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| 1.
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The Great Depression: |
| | A) | was the springboard for Keynesian economics. |
| | B) | led to a revival of Say's Law. |
| | C) | caused renewed interest is Austrian economics. |
| | D) | caused individuals to demand smaller government. |
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| 2.
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The primary components of aggregate demand are: |
| | A) | consumption, investment, youth expenditures and exports minus imports. |
| | B) | health care, education, automobiles and net exports. |
| | C) | consumption, investment, government spending and net exports. |
| | D) | entertainment, housing, food and, finally, education. |
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| 3.
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Which of the following represent examples of investment spending? |
| | A) | The purchase of savings bonds. |
| | B) | The purchase of stock. |
| | C) | The purchase of modern machines for a local factory. |
| | D) | All of the above represent examples of investment spending. |
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| 4.
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According to Keynesian theory, the purpose of fiscal policy is: |
| | A) | to reduce spending if the economy is operating above full employment. |
| | B) | always to stimulate the economy so as to increase short-run employment. |
| | C) | always to dampen the economy so as to prevent inflationary episodes. |
| | D) | None of the above is true. |
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| 5.
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If the economy is operating at a level of total spending that is $100 billion short of that consistent with full employment, the government would have to: |
| | A) | increase spending by more than $100 billion to move the economy to full employment because some of the government spending "bleeds off" as economic waste. |
| | B) | increase spending by exactly $100 billion. |
| | C) | increase spending by $100 billion times the multiplier. |
| | D) | increase spending by less than $100 billion due to the multiplier effect. |
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| 6.
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The macroeconomic term "marginal propensity to consume": |
| | A) | means that consumers are in a funk and only marginally willing to consume. |
| | B) | means consumer debt is so high that consumers are only marginally able to consume. |
| | C) | represents that portion of an additional dollar that consumers spend rather than save. |
| | D) | represents only spending by the poorest 1/5th of the population as they are the marginal consumers. |
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| 7.
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The marginal propensity to consume plus the marginal propensity to save: |
| | A) | always add to a number less than one. |
| | B) | always add to one. |
| | C) | can add to any number since they are independent data series. |
| | D) | generally add to a number larger than one since the poor consume while the rich save. |
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| 8.
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In the simple Keynesian model used in this chapter: |
| | A) | the multiplier is equal to 1/(1 - MPS). |
| | B) | the multiplier is equal to 1/(1 - MPC). |
| | C) | the multiplier is equal to 1/(1 + MPS). |
| | D) | the multiplier is equal to (1 - MPC)*10. |
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| 9.
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Disposable income consists of all income: |
| | A) | that is not needed to purchase essentials; hence, it is "disposable." |
| | B) | the amount of income given by the product of total income times the marginal propensity to consume since this yields total marginal or "disposable" income. |
| | C) | that remains after taxes. |
| | D) | that is disposed of by saving it. |
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| 10.
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A rightward shift in aggregate demand, especially when it is to the right of the full employment level of output: |
| | A) | increases output and employment but has no effect on prices. |
| | B) | decreases prices but has no effect on output. |
| | C) | increases both prices and output, running the risk of renewed inflation. |
| | D) | causes an increase in employment and output but a decrease in prices. |
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| 11.
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Fiscal policy deals with: |
| | A) | government spending. |
| | B) | taxes. |
| | C) | Both (a) and (b) are true. |
| | D) | None of the above is true. |
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| 12.
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Which is the largest component of AD? |
| | A) | Consumption |
| | B) | Investment |
| | C) | Government spending |
| | D) | Net exports |
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| 13.
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Which of the following is an example of investment? |
| | A) | Stocks |
| | B) | Bonds |
| | C) | Plant and equipment |
| | D) | None of the above is true. |
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| 14.
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Recently in the United States net exports have been ______. |
| | A) | positive. |
| | B) | negative. |
| | C) | zero. |
| | D) | None of the above is true. |
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| 15.
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Fiscal policy works mainly by changing the ______ curve. |
| | A) | aggregate demand |
| | B) | aggregate supply |
| | C) | Supply |
| | D) | None of the above is true. |
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| 16.
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Which of the following combinations represents a fiscal stimulus? |
| | A) | Increasing government spending and raising taxes |
| | B) | Decreasing government spending and lowering taxes |
| | C) | Increasing government spending and lowering taxes |
| | D) | Decreasing government spending and raising taxes |
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| 17.
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The MPS is: |
| | A) | the marginal propensity to save. |
| | B) | the change in savings divided by the change in income. |
| | C) | the fraction of additional income that is saved. |
| | D) | All of the above are true. |
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| 18.
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Fiscal restraint involves ______ government spending and ______ taxes. |
| | A) | increasing; increasing |
| | B) | decreasing; decreasing |
| | C) | increasing; decreasing |
| | D) | decreasing; increasing |
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| 19.
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Which of the following is appropriate if the economy is experiencing inflation? |
| | A) | Fiscal stimulus |
| | B) | Fiscal restraint |
| | C) | Both fiscal stimulus and fiscal restraint |
| | D) | Neither fiscal stimulus or fiscal restraint |
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| 20.
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A budget deficit occurs when government spending ______ tax revenues. |
| | A) | is greater than |
| | B) | is less than |
| | C) | equals |
| | D) | None of the above is true. |
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| 21.
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Which of the following policies is appropriate during a recession? |
| | A) | Raising taxes |
| | B) | Lowering taxes |
| | C) | Increasing government spending |
| | D) | Both (b) and (c) are true. |
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| 22.
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When consumers feel pessimistic and reduce their spending, _____ shifts to the _____. |
| | A) | AD; left |
| | B) | AD; right |
| | C) | AS; left |
| | D) | AS; right |
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| 23.
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What is meant by the term fiscal stimulus? |
| | A) | Tax increases or increases in government spending |
| | B) | Tax cuts or decreases in government spending |
| | C) | Tax increases or decreases in government spending |
| | D) | Tax cuts or increases in government spending |
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| 24.
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The sum of the MPC and the MPS must equal: |
| | A) | 0. |
| | B) | 1. |
| | C) | 10. |
| | D) | 100. |
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| 25.
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An increase in government spending would cause a: |
| | A) | leftward shift of the AS curve. |
| | B) | rightward shift of the AS curve. |
| | C) | leftward shift of the AD curve. |
| | D) | rightward shift of the AD curve. |
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| 26.
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The solution to unemployment or recession is to _____ AD by _____ government spending and _____ taxes. |
| | A) | increase; increasing; increasing |
| | B) | decrease; decreasing; decreasing |
| | C) | increase; increasing; decreasing |
| | D) | decrease; decreasing; increasing |
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| 27.
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Which of the following is fiscal policy concerned with? |
| | A) | government spending and the money supply |
| | B) | taxes and the money supply |
| | C) | government spending and taxes |
| | D) | interest rates and the money supply |
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| 28.
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Consumer spending accounts for about _____ of all spending in the economy. |
| | A) | one-quarter |
| | B) | one-third |
| | C) | one-half |
| | D) | two-thirds |
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| 29.
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For most of recent U.S. history the budget has been in _____. |
| | A) | balance. |
| | B) | deficit. |
| | C) | surplus. |
| | D) | None of the above is true. |
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