consumption function
e. the flatter the saving function
31.If autonomous consumption rises by \$0.8 trillion and the marginal propensity to consume (MPC)
equals 3/4, the equilibrium level of output demanded will rise by
a. \$0.2 trillion
b. \$0.6 trillion
c. \$1.07 trillion
d. \$2.4 trillion
e. \$3.2 trillion
32.Other things being equal, a decrease in an economy's exports will
a. increase domestic aggregate expenditures and the equilibrium level of output
b. decrease domestic aggregate expenditures and the equilibrium level of output
c. have no impact on domestic aggregate expenditures or output
d. decrease the marginal propensity to import
e. change autonomous consumption
33.If the multiplier is 3, a \$20 billion increase in autonomous consumption will cause a
a. \$20 billion increase in equilibrium consumption
b. \$60 billion increase in equilibrium consumption
c. \$20 billion increase in equilibrium real GDP demanded
d. \$60 billion increase in equilibrium real GDP demanded
e. \$60 billion decrease in autonomous saving
34.If the marginal propensity to consume in your classmate's nation is 3/5 and the marginal propensity to
save in your country is 1/10, which of the following must be true?
a. The spending multiplier is larger in your classmate's nation than in your country.
b. The spending multiplier is smaller in your classmate's nation than in your country.
c. Autonomous consumption is higher in your classmate's nation than in your country.
d. Autonomous consumption is lower in your classmate's nation than in your country.
e. Total consumption is lower in your classmate's nation than in your country.
35.The aggregate demand curve illustrates a relationship between
a. interest rates and income levels
b. the price level and real GDP
c. the price level and interest rates
d. income levels and real GDP levels
e. income levels and nominal income levels
36.The aggregate demand curve slopes downward to the right, reflecting a relationship between the price
level and
a. real GDP
b. interest rates
c. the saving rate
d. the investment level
e. the consumption level
37.An increase in the price level will
a. shift the aggregate demand curve to the right
b. shift the aggregate demand curve to the left
c. increase the level of aggregate quantity demanded
d. decrease the level of aggregate quantity demanded
e. have no effect at all on aggregate demand
38.What is the effect of an increase in the price level?
a. The real value of dollar-denominated assets will fall.
b. The aggregate expenditure line will shift upward.
c. The equilibrium level of output demanded will rise.
d. There will be downward movement along a particular aggregate demand curve.
e. The aggregate demand curve will shift rightward.
39.If the price level increases, other things constant, consumption spending
a. increases because real income rises
b. decreases because real income rises
c. increases because the real value of wealth increases
d. decreases because the real value of wealth decreases
e. increases because nominal income increases
40.An increase in planned investment would shift the
a. aggregate demand curve outward
b. aggregate demand curve inward
c. aggregate supply curve outward
d. aggregate supply curve inward
e. consumption function upward
Macro Multiple Choice Chapter 11
Exhibit 11-1

Quantity of                                            Quantity of
Aggregate Output           Price                   Aggregate Output Supplied
Demanded                 Level            #1                #2              #3
\$7.0                   110            \$5.0              \$6.0            \$4.0
6.5                   120             5.5               6.5             4.5
6.0                   130             6.0               7.0             5.0
5.5                   140             6.5               7.5             5.5
5.0                   150             7.0               8.0             6.0

1. Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1, the equilibrium price
level is
a. 110
b. 120
c. 130
d. 140
e. 150
2.For the purpose of aggregate supply analysis, the long run is the period of time during which
a. aggregate supply adjusts to equal aggregate demand
b. excess aggregate supply is bought
c. excess aggregate demand is fulfilled
d. real wages are constant
e. all resource prices can be varied
3.In the short run, but not in the long run,
a. output is fixed
b. prices are fixed
c. prices can change but output is fixed
d. some resource prices are fixed
e. the aggregate supply curve is vertical
Exhibit 11-1

Quantity of                                            Quantity of
Aggregate Output          Price                    Aggregate Output Supplied
Demanded                Level            #1                 #2              #3
\$7.0                  110            \$5.0               \$6.0            \$4.0
6.5                  120             5.5                6.5             4.5
6.0                  130             6.0                7.0             5.0
5.5                  140             6.5                7.5             5.5
5.0                  150             7.0                8.0             6.0

4. Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1, the equilibrium level
of output is
a. \$5.0
b. \$5.5
c. \$6.0
d. \$6.5
e. \$7.0
5.When the expected price level falls below the actual price level, firms
a. increase production in the short run
b. decrease production in the short run
c. maintain production in the short run but increase prices
d. maintain production in the short run but decrease prices
e. decrease production and lower prices in the short run

6.An expansionary gap is equal to
a. real GDP minus nominal GDP
b. nominal GDP minus real GDP
c. actual short-run output minus potential output
d. this period's nominal GDP minus last period's nominal GDP
e. this period's real GDP minus last period's real GDP
7.The situation in which actual output exceeds potential output
a. is impossible because all resources are employed to produce potential output
b. is possible only in times of high unemployment
c. is possible only if the unemployment rate is negative
d. is possible only in the long run
e. creates pressure for inflation
Exhibit 11-2

8. If the actual price level in Exhibit 11-2 exceeds the expected price level, then
a. equilibrium output might be Y2 in the short run
b. equilibrium output might be Y1 in the short run
c. equilibrium output might be Y3 in the short run
d. potential output is greater than actual output
e. unemployment is above the natural rate
9.In Exhibit 11-2, an expansionary gap would be represented by the distance
a. Y2 - Y1
b. Y3 - Y1
c. Y2 - Y3
d. P3 - P1
e. P2 - P3
Exhibit 11-3

10. Consider Exhibit 11-3. In this situation, long-run equilibrium would be established by a(n)
a. increase of short-run aggregate supply to close the expansionary gap
b. decrease of short-run aggregate supply to close the expansionary gap
c. decrease of short-run aggregate supply to close the contractionary gap
d. increase of short-run aggregate supply to close the contractionary gap
e. rightward shift of the aggregate demand curve
11.Aggregate supply expresses the relationship between
a. the price level in the economy and the aggregate output firms will produce, other things
constant
b. the price level and the aggregate amount people will buy at that price level
c. the price level and the potential amount of output that could be produced
d. the quantity of output that will be produced and sold in one year
e. the actual output and the potential output of the economy
12.A nominal wage is
a. not above the legal minimum
b. always above the legal minimum
c. measured in terms of goods and services it can buy
d. measured in current dollars rather than in constant dollars
e. measured in constant dollars rather than in current dollars
13.The expected price level is significant because
a. it is the equilibrium price level in the short run
b. it determines the actual price level in the short run
c. it determines the actual price level in the long run
d. firms and resource owners make long-term agreements based on the expected price level
e. the difference between the expected and actual price levels is equal to the actual inflation
rate
14.The nominal wage represents
a. the quantity of goods and services a worker can purchase in exchange for work time
b. the dollar value of the goods and services a worker can purchase in exchange for work
time
c. real wages minus taxes paid on wages
d. the most accurate measure for comparing employee standard of living across time
e. real wages divided by the price level
15.Which of the following is true about real and nominal wages?
a. In periods of low inflation, real wages are constant and nominal wages decline.
b. If the price level is high, real wages will fall.
c. If the price level is high, nominal wages will fall.
d. If there is inflation, real wages will change if nominal wages are constant.
e. If there is a constant inflation rate, real wages will not change unless nominal wages do.
16.Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage was \$20
in year 1 and \$18 in year 2. What is true about the price level?
a. It rose by 20 percent.
b. It rose by 25 percent.
c. It remained unchanged.
d. It fell by 10 percent.
e. It fell by 20 percent.

17. If the price level rises by 5 percent and the nominal wage rises 3 percent, the real wage
a. falls by 2 percent
b. falls by 8 percent
c. rises by 2 percent
d. rises by 8 percent
e. remains constant
18.Potential output depends on all of the following except one. Which is the exception?
a. the supply of labor
b. labor productivity
c. household choices regarding labor and leisure
d. the technology in current use
e. the number of consumers in the market
19.The long-run equilibrium price level is the price level the economy is expected to reach when the
a. economy produces its potential output
b. Fed has stabilized interest rates
c. federal budget is balanced
d. discount rate equals the prime rate
e. inflation rate is zero
20.A wage rate above what is necessary to attract a sufficient number of workers is known as a(n)
a. inefficient wage
b. market-clearing wage
c. efficiency wage
d. marginal productivity wage
e. minimum wage
21.In constructing a short-run aggregate supply curve, we assume that the goal of business is to
a. maximize sales revenue
b. maximize profit
c. maximize growth in assets
d. maximize growth in sales
e. minimize cost
22.In constructing the short-run aggregate supply curve, we define the short run as the period in which
a. the price level is constant
b. output is fixed
c. profit is constant
d. the costs of some resources are fixed
e. the economic growth rate is less than 4 percent
23.A rising price level in the short run may create an incentive for firms to increase production because
a. costs of production will increase
b. total sales revenue will decrease
c. profits will increase
d. costs of production will increase faster than total revenue
e. output prices are generally not fixed by contract whereas resource prices are
24.Between 1994 and 2004, Jack's salary increased from \$100,000 to \$200,000 per year and the price
index increased from 100 to 300 during the same period. Which of the following statements best
describes Jack's situation?
a. his real income and money income have both increased
b. his real income increased and money income decreased
c. his real income and money income both decreased
d. his real income decreased and money income increased
e. his real income and money income remained unchanged
25.If nominal wage rates increase by 5 percent per year and the price level increases by 3 percent per
year, which of the following is correct?
a. real wages increase by 2 percent per year
b. real wages increase by 3 percent per year
c. real wages decrease by 3 percent per year
d. real wages decrease by 2 percent per year
e. real wages remain constant
26.If nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per
year, real wages will
a. increase by 3 percent per year
b. increase by 5 percent per year
c. increase by 2 percent per year
d. decrease by 5 percent per year
e. decrease by 3 percent per year
27.If the price level turns out to be lower than expected,
b. the potential output level decreases
c. initially, the short-run aggregate supply curve shifts leftward; later, there is a downward
movement along that curve
d. initially, the short-run aggregate supply curve shifts leftward; later, there is an upward
movement along that curve
e. an expansionary gap develops
Exhibit 11-1

Quantity of                                            Quantity of
Aggregate Output          Price                    Aggregate Output Supplied
Demanded                Level             #1                #2              #3
\$7.0                  110             \$5.0              \$6.0            \$4.0
6.5                  120              5.5               6.5             4.5
6.0                  130              6.0               7.0             5.0
5.5                  140              6.5               7.5             5.5
5.0                  150              7.0               8.0             6.0

28. Given aggregate demand and aggregate supply schedule #2 in Exhibit 11-1, the equilibrium
output level and price level are
a. output \$7.0, price level 110
b. output \$6.5, price level 120
c. output \$6.0, price level 130
d. output \$5.5, price level 140
e. output \$5.0, price level 150
29.The aggregate supply curve reflects the relationship between the
a. price of a particular good and the quantity supplied by all firms producing that good
b. price of a particular good and the quantity supplied by the aggregate economy
c. price level and the quantity of all goods supplied in the economy
d. price level and the quantity purchased of all goods in the economy
e. price level and investment spending
30.The short-run aggregate supply curve slopes upward because quantity supplied
a. increases when cost per unit falls
b. decreases when cost per unit falls
c. increases when the price level increases
d. increases when GDP decreases
e. decreases as profit per unit increases
Exhibit 11-3

31.In Exhibit 11-3, the distance between Y1 and Y2 is called
a. an expansionary gap
b. a contractionary gap
c. an increase in potential output
d. the natural rate of unemployment
e. a decrease in potential output
32.If the economy is experiencing an expansionary gap, which of the following will occur in the long
run?
a. Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.
b. Workers will negotiate nominal wage increases that will shift the SRAS curve to the right.
c. Employers will negotiate lower nominal wages (relative to prices) that will shift the SRAS
curve to the right.
d. Employers will negotiate lower nominal wages (relative to prices) that will shift the SRAS
curve to the left.
e. Aggregate demand will fall because workers' incomes are rising.
33.An expansionary gap is closed in the long run by a(n)
a. rightward shift of the short-run aggregate supply curve
b. leftward shift of the short-run aggregate supply curve
c. movement to the right along a fixed short-run aggregate supply curve
d. increase in aggregate demand
e. decrease in aggregate demand
34.As an expansionary gap is closed in the long run by firms' actions,
a. output decreases and the price level increases
b. inflation decreases and unemployment rises
c. both output and the price level increase
d. both output and the price level decrease
e. inflation rises and unemployment decreases
35.If the expected price level exceeds the actual price level,
a. firms increase production in the short run
b. firms decrease production in the short run
c. firms maintain production in the short run but increase prices
d. firms maintain production in the short run but decrease prices
e. firms increase production and raise prices in the short run
36.If the expected price level exceeds the actual price level, then firms will
a. expand output hoping that prices will rise
b. expand output if workers suffer from money illusion
c. expand output if some resource prices are fixed by contracts
d. reduce output if some resource prices are fixed by contracts
e. reduce output if workers suffer from money illusion
37.As actual output falls below the potential level, which of the following must be true?
a. more resources become unemployed
b. prices remain constant
c. real GDP rises
d. nominal GDP remains constant
e. production rises
38.Aggregate supply describes the relationship between
a. price level and real GDP
b. nominal and real GDP
c. real GDP and the level of production
d. nominal GDP and the level of output
e. the level of output and income
39.The long-run aggregate supply curve is represented by
a. an upward-sloping line
b. a downward-sloping line
c. a vertical line
d. a horizontal line
e. any of the above; it depends on the relationship between the actual and the expected price
level
40.Which of the following is true in the long run?
a. The aggregate demand curve determines the level of potential output.
b. The long-run aggregate supply curve is horizontal.
c. The actual price level is less than the expected price level.
d. Cyclical unemployment is between 5 percent and 6 percent.
e. The price level is determined entirely by the aggregate demand curve.
Macro Chapter 12 Multiple Choice
1.A tax is considered to be autonomous if it is independent of
a. investment
b. consumption
c. government spending
d. real GDP
e. the price level
2.An autonomous net tax will
a. decrease disposable income by the same amount regardless of the level of real GDP
b. increase disposable income by the same amount regardless of the level of real GDP
c. decrease disposable income by more than it increases real GDP
d. increase disposable income by more than it increases real GDP
e. have no effect on disposable income at some levels of real GDP
3.The introduction of a \$100 autonomous net tax in an economy with an MPC equal to 0.7 will, at each
level of real GDP,
a. increase consumption by \$100
b. decrease consumption by \$100
c. increase consumption by \$70
d. decrease consumption by \$70
e. decrease consumption by \$30
4.If transfer payments and autonomous taxes both increase by identical amounts,
a. equilibrium income will increase by the amount of the increase
b. equilibrium income will increase by more than the increase
c. equilibrium income will increase by less than the increase
d. the change in equilibrium income will depend on the value of the MPC
e. there will be no change in equilibrium income
5. By how much would government purchases have to change if the government wanted to increase
income by \$1,000 and the MPC were 0.9?
a. \$100
b. \$900
c. \$1,000
d. \$10,000/9
e. \$10,000
6. To close a contractionary gap using fiscal policy, the government can
a. increase taxes by the size of the gap
b. decrease taxes by the size of the gap
c. increase taxes by more than the size of the gap
d. decrease taxes by less than the size of the gap
e. decrease taxes by more than the size of the gap
7.A federal budget deficit occurs when
a. there is deflation
b. federal government purchases exceed net taxes
c. there is inflation
d. aggregate demand is greater than aggregate supply
e. aggregate supply is greater than aggregate demand
8.To close an expansionary gap, the government can
a. increase government spending, which will increase aggregate demand
b. increase government spending, which will decrease aggregate demand
c. decrease government spending, which will increase aggregate demand
d. decrease government spending, which will decrease aggregate demand
e. increase government spending, which will increase aggregate supply
9. A federal budget surplus occurs when
a. there is deflation
b. federal government net taxes exceed purchases
c. there is inflation
d. aggregate demand is greater than aggregate supply
e. aggregate supply is greater than aggregate demand
10.Which of the following is not true about classical economists?
a. They criticized mercantilism as an economic system.
b. They advocated laissez-faire policies to promote economic growth.
c. They believed the economy would naturally tend toward full employment.
d. They believed prices and wages react slowly to market changes.
e. They discouraged government intervention in markets.
11.Fiscal policy is concerned with
a. government spending and taxation only
b. government spending and money only
c. money and taxation only
d. government spending, taxation, and money
e. money only
12.Which of the following is not a tool of fiscal policy?
a. money supply
b. government purchases
c. taxes
d. Social Security program
e. unemployment benefits
13.All of the following are tools of fiscal policy except one. Which is the exception?
a. taxes
b. transfer payments
c. interest rates
d. government purchases of goods
e. government purchases of services
14.Which of the following are used in fiscal policy?
a. transfer payments only
b. taxes and government purchases
c. government purchases only
d. government purchases, transfer payments, and taxes
e. taxes and transfer payments
15.Which of the following best illustrates the use of discretionary fiscal policy?
a. Congress provides \$1 billion in relief aid for hurricane victims.
b. Congress appropriates \$500 million to help the needy, and the appropriation is financed by
a tax on wealth.
c. Income tax receipts are smaller because of a decline in real GDP during a recession.
d. The Federal Reserve tightens credit when it receives news of accelerating inflation.
e. Congress passes a bill authorizing \$2 billion in additional spending when it receives news
of a deepening recession.
16.The distinction between discretionary fiscal policy and the use of automatic stabilizers is that
a. only discretionary fiscal policy can stimulate the economy
b. only automatic stabilizers can stimulate the economy
c. discretionary fiscal policy, once adopted, is built into the structure of the economy
d. automatic stabilizers, once adopted, are built into the structure of the economy
e. only discretionary fiscal policy can be used by the federal government
17.Discretionary fiscal policy is policy that
a. is developed in secret
b. applies to some states but not others
c. applies to some industries but not others
d. works automatically without public announcement or plan
e. is an intentional change in taxation or government spending
18.Fiscal policy focuses on manipulating
a. aggregate demand to smooth out business fluctuations
b. aggregate supply to smooth out business fluctuations
c. both aggregate supply and aggregate demand to smooth out business fluctuations
d. aggregate demand to stimulate the economy and aggregate supply to contract it
e. short-run aggregate supply to stimulate the economy and aggregate demand to contract it
19.Fiscal policy
a. uses the federal government's powers of spending and taxation to affect employment, the
price level, and GDP
b. uses the federal government's powers over the money supply and interest rates to affect
employment, the price level, and GDP
c. can affect employment and prices, but not the level of GDP
d. can affect employment and the level of GDP, but not the price level
e. is most effective when employed by state governments rather than by the federal
government
20.All of the following are variables that can be manipulated to affect fiscal policy except one. Which is
the exception?
a. personal income taxes
b. government expenditures on goods and services
c. government expenditures on unemployment benefits
d. the interest rate
e. corporate income taxes
21.Which of the following is a component of aggregate demand?
a. transfer payments from government
b. taxation by government
c. purchases by government
d. borrowing by government
e. saving by consumers
22.Government purchases are assumed to be autonomous because they are
a. independent of the price level
b. independent of the level of real GDP
c. independent of consumption
d. independent of investment
e. determined by the government independent of the desires of the households in the
economy
23.If government expenditures or taxes are assumed to be autonomous, they
a. do not depend upon on the level of GDP
b. may be changed only through direct action by Congress
c. change only when the price level changes
d. change only upon executive order by the president of the United States
e. are autonomous at low levels of GDP but not at higher levels of GDP

24.Assume that initially G is \$100 and equilibrium real GDP demanded is \$1,000. If the multiplier is 4
and G increases to \$200, real GDP demanded will increase
a. by \$100
b. by \$2,000
c. by \$1,000
d. to \$1,400
e. to \$2,000
25.If the MPC equals 0.75 and G increases by \$100, real GDP demanded will increase by
a. 75 percent
b. 25 percent
c. \$50
d. \$200
e. \$400
26.If equilibrium real GDP demanded rises from \$4 trillion to \$6 trillion when government purchases
increase by \$1 trillion, how large is the marginal propensity to consume?
a. 0.8
b. 0.4
c. 0.5
d. 0.2
e. 2
27.If the Naval Research Labs fired a chemist and the Environmental Protection Agency hired her at the
same salary, the net effect of these events would to be __________ in aggregate demand.
a. an increase (rightward shift)
b. an increase (leftward shift)
c. a decrease (rightward shift)
d. a decrease (leftward shift)
e. no change
28.The effect of a change in net taxes on the quantity of real GDP demanded equals the resulting shift in
the consumption function times
a. the marginal propensity to consume
b. the marginal propensity to save
c. the autonomous net tax multiplier
d. the simple spending multiplier
e. the marginal tax rate
29.A decrease in net taxes
a. raises aggregate expenditure by raising disposable income, thereby increasing
consumption
b. raises aggregate expenditure by raising disposable income, thereby decreasing
consumption
c. lowers aggregate expenditure by lowering disposable income, thereby decreasing
consumption
d. lowers aggregate expenditure by lowering disposable income, thereby increasing
consumption
e. has no effect on aggregate expenditure

30.Which of the following will not increase when net taxes decrease?
a. saving
b. disposable income
c. consumption
d. government expenditure
e. GDP
31.John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that
a. balancing the national budget at all times was sound economic policy
b. natural economic forces were not necessarily adequate to move the economy toward its
potential output level
c. the government did not need to stimulate output in order for the economy to achieve its
potential output level
d. increases in taxes and increases in government purchases are equally effective in closing
an expansionary gap
e. increases in taxes and increases in government purchases are equally effective in closing a
contractionary gap
32.The difference between the classical approach and the Keynesian approach to fiscal policy is
a. Keynesians believe that natural forces in the economy would tend toward full employment
b. Keynesians believe that natural forces in the economy would not tend toward full
employment, but they were distrustful of government's ability to stimulate the economy
c. classical economists believe that the economy would not achieve its potential GDP but
that any action of the government would make matters worse
d. Keynesians believe that it may be necessary that government increase aggregate demand
so as to stimulate output and employment, if the economy is to achieve its potential output
e. both the classical economists and Keynesians were equally distrustful of government
intervention in the economy
33.A leading Classical economist and author of The Wealth Of Nations was
a. David Ricardo
b. François Quesnay
c. Simon Kuznets
d. John Maynard Keynes
34.Most government transfer programs are
a. also government spending programs
b. examples of monetary policy rather than fiscal policy
c. designed mainly to offset macroeconomic instability
d. discretionary fiscal policies
e. automatic stabilizers
35.During economic contractions, transfer payments such as welfare benefits
a. automatically increase, reducing incomes further
b. automatically increase, reducing the impact of the contraction on disposable income
c. automatically decrease, because tax revenues fall and welfare benefits are no longer
affordable
d. are decreased, as a discretionary move on the part of Congress to stimulate expansion
e. are increased, as a discretionary move on the part of Congress to cushion recipients against
the negative effects of economic contraction
36.Which of the following is not an automatic stabilizer?
a. a progressive income-tax system
b. unemployment compensation
c. new legislation to increase tax rates
d. unemployment insurance
e. welfare programs
37.The U.S. federal income tax is progressive, which means that
a. tax receipts grow at the same rate that income does
b. tax receipts grow at the same rate that government spending does
c. middle income individuals pay more total taxes than either high or low-income individuals
d. high-income individuals are generally able to pay fewer taxes
e. high-income individuals are taxed at a higher rate than low-income individuals
38.The tax cut of 1964 (proposed by President Kennedy)
a. was the last time fiscal policy was used
b. was the greatest failure as a demand-management tool
c. actually increased investment, consumption, and employment
d. shifted the aggregate demand curve leftward
e. was the first time the focus moved away from managing aggregate demand to focus
exclusively on aggregate supply
39.Which of the following best describes stagflation?
a. rising unemployment together with economic growth
b. deflation coupled with a decline of the money supply
c. deficits coupled with rising unemployment
d. rising unemployment and inflation rates
e. inflation coupled with balance of trade deficits
40.The rate of unemployment that occurs when the economy is producing its potential GDP
a. is called the natural rate of unemployment
b. is zero
c. is thought to be approximately 10%
d. can be kept at zero through fiscal policy
e. is equal to the rate of stagflation in most years
Macro Chapter 13 Multiple Choice
1.If aggregate output is increasing,
a. both b and e
b. tax revenue decreases
c. automatic stabilizers will tend to increase the size of the deficit
d. automatic stabilizers will tend to decrease the size of the deficit
e. transfer payments increase as fewer people become eligible for public assistance
2.If the deficit is increasing because of the effects of the automatic stabilizers,
a. all of the following
b. the economy is contracting
c. the annual deficit will approach zero
d. the budget is cyclically balanced
e. the economy is growing
3.When automatic stabilizers are the cause of higher deficits, we would expect to observe that
a. the economy has been contracting
b. the economy has been growing
c. interest rates must be rising
d. interest rates must be falling
e. net exports have been decreasing
4.Discretionary expansionary fiscal policy may lead to
a. all of the following except d
b. decreased unemployment
c. inflation
d. lower interest rates
e. crowding out
5.Which component of aggregate expenditure is most subject to crowding out?
a. consumption expenditures
b. investment spending
c. U.S. imports
d. government purchases of goods and services
e. saving
6.Crowding out refers to the government's increased demand for credit, which
a. displaces some private sector consumption by decreasing the price level
b. displaces some private sector borrowing by decreasing the interest rate
c. displaces some private sector borrowing by increasing the interest rate
d. hires labor away from the private sector
e. means longer lines at government agencies
7.Which of the following is not a form of crowding out?
a. lower household spending due to higher interest rates
b. lower business spending due to higher interest rates
c. lower net exports due to higher interest rates
d. lower private spending due to higher taxes
e. none of the above; they all represent crowding out
8 If government deficits stimulate the economy,
a. there is no crowding out
b. crowding in may occur
c. crowding out is more than offset by crowding in
d. crowding out and crowding in cancel each other out
e. interest rates must fall
9.The crowding out of private investment is associated with
a. a reduction in profitable investment opportunities due to a recession
b. increased competition from foreign investors in U.S. markets
c. higher interest rates resulting from a declining rate of saving
d. higher interest rates resulting from increased borrowing by the federal government
e. higher interest rates resulting from restrictive monetary policy
10.All of the following are possible implications of federal budget deficits except one. Which is the
exception?
a. crowding out
b. increased interest rates
c. inflation
e. depreciation of the dollar
11.The largest category of federal government expenditures is
a. national defense
b. interest on the federal debt
c. direct benefit payments to individuals
d. grants to states and localities
e. capital expenditures
12.The U.S. government's fiscal year covers from
a. January through December
b. April of one year through March of the next year
c. June of one year through May of the next year
d. September of one year through August of the next year
e. October of one year through September of the next year
13. The federal government budget is
a. a year-end record of how much the government received in income and how much it spent
b. a plan for government expenditures and revenues for the coming year
c. always in balance: receipts must equal expenditures
d. equal to government receipts minus government expenditures
e. usually planned for the calendar year: January through December
14. A continuing resolution
a. shuts down government agencies in the absence of an approved budget
b. allows agencies to spend at the rate of the previous year in the absence of an approved
budget
c. enables Congress to override the President's budget
d. contributes to the efficiency of the federal budget process
e. is seldom used
15.Which of the following is not a problem with the U.S. federal budget process?
a. the congressional committee framework
b. the lengthy budget process
c. the failure to meet deadlines
d. the lack of detail in the budget
e. the portion of the budget over which Congress and the President have little control
16.Problems with the budget process include the fact that
a. all of the following
b. frequently missed timetables result in continuing resolutions replacing budgets
c. budgets are frequently overly detailed
d. much of federal spending is uncontrollable
e. overlapping budget authorities exist across committees
17.One proposal for improving the budget process is to
a. switch to a two-year or biennial budget
b. remove the Council of Economic Advisers from the process
c. require more detail in the various line items of the budget
d. provide for automatic annual increases in all budget categories
e. eliminate the role of Congressional committees in the process
18.If for every dollar increase in farm subsidies the government decreased urban welfare payments by a
dollar, we would expect the net effect to be
a. an increase in the budget deficit because government spending has increased
b. a decrease in the budget deficit because transfer payments are not included in the
government's budget
c. an increase in the budget deficit because transfer payments have increased
d. an increase in the budget deficit because farm subsidies are transfer payments but urban
welfare payments are not
e. no change in the budget deficit
19.If the U.S. government spent \$20 million paying people to dig holes in 2005, and then spent \$30
million paying the same people to fill the holes up again that same year, we would expect the net
effect to be a(n)
a. decrease in transfer payments
b. increase in the budget deficit as transfer payments increased
c. increase in the budget deficit as government purchases of goods and services increased by
\$50 million
d. increase in the budget deficit as government purchases of goods and services increased by
\$30 million
e. \$10 million dollar increase in the budget deficit
20.The federal budget deficit becomes __________ during recessions because __________.
a. smaller; transfer payments increase and tax revenues decline
b. larger; transfer payments increase and tax revenues decline
c. larger; both transfer payments and tax revenues increase
d. smaller; both transfer payments and tax revenues increase
e. smaller; both transfer payments and tax revenues decrease

21.Because of automatic stabilizers, government budget deficits are
a.   positive during both expansions and contractions
b.   negative during both expansions and contractions
c.   zero if averaged out over the entire business cycle
d.   larger during expansions and smaller during contractions
e.   smaller during expansions and larger during contractions
22.In Keynes’ philosophy of government budgets,
a. permanent deficits are desirable
b. permanent surpluses are desirable
c. the goal is to have a budget surplus
d. surpluses are appropriate during recessions
e. deficits are appropriate during recessions
23.John Maynard Keynes is best known for advocating
a. a policy of annually balancing the budget
b. deficit spending by the federal government during recessions
c. the fixed-growth-rate monetary rule
d. adoption of the biennial budget process
e. an active monetary policy to prevent inflation
24.During a recession, higher welfare outlays
a. increase the size of the budget deficit even if the government does not undertake
discretionary fiscal policy
b. decrease the size of the budget deficit regardless of the government's discretionary fiscal
policy
c. increase the size of the budget deficit only if the government undertakes discretionary
fiscal policy
d. decrease the size of the budget deficit only if the government undertakes discretionary
fiscal policy
e. have the same effect on the budget deficit as they do in times of expansion
25.A disadvantage of having an annually balanced budget is that government spending would have to
a. increase in recessions and decrease during expansions
b. decline during a recession to offset the increase in tax revenues
c. rise during a recession to match the increase in tax revenues
d. rise during an expansion to offset the decline in tax revenues
e. decline in a recession to match the decrease in tax revenues
26.According to the functional finance budget philosophy,
a. deficits should never be used to stimulate the economy
b. automatic stabilizers should be eliminated
c. the government budget should be whatever is necessary to have the economy operate at
potential GDP
d. each government spending program should be financed on the basis of its function
e. the federal budget should be balanced in the long run
27.Cyclical budget deficits refer to
a. the fact that deficits increase during expansions and decrease during contractions
b. the fact that deficits increase during contractions and decrease during expansions
c. the size of the deficit after the economy has gone through a complete business cycle
d. the size of the deficit when the economy is at potential GDP
e. none of the above
28.Which of the following would decrease the size of a federal budget deficit?
a. a recession
b. an increase in defense spending
c. growth in real GDP
d. a decrease in taxes
e. an increase in transfer payments
29.A possible explanation for the persistence of the U.S. federal budget deficits is that
a. it is easier politically to increase government spending than to decrease taxes
b. it is easier politically to decrease government spending than to decrease taxes
c. it is easier politically to increase government spending than to increase taxes
d. the economy naturally tends toward recessions
e. the economy naturally tends toward full employment
30.If aggregate output is falling,
a. both b and e
b. tax revenue increases
c. automatic stabilizers will tend to increase the size of the deficit
d. automatic stabilizers will tend to decrease the size of the deficit
e. transfer payments decrease as fewer people become eligible for public assistance

31. Increasing U.S. trade deficits result in
a. both c and d
b. all of the following
c. reduced purchases of U.S. government bonds by people in other countries
d. accumulation of dollars overseas
32. The key link between the so-called twin deficits involves
a. higher interest rates and a stronger dollar
b. lower interest rates and a stronger dollar
c. higher interest rates and a weaker dollar
d. lower interest rates and therefore larger trade deficits
e. higher interest rates leading to more exports
33. The U.S. Social Security program
a. is a redistribution program that collects taxes from current workers to provide pensions for
current retirees
b. is a redistribution program that collects taxes from retired individuals with high incomes
and uses them to provide pensions for individuals with low incomes
c. is a pay-as-you-go program in which workers' contributions are invested to provide them
with income at retirement
d. is funded by earnings on its investment portfolio
e. is funded through money creation by the Federal Reserve
34. The Social Security program
a. is funded by a tax on wealth
b. is experiencing a Trust Fund deficit that beginning in 2001
c. consists of a pension program and a program that provides hospital care for the elderly
d. was designed to allow workers to retire at age 55
e. is running a Trust Fund deficit that is funded by borrowing from the U.S. Treasury
35. National debt held by the public includes public debt held by all of the following, except one. Which
is the exception?
a. banks
b. firms
c. the U.S. Treasury
d. households
e. foreign entities

36. If the fraction of U.S. government securities held by foreigners increases,
a. current consumption by U.S. citizens must fall
b. current consumption by U.S. citizens can rise
c. current consumption increases by U.S. citizens will be offset by equivalent decreases in
future consumption when the debt is refinanced
d. current consumption decreases by U.S. citizens will be offset by equivalent increases in
future consumption when the debt is refinanced
e. the debt will be less of a burden on our children
37. When crowding out occurs,
a. private spending replaces public spending
b. the dollar typically weakens in foreign exchange markets
c. public spending replaces private spending
d. it offsets any gains created from the lower interest rates
e. none of the above
38. Including the unfunded liabilities of government retirement programs like Social Security in the
deficit would
a. have little impact on the size of the deficit
b. have little impact on the size of the national debt
c. double the size of the national debt
d. triple the size of the national debt
e. quadruple the size of the national debt
39. A possible budget reform is
b. breaking down the budget into increasingly small budget lines
c. appointing agency heads with different priorities than those of elected representatives
d. creating a capital budget
e. eliminating the operating budget
40.4One explanation for persistent federal budget deficits is that officials are not required to
a. honor the Constitution
b. balance the budget
c. raise taxes
d. run for reelection
e. None of the answers is correct

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