Chapter 3 Fiscal policy and APE

1.     Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact on gross domestic product (GDP) ?

• GDP will increase by a maximum of $200 million.

• GDP will increase by a maximum of $180 million.

• GDP will decrease by a maximum of $200 million.

• GDP will decrease by a maximum of $180 million.

• GDP will decrease by a maximum of $20 million.

Assume that the marginal propensity to consume is 0.8. If the government increases its purchases of goods and services by $200 and exports decline by $50, at most the equilibrium level of income will

• decrease by $250

• decrease by $1,000

• increase by $150

• increase by $750

• increase by $1,250

Automatic stabilizers can do which of the following?

• Offset the destabilizing influence of changes in tax revenues

• Aid the economy to move away from the full-employment output level

• Allow policymakers to formulate a set of rules flexible and comprehensive enough to eliminate discretionary actions

• • Allow policymakers to prescribe public works programs during inflationary periods because expenditures for unemployment and welfare have correspondingly decreased

• • Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases

Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses?

• Unemployment will be eliminated and prices will be stable.

• The national debt will increase

• Business cycles will become more stable.

• The automatic stabilizing effect of fiscal policy will be eliminated

• The government will be forced to spend less when there are surpluses

Assume that Jane’s marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by

• $4,000

• $8,000

• $9,000

• $10,000

• $14,000

Which of the following is an example of fiscal policy?

• Decreasing income tax rates

• Increasing the money supply

• Decreasing the discount rate

• Selling government bonds

• Decreasing the required reserve ratio

Which of the following statements best describes the concept of an automatic stabilizer?

• • It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions.

• • It is discretionary fiscal policy that increases government spending during recessions and decreases government spending during expansions.

• • It is a measure of the effect that a change in government spending and investment has on the gross domestic product.

• • It is a description of how total income is always equal to total expenditures as a measure of gross domestic product.

• • It is the process whereby surpluses lead to falling prices and shortages lead to rising prices to stabilize market equilibrium.

A high marginal propensity to consume implies which of the following?

• • A small change in consumption when income changes

• • A high savings rate

• • A high marginal tax rate

• • An equilibrium level of income near full employment

• • A low marginal propensity to save

An increase in which of the following will increase the value of the spending multiplier?

• • The supply of money

• • Equilibrium output

• • Personal income tax rates

• • The marginal propensity to consume

• • The required reserve ratio

Which of the following is an example of fiscal policy?

• • Increasing government expenditures to build highways

• Increasing the money supply to increase income

• • Decreasing the discount rate to lower unemployment and inflation

• • Decreasing the policy rate to stimulate investment

• Decreasing the reserve ratio to increase bank reserves