ECON 400 EXAM 2 QUESTIONS AND ANSWERS
If the government ran a major deficit, and there was no noticeable effect on the level of
GDP, this could be taken as evidence of
a. the Laffer curve effect
b. structural deficit
c. monetary policy ineffectiveness
d. crowding-out - Answers - d. crowding-out
Which of the following best expresses the central idea of countercyclical fiscal policy?
a. actual deficits should equal actual surpluses during a period of deflation
b. planned deficits are experienced during economic booms and planned surpluses
during economic recessions
c. the balanced-budget approach is the proper criterion for determining annual budget
policy
d. deficits are planned during economic recessions, and surpluses are utilized to
restrain inflationary booms - Answers - d. deficits are planned during economic
recessions, and surpluses are utilized to restrain inflationary booms
When an economy is operating well below its full-employment capacity and the marginal
propensity to consume is 3/4, a $10 billion increase in investment will cause the
equilibrium income to rise by
a. $40 billion
b. $5 billion
c. $10 billion
d. $20 billion - Answers - a. $40 billion
It will be difficult to institute fiscal policy in a stabilizing manner because politicians will
find
a. it more attractive to raise taxes than to increase spending
b. it attractive to increase taxes during a recession, but they will be reluctant to reduce
them during an expansion
c. budget surpluses attractive during a recession, but they will be reluctant to run budget
deficits during an expansion
d. budget deficits attractive during a recession, but they will be reluctant to run budget
surpluses during an expansion - Answers - d. budget deficits attractive during a
recession, but they will be reluctant to run budget surpluses during an expansion
Keynesian analysis indicates that an unexpected decline in aggregate demand will lead
to
, a. an increase in inventories and a reduction in output
b. lower interest rates, which will stimulate aggregate demand and keep the economy at
full employment
c. a reduction in inventories and an expansion in employment
d. a lower price level, which will quickly guide the economy to full-employment
equilibrium. - Answers - a. an increase in inventories and a reduction in output
If an economy is experiencing both full employment and price stability, within the
Keynesian model, a major tax reduction probably would cause
a. a decrease in consumption unless the expected budget deficit is financed by selling
bonds to foreigners
b. an increase in the interest rate since individuals will reduce their savings in response
to the tax cut
c. an increase in the general level of prices unless government expenditures are also
reduced
d. an increase in unemployment in the near future. - Answers - c. an increase in the
general level of prices unless government expenditures are also reduced
The expansionary effects of an increase in government expenditures will tend to be
offset, at least partially, if
a. the economy is operating well below its full-employment capacity
b. business decision-makers and consumers become more optimistic as the result of
the fiscal stimulus
c. government borrowing drives interest rates upward
d. taxes are not also increased. - Answers - c. government borrowing drives interest
rates upward
As the marginal propensity to consume (MPC) increases, the expenditure multiplier
a. increases
b. decreases
c. remains constant
d. becomes indefinable - Answers - a. increases
Keynesian economists believed that the prolonged unemployment of the 1930s was the
result of
a. the high interest rates of the 1930s
b. the sharp reduction in the supply of money during 1929-1933 and another monetary
contraction in 1938
c. insufficient aggregate demand and the failure of market forces to direct the economy
back to full employment
d. the double-digit inflation of the 1930s - Answers - c. insufficient aggregate demand
and the failure of market forces to direct the economy back to full employment
If the government ran a major deficit, and there was no noticeable effect on the level of
GDP, this could be taken as evidence of
a. the Laffer curve effect
b. structural deficit
c. monetary policy ineffectiveness
d. crowding-out - Answers - d. crowding-out
Which of the following best expresses the central idea of countercyclical fiscal policy?
a. actual deficits should equal actual surpluses during a period of deflation
b. planned deficits are experienced during economic booms and planned surpluses
during economic recessions
c. the balanced-budget approach is the proper criterion for determining annual budget
policy
d. deficits are planned during economic recessions, and surpluses are utilized to
restrain inflationary booms - Answers - d. deficits are planned during economic
recessions, and surpluses are utilized to restrain inflationary booms
When an economy is operating well below its full-employment capacity and the marginal
propensity to consume is 3/4, a $10 billion increase in investment will cause the
equilibrium income to rise by
a. $40 billion
b. $5 billion
c. $10 billion
d. $20 billion - Answers - a. $40 billion
It will be difficult to institute fiscal policy in a stabilizing manner because politicians will
find
a. it more attractive to raise taxes than to increase spending
b. it attractive to increase taxes during a recession, but they will be reluctant to reduce
them during an expansion
c. budget surpluses attractive during a recession, but they will be reluctant to run budget
deficits during an expansion
d. budget deficits attractive during a recession, but they will be reluctant to run budget
surpluses during an expansion - Answers - d. budget deficits attractive during a
recession, but they will be reluctant to run budget surpluses during an expansion
Keynesian analysis indicates that an unexpected decline in aggregate demand will lead
to
, a. an increase in inventories and a reduction in output
b. lower interest rates, which will stimulate aggregate demand and keep the economy at
full employment
c. a reduction in inventories and an expansion in employment
d. a lower price level, which will quickly guide the economy to full-employment
equilibrium. - Answers - a. an increase in inventories and a reduction in output
If an economy is experiencing both full employment and price stability, within the
Keynesian model, a major tax reduction probably would cause
a. a decrease in consumption unless the expected budget deficit is financed by selling
bonds to foreigners
b. an increase in the interest rate since individuals will reduce their savings in response
to the tax cut
c. an increase in the general level of prices unless government expenditures are also
reduced
d. an increase in unemployment in the near future. - Answers - c. an increase in the
general level of prices unless government expenditures are also reduced
The expansionary effects of an increase in government expenditures will tend to be
offset, at least partially, if
a. the economy is operating well below its full-employment capacity
b. business decision-makers and consumers become more optimistic as the result of
the fiscal stimulus
c. government borrowing drives interest rates upward
d. taxes are not also increased. - Answers - c. government borrowing drives interest
rates upward
As the marginal propensity to consume (MPC) increases, the expenditure multiplier
a. increases
b. decreases
c. remains constant
d. becomes indefinable - Answers - a. increases
Keynesian economists believed that the prolonged unemployment of the 1930s was the
result of
a. the high interest rates of the 1930s
b. the sharp reduction in the supply of money during 1929-1933 and another monetary
contraction in 1938
c. insufficient aggregate demand and the failure of market forces to direct the economy
back to full employment
d. the double-digit inflation of the 1930s - Answers - c. insufficient aggregate demand
and the failure of market forces to direct the economy back to full employment
