Exercise 9 - Solution

Exercise 9 Answer Key
Chapter 15 Fiscal Policy

15.1
What is Fiscal Policy?
1) Which of the following does not reflect the state of the tax system in the United
States today?
A) The tax laws have become increasingly simplified as private citizens have
demanded these changes.
B) The tax laws are used to achieve social policy goals such as energy conservation.
C) The tax laws are used to achieve macroeconomic goals of high employment and
economic growth.
D) Many taxpayers use software or professional tax preparation companies to file their
income taxes.
Answer: A
Diff: 1 Page Ref: 899/495
Topic: The Income Tax System
Objective: LO1: Define fiscal policy.
AACSB: Reflective Thinking
Special Feature: Chapter Opener: A Boon for H&R Block
2) Fiscal policy refers to changes in
A) state and local taxes and purchases that are intended to achieve macroeconomic
policy objectives.
B) federal taxes and purchases that are intended to achieve macroeconomic policy
objectives.
C) federal taxes and purchases that are intended to fund the war on terrorism.
D) the money supply and interest rates that are intended to achieve macroeconomic
policy objectives.
Answer: B
Comment: Recurring
Topic: What Fiscal Policy Is and What It Isn't
Special Feature: None
3) Which of the following is an objective of fiscal policy?
A) energy independence from Middle East oil
B) health care coverage for all Americans
C) discovering a cure for AIDs
D) high rates of economic growth
E) homeland security
Answer: D
Comment: Recurring
Topic: What Fiscal Policy Is and What It Isn't
4) The increase in the amount that the government collects in taxes when the economy
expands and the decrease in the amount that the government collects in taxes when the
economy goes into a recession is an example of
A) automatic stabilizers.
B) discretionary fiscal policy.
C) discretionary monetary policy.
D) automatic monetary policy.
Answer: A
Comment: Recurring
Topic: Automatic Stabilizers versus Discretionary Fiscal Policy
5) Which of the following would not be considered an automatic stabilizer?
A) legislation increasing funding for job retraining passed during a recession
B) decreasing unemployment insurance payments due to decreased jobless during an
expansion
C) rising income tax collections due to rising incomes during an expansion
D) declining food stamp payments due to more persons finding jobs during an
expansion
Answer: A
Comment: Recurring
Topic: Automatic Stabilizers versus Discretionary Fiscal Policy
6) Federal government purchases, as a percentage of GDP,
A) have risen since the early 1950s.
B) have fallen since the early 1950s.
C) have remained roughly the same since the early 1950s.
D) rose from the early 1950s until the mid 1980s, and then fell.
Answer: B
Comment: Recurring

Topic: Government Spending and Taxes
15.2
The Effects of Fiscal Policy on Real GDP and the Price Level
1) Automatic stabilizers refer to government spending and taxing which automatically

increase and decrease to
A) stabilize interest rates.
B) stabilize foreign-exchange rates.
C) offset the effects of the business cycle on the economy.
D) offset the effects of inflation.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 904-906/500-502
Topic: Expansionary and Contractionary Fiscal Policy
Objective: LO2: Explain how fiscal policy affects aggregate demand and how the
government can use fiscal policy to stabilize the economy.
2) An increase in government purchases will increase aggregate demand because
A) government expenditures are a component of aggregate demand.
B) consumption expenditures are a component of aggregate demand.
C) the decline in the price level will increase demand.
D) the decline in the interest rate will increase demand.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 904-906/500-502
Figure 15-1
3) Refer to Figure 15-1. An increase in taxes would be depicted as a movement from

________, using the static AD-AS model in the figure above.
A) E to B
B) B to C
C) A to B
D) B to A
E) C to D
Answer: D
Comment: Recurring
Skill: Graphing
AACSB: Analytic Skills
4) Refer to Figure 15-1. Suppose the economy is in a recession and expansionary
fiscal policy is pursued. Using the static AD-AS model in the figure above, this would
be depicted as a movement from
A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.
Answer: A
Comment: Recurring
Skill: Graphing
5) Refer to Figure 15-1. Suppose the economy is in short-run equilibrium below
potential GDP and Congress and the president lower taxes to move the economy back
to long-run equilibrium. Using the static AD-AS model in the figure above, this would
be depicted as a movement from
A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.
Answer: A
Comment: Recurring
Skill: Graphing
6) Refer to Figure 15-1. Suppose the economy is in short-run equilibrium below
potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS
model in the figure above, this would be depicted as a movement from
A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.
Answer: E
Comment: Recurring
Skill: Graphing
7) Refer to Figure 15-1. Suppose the economy is in short-run equilibrium above
potential GDP and automatic stabilizers move the economy back to long-run
equilibrium. Using the static AD-AS model in the figure above, this would be depicted
as a movement from
A) D to C.
B) A to E.
C) C to B.
D) B to A.
E) E to A.
Answer: C
Comment: Recurring
Skill: Graphing
potential GDP and no policy is pursued. Using the static AD-AS model in the figure
above, this would be depicted as a movement from
A) D to C.
B) A to E.
C) C to D.
D) C to B.
E) E to A.
Answer: C
Comment: Recurring
Skill: Graphing
potential GDP and wages and prices are rising. If contractionary policy is used to move
the economy back to long run equilibrium, this would be depicted as a movement from
________ using the static AD-AS model in the figure above.
A) D to C
B) C to B
C) A to E
D) B to A
E) E to A
Answer: B
Comment: Recurring
Skill: Graphing
15.4
The Government Purchases and Tax Multipliers
1) Economists refer to the series of induced increases in consumption spending that

result from an initial increase in autonomous expenditures as the ________ effect.
A) multiplier
B) expenditure
C) consumption
D) aggregate demand
Answer: A
Comment: Recurring
Topic: Multiplier Effect
Objective: LO4: Explain how the government purchases and tax multipliers work.
2) The aggregate demand curve will shift to the right ________ the initial increase in
government purchases.
A) by less than
B) by more than
C) by the same amount as
D) sometimes by more than and other times by less than
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 908-909/504-505
Topic: Government Purchases Multiplier
3) The aggregate demand curve will shift to the right ________ the initial decrease in
taxes.
A) by less than
B) by more than
C) by the same amount
D) sometimes by more than and other times by less than

Answer: B
Comment: Recurring
Topic: Tax Multiplier
4) A change in consumption spending caused by income changes is ________ change
in spending, and a change in government spending that occurs to improve roads and
bridges is ________ change in spending.
A) an induced; an autonomous
B) an expansionary; a contractionary
C) an autonomous; an induced
D) a contractionary; an expansionary
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 908-909/504-505
Topic: Government Purchases Multiplier
5) The tax multiplier equals the change in ________ divided by the change in
________.
A) taxes; equilibrium real GDP
B) equilibrium real GDP; taxes
C) taxes; consumption spending
D) consumption spending; taxes
Answer: B
Comment: Recurring
6) If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the
change in GDP, holding everything else constant? (Assume the price level stays
constant.)
A) a $300 billion decrease in GDP
B) a $300 billion increase in GDP
C) a $30 billion increase in GDP
D) a $133.33 billion decrease in GDP

E) a $133.33 billion increase in GDP
Answer: A
Comment: Recurring
15.5
The Limits of Using Fiscal Policy to Stabilize the Economy
1) The Federal Reserve plays a larger role than Congress and the president in stabilizing
the economy because
A) the Federal Reserve can more quickly change monetary policy than the president
and the Congress can change fiscal policy.
B) the Federal Reserve can immediately recognize when real GDP is below or above
potential GDP.
C) changes in interest rates have a considerably larger effect on the economy than
changes in government purchases or taxes.
D) changes in interest rates have their full effect on the economy in a short period of
time, whereas changes in government spending and taxes have their full effect over a
long period of time.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 915-916/511-512
Topic: Limits of Fiscal Policy
Objective: LO5: Discuss the difficulties that can arise in implementing fiscal policy.
2) Crowding out refers to a decline in ________ as a result of an increase in ________.
A) tax revenues; unemployment
B) government purchases; tax rates
C) government purchases; private expenditures
D) private expenditures; government purchases
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 916-917/512-513
Topic: Crowding Out
3) An increase in the sensitivity of private spending (consumption, investment, and net

exports) to changes in the interest rate ________ the government purchases multiplier.
A) will decrease
B) will increase
C) will not change
D) may increase or may decrease
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 916-917/512-513
Topic: Crowding Out
4) In the long run, most economists agree that a permanent increase in government
spending leads to ________ crowding out of private spending.
A) no
B) partial
C) complete
D) more than complete
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 917-918/513-514
Topic: Crowding Out
5) In the long run, most economists agree that a permanent increase in government
spending leads to
A) no decrease in private spending.
B) a decrease in private spending by less than the amount that government spending
increased.
C) a decrease in private spending by the same amount that government spending
increased.
D) a decrease in private spending by more than the amount that government spending
increased.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 917-918/513-514
Topic: Crowding Out
15.6
Deficits, Surpluses, and Federal Government Debt
1) To evaluate the size of the federal budget deficit or surplus over time, it would be
best to look at the
A) absolute size of the budget deficit or surplus.
B) budget deficit or surplus as a percentage of GDP.
C) budget deficit or surplus as a percentage of tax revenues.
D) budget deficit or surplus as a percentage of government spending.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 919-920/515-516
Topic: Budget Deficits and Surpluses
Objective: LO6: Define federal budget deficit and federal government debt and
explain how the federal budget can serve as an automatic stabilizer.
2) An economic expansion tends to cause the federal budget deficit to ________
because tax revenues ________ and government spending on transfer payments
________.
A) increase; rise; falls
B) increase; fall; rises
C) decrease; rise; falls
D) decrease; fall; rises
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 919-920/515-516
3) Suppose the federal budget deficit for the year was $100 billion and the economy
was in a recession. If the economy had been at potential GDP, it is estimated that tax
revenues would have been $60 billion higher and government spending on transfer
payments $50 billion lower. Using these estimates, the cyclically adjusted budget
A) deficit was $210 billion.
B) deficit was $110 billion.
C) surplus was $10 billion.
D) surplus was $110 billion.
Answer: C
Comment: Recurring

Topic: The Federal Budget as an Automatic Stabilizer
4) During the Great Depression, what appeared to be ________ fiscal policy was
actually not when the ________ budget deficit or surplus is examined.
A) expansionary; actual
B) expansionary; cyclically adjusted
C) contractionary; actual
D) contractionary; cyclically adjusted
Answer: B
Special Feature: Making the Connection: Did Fiscal Policy Fail during the Great
Depression?
15.7
The Effects of Fiscal Policy in the Long Run
1) Which of the following best describes supply-side economics?

A) Labor productivity affects aggregate supply.
B) Education affects labor productivity which affects aggregate supply.
C) Education affects the incentive to work, save, and invest and, therefore, aggregate
supply.
D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and
invest and, therefore, aggregate supply.
Answer: D
Comment: Recurring
Topic: Supply-Side Policy
Objective: LO7: Discuss the effects of fiscal policy in the long run.
2) A decrease in which of the following would decrease the tax wedge?
A) marginal tax rate
B) money supply
C) national debt
D) federal budget deficit
Answer: A
Comment: Recurring
Topic: The Tax Wedge
3) Economists who believe the supply-side effects of tax cuts are small essentially
believe that
A) tax cuts mainly affect aggregate demand.
B) tax cuts mainly affect aggregate supply.
C) tax cuts will increase the quantity of labor supplied.
D) tax cuts will result in relatively small changes in the price level.
Answer: A
Comment: Recurring
Topic: Supply-Side Policy
4) From 2007 to 2009, aggregate demand in the United States had ________ and the
effects of changing oil prices caused short-run aggregate supply to ________, resulting
in a new equilibrium with a higher price level and lower real GDP.
A) decreased; increase
B) decreased; decrease
C) increased; increase
D) increased; decrease
Answer: B
Topic: Tax Policy
Special Feature: An Inside LOOK at Policy: Obama Uses Fiscal Policy to Stimulate
the Economy

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Exercise 9 Answer Key

Chapter 15 Fiscal Policy

What is Fiscal Policy?

Diff: 2 Page Ref: 901/497

1) Automatic stabilizers refer to government spending and taxing which automatically

3) Refer to Figure 15-1. An increase in taxes would be depicted as a movement from

The Government Purchases and Tax Multipliers

1) Economists refer to the series of induced increases in consumption spending that

D) sometimes by more than and other times by less than

D) a $133.33 billion decrease in GDP

The Limits of Using Fiscal Policy to Stabilize the Economy

3) An increase in the sensitivity of private spending (consumption, investment, and net

Deficits, Surpluses, and Federal Government Debt

Diff: 2 Page Ref: 920/516

The Effects of Fiscal Policy in the Long Run

1) Which of the following best describes supply-side economics?

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