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1
Answer the next question using the following graph:

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Refer to the graph. Suppose the full-employment level of GDP is Q1, but a significant decline in investment demand has pushed the economy into recession as shown by the decline in aggregate demand to AD2. Currently, output is at Q3 and there is a negative GDP gap (Q3Q1) of $100 billion. If the multiplier is 5, which of the following would most likely move the economy back to its full potential?
A)A tax cut of $20 billion
B)Increased government spending of $20 billion
C)A tax cut of $100 billion
D)Increased government spending of $100 billion
2
Use the following table of hypothetical budget data to answer the next question:

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Refer to the table. The changes in the budget conditions between 2008 and 2009 best reflect:
A)demand-pull inflation.
B)a cut in government spending.
C)a tax increase.
D)an expansionary fiscal policy.
3
Of the following groups, the largest proportion of the total public debt is held by:
A)foreign individuals and institutions.
B)U.S. government agencies, including the Federal Reserve.
C)State and local governments.
D)U.S. banks and other financial institutions.
4
The effectiveness of an expansionary fiscal policy will be reduced if:
A)increased government borrowing increases interest rates, causing a reduction in private investment.
B)it is accompanied by a cut in Social Security taxes as well.
C)the price level falls.
D)stock prices rise.
5
Suppose the full-employment level of GDP is $250 billion in a hypothetical economy. Currently, aggregate expenditures total $270 billion. Which of the following would be most in accord with appropriate fiscal policy?
A)Lower tax rates on corporate income
B)Reducing or limiting personal deductions and credits when figuring personal income taxes
C)Expanded spending on new domestic security programs
D)Decreases in interest rates
6
Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment?
A)A tax cut in a recession
B)A tax increase during inflation
C)An increase in government spending during a recession
D)A decrease in government spending in a recession
7
Answer the next question using the following graph:

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Refer to the graph. If AD1 represents the current level of expenditures and Q2 is the full-employment level of GDP, the government should undertake:
A)an expansionary fiscal policy that reduces aggregate demand to AD2.
B)an expansionary fiscal policy that reduces aggregate demand to AD3.
C)a contractionary fiscal policy that reduces aggregate demand to AD2.
D)b. a contractionary fiscal policy that reduces aggregate demand to AD3.
8
Built-in stabilizers:
A)automatically increase the size of deficits when the economy experiences demand-pull inflation.
B)avoid the problems associated with the administrative lag of discretionary fiscal policy.
C)automatically produce a budget that is balanced over the business cycle.
D)tend to offset the impact of discretionary fiscal policy.
9
Answer the next question on the basis of the following diagram.

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An expansionary fiscal policy is best represented by graph:
A)A.
B)B.
C)C.
D)D.
10
Which of the following exemplifies the crowding-out effect? An increase in government spending:
A)is financed by increasing the money supply, reducing interest rates and causing net exports to fall.
B)is financed by borrowing, raising interest rates and causing private investment to fall.
C)causes taxes to rise automatically, reducing consumption spending.
D)causes the price level to rise, reducing net exports.







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