Fiscal Policy and the Keynesian Cross
Practice Questions: Macro
Test #2
1. Which of the following is a fiscal policy tool used to combat a
recession?
a. increasing income taxes
b. increasing government spending
c. increasing the budget surplus
d. decreasing the discount rate (monetary policy-not yet
covered)
e. decreasing the purchase of government bonds on the open
market
2. During a period of rapid expansion and high inflation, a Keynesian
would advocate…
a. deficit spending and
tight money
b. a budget surplus that
would limit aggregate demand
c.
operating with a balanced budget while pursing limiting
the growth of the money supply to 3% per year
d. leaving the economy
alone, allowing it to regulate itself
e. providing no public
information, in this way, the inflationary problems would not become worse
3. What is one economic difference between
increasing federal purchases of goods and services at a time when unemployment
is at 10% and at a time when unemployment is at 5%?
a. at 10% unemployment,
it is more likely that the programs would not be possible without sacrifice of
private goods
b. at 5%
unemployment , it is more likely that the programs would be possible without a
sacrifice of private goods
c. at 10% unemployment, the programs are more likely to
influence prices than real output
d. at 5% unemployment, the programs are more likely to
influence prices than real output
4. Which of the following will occur if a major new reserve of
natural gas is discovered in the United
States when the economy is operating at less than full
employment?
a. an increase in employment followed by a possible decrease in
price levels
b. a decrease in employment followed by a possible increase in
prices
c. a decrease in money demand followed by a decrease in money
supply
d. a decrease in imports followed by an increase in
unemployment
e. a downward shift in the aggregate supply curve followed by a
decrease in output
5. The multiplier measures…
a. the extent to which aggregate income will change in response
to a change in expenditures
b. the rise in expenditures caused by a change in aggregate
income
c. the marginal propensity to spend
d. the amount of time it takes to move from one equilibrium to
another
6. If an increase in investment of $100 brings an increase of $400
billion in real GDP, the multiplier is…
a. .20
b. .02
c. .40
d. 4.00
7. The "Paradox of Thrift" suggests
that if people try to save more,
a. Increased
savings will increase aggregate income.
b. Increased
savings will decrease aggregate income.
c. What is good for individuals will be good for
the economy as a whole.
d. Aggregate
income will go up and savings will go down.
8. Assume national output is at the full-employment
level and the government budget is balanced. A reduction in investment spending
would probably lead to…
a. a
decline in output and a recessionary gap
b. a
decline in output and an inflationary gap
c. no
change in output and a recessionary gap
d. an
increase in output and an inflationary gap
e. an
increase in output and a recessionary gap
9. Classical economists feel that during an
economic slowdown…
a. government
should step in and boost aggregate demand
b. interest
rates will fall to encourage investment
c. interest
rates will rise sharply to encourage investment
d. savings
will fluctuate wildly
10. Suppose
that, between year A and year B, unemployment rose from 6.0 to 7.2 percent and
inflation fell from 5.0 to 3.1 percent. An
explanation of these changes might be that the…
a. aggregate
demand curve shifted left.
b. aggregate demand curve shifted right.
c. aggregate
supply curve sifted right.
d. aggregate
supply curve shifted left.
e. aggregate
supply shifted left and aggregate demand shifted right.
11. Which of
the following would be regarded by an economist as "investment" as
that term is used in the calculation of Gross National Product?
a. the
purchase of a corporate bond
b. the
purchase of a car by a student
c. the deposit of
savings in a commercial bank
d. when Kingswood
buys a new lawn-mower to cut the grass around campus
12. Current
equilibrium output equals $2,500,000, potential output equals $2,600,000 and
the
marginal propensity
to consume equals 0.75. Under these conditions, a Keynesian economist is most
likely to recommend…
a. decreasing
taxes by $25,000.
b. decreasing
taxes by $100,000.
c. increasing
government spending by $25,000.
d. allowing
wages to decrease in order to stimulate production.
e.
relying on lower interest rates to spur investment.
13. If the
unemployment rate is 9% and the price level is stable what kind of policy would
a
Keynesian suggest?
a. allow
flexible interest rates to correct the economy
b. the
government should spend more and cut taxes, creating a budget deficit
c. the
government should increase taxes and cut spending, creating a budget surplus
d. the
government should do nothing because the economy is in good shape
14. If Ann Smith's disposable personal income rises from
$1,200 to $1,700 and her level of saving
increases from
minus $100 to plus $100, then her marginal propensity to…
a. consume is 1/6
b. consume is 3/5
c. consume is 1/2
d. save is 3/5
15. Given the
information in the previous question, what is the multiplier? ________
16. Given that
multiplier, a $100 increase in investment spending would lead to how much of a
change in national income? __________
17. Which of
the following statements are correct? (S = savings and I = investment)
a. S>I
then aggregate demand will increase
b. S<I
then national output will decrease
c. I>S
then aggregate demand will increase
d. S>I
then GDP will increase
e. I>S
then aggregate demand will decrease
18. Total
spending in the economy is most likely to increase by the largest amount if
which of the
following occur to government spending and
taxes?
Government Spending Taxes
a. Decrease Increase
b. Decrease No Change
c. Increase Increase
d. Increase Decrease
e. No
Change Increase
19. A
Keynesian economist would suggest that…
a. savings
will be larger than investment.
b. an
unregulated economy will tend to reach a full employment equilibrium.
c. savings
will be less than investment.
d. the
government should not be involved in the economy.
e. during
recessions, wages will decrease, leading to an increase in real GDP.
___________________________________________________________________________
20. At income
level OF, the volume of savings is…
a. CB
b. CD
c. CF-BF
d. AB
e. BD
21. If
equilibrium income is $600 billion and the marginal propensity to consume is
50%, how much
of an increase
in spending would be needed to bring the equilibrium up to full employment with
stable prices if that point (full employment) is at $1,000 billion?
a. $8
billion.
b. $200
billion.
c. $400
billion.
d. $800
billion.
e. not
enough data.
22. What are the
nation's economic goals?
23. What are
the basic tools of fiscal policy?
24. What is
the difference between a discretionary fiscal policy and an automatic fiscal
policy?
25. In the space
below, draw a 45º Line model that illustrates an inflationary gap.
26. In the
space below, draw a 45º Line model that illustrates a recessionary gap.
27. The Classical
Model believes that there are self-correcting mechanisms which help to
stabilize the economy, what are they?
28. The
Keynesian Model believes that these mechanisms will not work. Explain why.
Practice Written Response:
Assume that you are a Keynesian Economist who works for a Congressman
that needs advice. You are shown the following statistics. Write your response on a separate sheet
of paper.
July
1995 January 1996 Estimate for March 1996
________________________________________________________________________
Real GDP 1485 1479 1450
Inflation Rate 6% 5% 4%
Unemployment Rate 5% 7% 9%
________________________________________________________________________
A) Illustrate the situation as projected for
March of 1996 for the Congressman. Make sure to place the equilibrium in the
proper place and label your diagram completely.
B) Describe the situation this
economy faces. Compare the situation to the nation's economic goals.
C) Recommend two fiscal policies to your
Congressman. The policy needs to address the situation. Be sure to explain how
these policies would work.
D) How should your policies
influence…
* Aggregate Demand
* Real GDP
* Unemployment
* Inflation
* Interest Rates