ECON1220 Chapter9 Practice Macroeconomics Fiscal Policy

I. Multiple Choices
1) Which of the following is a government expenditure, but is not a government
purchase?
A) The federal government buys a Humvee.
B) The federal government pays the salary of an FBI agent.
C) The federal government pays out an unemployment insurance claim.
D) The Federal government pays to support research on Aids.

2) The increase in government spending on unemployment insurance payments to

workers who lose their jobs during a recession and the decrease in government
spending on unemployment insurance payments to workers during an expansion is an
example of
A) automatic stabilizers.
B) discretionary fiscal policy.
C) discretionary monetary policy.
D) automatic monetary policy.

3) Contractionary fiscal policy to prevent real GDP from rising above potential real
GDP would cause the inflation rate to be ________ and real GDP to be ________.
A) higher; higher B) higher; lower
C) lower; higher D) lower; lower

4) If the economy is growing beyond potential real GDP, which of the following
would be an appropriate fiscal policy to bring the economy back to long-run
aggregate supply? An increase in
A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices. D) taxes.

5) Refer to Figure. In the graph above, if the

economy is at point A, an appropriate fiscal
policy by the Congress and the president would
be to
A) decrease the required reserve ratio.
B) sell government securities.
C) increase government expenditures.
D) decrease transfer payments.

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ECON1220 Chapter9 Practice Macroeconomics Fiscal Policy

6) Refer to Figure. In the graph above, suppose

the economy is initially at point A. The
movement of the economy to point B as shown in
the graph illustrates the effect of which of the
following policy actions by the Congress and the
president?
A) an increase in transfer payments
B) an increase in interest rates
C) an increase in the marginal income tax rate
D) an open market purchase of Treasury bills

7) Refer to Figure. In the dynamic model of

AD- AS in the figure above, if the economy is
at point A in year 1 and is expected to go to
point B in year 2, and no fiscal or monetary
policy is pursued, then at point B
A) the unemployment rate is very low.
B) firms are operating below capacity.
C) the economy is above full employment.
D) income and profits are rising.
E) there is pressure on wages and prices to rise.

8) From an initial long-run equilibrium, if aggregate demand grows faster than long-
run and short-run aggregate supply, then Congress and the president would most
likely
A) decrease the required reserve ratio. B) decrease government spending.
C) decrease oil prices. D) decrease tax rates.

9) Refer to Figure .In the graph above, suppose

the economy in Year 1 is at point A and
expected in Year 2 to be at point B. Which of
the following policies could the Congress and
the president use to move the economy to point
C?
A) increase income taxes
B) increase government spending
C) buy Treasury bills
D) decrease the discount rate
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ECON1220 Chapter9 Practice Macroeconomics Fiscal Policy

10) Refer to Table. Consider the hypothetical information in the table above for
potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress
and the president do not use fiscal policy. If the Congress and the president use fiscal
policy successfully to keep real GDP at its potential level in 2014, which of the
following will be lower than if the Congress and the president had taken no action?
Year Potential Real GDP Real GDP Price Level
2013 $14.0 trillion $14.0 trillion 150
2014 14.5 trillion 14.8 trillion 154
A) real GDP and the unemployment rate
B) real GDP and the inflation rate
C) real GDP and potential GDP
D) potential GDP and the inflation rate

11) The tax multiplier is smaller in absolute value than the government purchases
multiplier because some portion of the
A) decrease in taxes will be saved by households and not spent, and some portion will
be spent on imported goods.
B) decrease in taxes will be saved by households and not spent, and some portion will
be spent on consumer durable goods.
C) increase in government purchases will be saved by households and not spent, and
some portion will be spent on imported goods.
D) increase in government purchases will be saved by households and not spent, and
some portion will be spent on consumer durable goods.

12) Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move
the economy back to potential GDP, Congress should
A) lower government purchases by an amount less than $200 billion. B) lower
government purchases by $200 billion.
C) raise taxes by $200 billion.
D) lower taxes by $200 billion.
E) raise taxes by an amount more than $200 billion.