Fiscal Policy and More Page | of 13 Fiscal Policy and More 1. The kinked-demand curve model helps to explain price rigidity because: A. there is @ gap in the marginal revenue curve within which changes in marginal cost will not affect, output or price. 1B, demand is inelastic above and elastic below the going price. C. the model assumes firms are engaging in some form of collusion. D. the associated marginal revenue curve is perfectly elastic at the going price. AS | 3 Z = Oo oe aude Real GDP 2. Refer to the above diagram, in which Qyis the full-employment output. if aggregate demand curve ‘ADs describes the current situation, appropriate fiscal poliey would be to: ‘A. do nothing since the economy appears to be achieving full-employment real output B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from ‘ADs to AD, assuming downward price flexibility. C. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level. D. increase taxes and reduce government spending to shift the aggregate demand curve from ADs to AD, 3. Refer to the above diagram, in which Qyis the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to: (A. increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD. B. reduce taxes on businesses to shift the aggregate supply curve leftward. C. reduce taxes and increase government spending to shift the aggregate demand curve from AD; to ADz, D. do nothing si the economy appears to be achieving full-employment real GDP. https://www.eztestonline.com/jmartin0 1/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 2 of 13 4, Ina certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion, To obtain price level stability under these conditions the government should: increase tax rates and/or reduce government spending, discourage personal saving by reducing the interest rate on government bonds, increase government expenditures. encourage private investment by reducing corporate income taxes, vOR> Answer the question on the basis of the following before-tax consumption schedule for a closed economy: Gross Domestic *{GDP)__ Consumption (©) 30 $40 400 420 200 200 300 280 400 360 Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system: is regressive. is proportional is progressive. may be either proportional or progressive. yosp 2 Refer to the above data, Ifa lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume 8 before taxes and .6 after taxes. , .8 both before and after taxes. 6 before taxes and .8 after taxes, D. .8 before taxes and .4 afler taxes. am> hittps://www.eztestonline.com/jmartin0 1/14265024209908300.tp4 3/16/2015Fiseal Policy and More Page 3 of 13 7. Refer to the above data, Ifa lump-sum tax (the same tax amount at each level of GDP) of $40 is ‘now imposed in this economy, the consumption schedule will be: A. GDP | 0 SB 100 88 200 168 300 248 400 320 B Cc 200 170 300 250 400 310 D. sop _¢_ $0 30 199 60 200 120 300 480 00 240 8. Which of the following best describes the built-in stabilizers as they function in the United States? ‘A. The size of the multiplier varies inversely with the level of GDP. B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. 1D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises. ° Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward: an equality of tax receipts and government expenditures an excess of tax receipts over government expenditures. an excess of government expenditures over tax receipts, a reduction of subsidies and transfer payments and an increase in tax rates. sawp https://www.eztestonline.com/jmartin01/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 4 of 13 10. The U.S. public debt: A, refers to the debts of all units of government-—Federal, state, and local. B. consists of the total debt of U.S. households. businesses, and government. C. refers to the collective amount that U.S. citizens and businesses owe to foreigners, D. consists of the historical accumulation of all past Federal deficits and surpluses. uM A B. ie D. 12, A. B. c. D. B A B. Cc. D. are me $19 16 13 19. D ‘MR O08 180780 310 ‘Quantity Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be: 100, 160. 180. 210, Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be: $10. $13. S16. $19. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic: loss of $320. profit of $480. profit of $280. profit of $600. https://www.eztestonline.com/jmartinO1/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 5 of 13 Tax Revenue qr 15. Refer to the above diagram, Which tax system has the /east built-in stability? ATs BLT Ch DT { AS | i i Bh Bet hy ao, 2 - i, AD, tA0, | eee er Bee ie Real GOP (eitions} Real GOP (Ellons} Graph A Graph 8 16, Refer to the above diagrams, Suppose that goverment undertakes fiscal policy designed to increase aggregate demand from AD, to AD» and thereby to increase GDP from to Z, In terms of graph B, which of the following might explain why GDP increases to ¥ rather than to Z? depreciation of the dollar. reduction in tariffs imposed by our trading partners. decrease in the saving schedule. . crowding-out effect. yoep https:/www.eztestonline.com/jmartin0 1/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 6 of 13 17. The Federal budget deficit is found by: A. subtracting government tax revenues plus government borrowing from government spending in a particular year. B. subtracting government tax revenues from government spending in a particular year. C. cumulating the differences between government spending and tax revenues over all years since the nation’s founding 1D. subtracting government revenues from the noninvestment-type government spending in a particular year. 18, Monopolistically competitive firms: realize normal profits in the short run but losses in the long run. incur persistent losses in both the short ran and long run. may realize either profits or losses in the short run, but realize normal profits in the long run, persistently realize economic profits in both the short run and long run. com> 19, Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: increase government expenditures by $100 billion. increase government expenditures by $50 billion. reduce taxes by $50 billion reduce taxes by $200 billion, corp Ifthe MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: increasing government spending by $4 billion. increasing government spending by $40 billion. decreasing taxes by $4 billion. increasing taxes by $4 billion. voRp _ Tnan aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will: shift the AD curve to the tight. increase the equilibrium GDP. not affect the AD curve. shift the AD curve to the left, pap 22, In the short-run, the price charged by a monopolistically competitive firm attempting to maximize profits: must be less than ATC. must be more than ATC. may be either equal to ATC, less than ATC, or more than ATC. must be equal to ATC. goep hitps:/Awww.eztestonline.com/jmartin01/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 7 of 13 Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover 23, Refer to the above information, The administrative lag of fiscal policy is reflected in events: Land 2. 2and 3. 3and 4, 4and 5. pape 24, Refer to the above information. The recognition lag of fiscal policy is reflected in events: . Land 2, 2and 3. . Sand 4, . 4 and 5: voRP 5, Refer to the above information, The operational lag of fiscal policy is reflected in event(s): - Land 2. and 3. 3and 4. 5. com> 6, Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spendin; increases during a period of recession, rather than prosperity, s primarily for capital-type goods. s financed by borrowing. is financed by taxation. vow> 27. Which of the following is not a basic characteristic of monopolistic competition? A. the use of trademarks and brand names B. recognized mutual interdependence C. product differentiation D. arelatively large number of sellers https:/vww.eztestonline.com/jmartin0 1/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 8 of 13 Price Level 2 AD, oo Ky z Real GOP (Billions) 28. Refer to the above figure. Suppose that the economy is currently operating at the intersection of AS and ADz, and that the full employment level of output is Y. If contractionary fiscal poliey and accompanying multiplier effects move aggregate demand from AD» to ADj, what will be the effect on real GDP and the price level? Real GDP will fall to Y and the price level will fall to Po, assuming a ratchet effect occurs. Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs. C, Real GDP will fall to X and the price level will fall to Po, assuming a ratchet effect occurs. D. Real GDP will fall to Y and the price level will remain unchanged, assuming a ratchet effect oceurs. p> 29. Refer to the above figure. Suppose that the economy is currently operating at the intersection of ‘AS and AD», and that the full employment level of output is Y. Because of the ratchet effect: A. itis impossible to enact fiscal policy that will both reduce output to Y and reduce demand-pull inflation. B. fiscal policy will need to be more contractionary to reduce output to Y than if no ratchet effect occurred, C. tax increases will be more effective at reducing demand-pull inflation than cuts in government spendin; D. contractionary fiscal policy that shifts aggregate demand to AD; will eause real GDP to fall below its full employment level. “The amount by which government expenditures exceed revenues during a particular year is the: 3 public debt. budget deficit. full-employment. GDP gap. yorp> https:/Avww.eziestonline,com/imartin01/14265024209908300.tp4 3/16/2015Fiscal Policy and More Page 9 of 13 31. If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by A. reducing government expenditures by $12 billion. B. reducing government expenditures by $60 billion. C. increasing taxes by $15 billion D. increasing taxes by $20 billion. 32. Which of the following 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. Fiscal policy will result in alternating budget deficits and surpluses. C. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections. D. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle. 33. The crow: ing-out effect suggests that: |A. tax increases ate paid primarily out of saving and therefore are not an effective fiscal device. B. government borrowing to finance the public debt increases the real interest rate and reduces private investment, itis very difficult to have excessive aggregate spending in a capitalist economy. . consumer and investment spending always vary inversely 90 The cyclically-adjusted budget refers to: the inflationary impact that the automatic stabilizers have in a full-employment economy. that portion of a full-employment GDP that is not consumed in the year itis produced. the size of the Federal government's budgetary surplus or deficit when the economy is operating at full employment the number of workers who are underemployed when the level of unemployment is 4 10 5 percent, app g 9 . A major advantage of the built-in or automatic stabilizers is that they: __ simultaneously stabilize the economy and reduce the absolute size of the public debt. ‘automatically produce surpluses during recessions and deficits during inflations. require no legislative action by Congress to be made effective. guarantee that the Federal budget will be balanced over the course of the business cycle, vow 6. Fiscal poliey refers to the: manipulation of government spending and taxes to stabilize domestic output, employment, and the price level. ‘manipulation of government spending and taxes to achieve greater equality in the distribution of income. altering of the interest rate to change aggregate demand, ). fact that equal increases in government spending and taxation will be contractionary on pp > https://www.eztestonline.com/jmartin01/14265024209908300.1p4. 3/16/2015Fiscal Policy and More Page 10 of 13 Beta's Price Polley Alpha’s Price Polley 37. Refer to the above diagram where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast comer and Alpha's profits in the southwest comer of each cell. If both firms follow a high-price policy: Alpha will realize a $10 million profit and Beta a $30 million profit. cach will realize a $20 million profit. Beta will realize a $10 million profit and Alpha a $30 million profit. each will realize a $15 million profit. pomp 38, Refer to the above diagram wherein the numerical data show profits in millions of dollars, Betas profits are shown in the northeast corner and Alpha's profits in the southwest comer of exch cell. If Beta commits to a high-price policy, Alpha will gain the largest profit by: also adopting a high-price policy. adopting a low-price policy adopting a low-price policy, but only if Beta agrees to do the same. . engaging in non-price competition only. 39, Refer to the above diagram where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast comer and Alpha's profits in the southwest comer of each cell. With independent pricing the oufeome of this duopoly game will gravitate to cell: A B. GC: . D. voEPp 40. The American Recovery and Reinvestment Act of 2009 was implemented primarily to: A. reduce inflationary pressure caused by oil price increases, B. curb the overspending by households that contributed to the Great Recession. C. bring the Federal budget back into balance. D. stimulate aggregate demand and employment. https://www.eztestonline.com/jmartin01/14265024209908300.tp4 3/16/2015