1 The expenditure multiplier indicates that a changes in investment government or consumption spending can trigger much larger changes in output b an increase in saving will cause output to rise by a multiple of the additional saving c a market economy will be more stable than classical economists thought d the marginal propensity to consume is greater than one 2 Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called a business cycle fiscal policy b new classical fiscal policy c supply side fiscal policy d countercyclical fiscal policy 3 Which of the following best expresses the central idea of countercyclical fiscal policy a Planned deficits are experienced during economic booms and planned surpluses during economic recessions b The balanced budget approach is the proper criterion for determining annual budget policy c Actual deficits should equal actual surpluses during a period of deflation d Deficits are planned during economic recessions and surpluses are utilized to restrain inflationary booms 4 If the economy is experiencing less than full employment the Keynesian model recommends that the government a do nothing to stimulate the economy b undertake expansionary fiscal policy to stimulate aggregate demand c undertake expansionary fiscal policy to stimulate aggregate supply d balance the budget to stimulate aggregate demand Figure 11 4 5 According to Keynesian analysis which of the following policy combinations would most likely to move the economy illustrated in Figure 11 4 to full employment a increase both taxes and government transfer payments b reduction in government purchases and increase in taxes c increase in government purchases and reduction in taxes d increase in taxes to reduce the government deficit 6 Automatic stabilizers are government programs that tend to a reduce the ups and downs in aggregate demand without legislative action b bring expenditures and revenues automatically into balance without legislative action c signal Congress that legislative changes are needed d increase tax collections automatically during a recession 7 According to Keynesian theory which of the following would most likely stimulate an expansion in real output if the economy were in a recession a an increase in tax rates b a balanced budget c a budget deficit d a budget surplus 8 If output is less than full employment in the Keynesian model what is needed to restore full employment a an increase in the price level b an increase in aggregate demand c a reduction in government expenditure Answers 1 A 2 D 3 D 4 B 5 C 6 A 7 C 8 B
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