MODULE 21: Fiscal Policy and Multiplier Effects

Multiple-Choice Questions

Question

Which of the following will occur if the federal government reduces defense spending?
A.
Aggregate demand will increase.
B.
Aggregate demand will decrease.
C.
There will be no change in aggregate demand or supply.
D.
Aggregate supply will increase.
E.
Aggregate supply will decrease.

Which of the following will occur if the federal government reduces defense spending?
Question

Which of the following will occur if an increase in interest rates leads to a decrease in investment spending?
A.
Aggregate demand will increase.
B.
Aggregate demand will decrease.
C.
There will be no change in aggregate demand or supply.
D.
Aggregate supply will increase.
E.
Aggregate supply will decrease.

Which of the following will occur if an increase in interest rates leads to a decrease in investment spending?
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Question

Which of the following will occur as a result of an increase in the aggregate price level?
A.
Aggregate demand will increase.
B.
Aggregate demand will decrease.
C.
There will be no change in aggregate demand or supply.
D.
Aggregate supply will increase.
E.
Aggregate supply will decrease.

Which of the following will occur as a result of an increase in the aggregate price level?
Question

Which of the following will occur if the price of steel decreases as a result of the discovery of new deposits of iron ore used to make steel?
A.
Aggregate demand will increase.
B.
Aggregate demand will decrease.
C.
There will be no change in aggregate demand or supply.
D.
Aggregate supply will increase.
E.
Aggregate supply will decrease.

Which of the following will occur if the price of steel decreases as a result of the discovery of new deposits of iron ore used to make steel?
Question

Sticky nominal wages in the short run cause the short-run aggregate supply curve to
A.
shift to the right.
B.
shift to the left.
C.
slope upward.
D.
slope downward.
E.
be vertical.

Sticky nominal wages in the short run cause the shor
Question

As a result of the wealth effect, a higher aggregate price level will reduce which of the following?
A.
households’ purchasing power
B.
interest rates
C.
investment spending
D.
nominal wages
E.
aggregate demand

As a result of the wealth effect, a higher aggregate price level will reduce which of the following?
Question

The interest rate effect of a decrease in the aggregate price level will increase which of the following?
A.
the purchasing power of money holdings
B.
investment spending
C.
interest rates
D.
aggregate supply
E.
aggregate demand

The interest rate effect of a decrease in the aggregate price level will increase which of the following?
Question

Which of the following types of shocks poses a policy dilemma due to the inability to use stabilization policy to address inflation and unemployment at the same time?
A.
negative supply shock
B.
positive supply shock
C.
negative demand shock
D.
positive demand shock
E.
negative budget shock

Which of the following types of shocks poses a policy dilemma due to the inability to use stabilization policy to address inflation and unemployment at the same time?
Question

A higher aggregate price level leads to higher profit per unit of output and increased output in the short run because of which of the following?
A.
the wealth effect
B.
the interest rate effect
C.
sticky nominal wages
D.
productivity gains
E.
stabilization policy

A higher aggregate price level leads to higher profit per unit of output and increased output in the short run because of which of the following?
Question

If potential output is equal to actual aggregate output, which of the following is true?
A.
The economy is experiencing inflation.
B.
The economy is experiencing cyclical unemployment.
C.
Nominal wages are sticky.
D.
The economy is in long-run equilibrium.
E.
The aggregate price level is rising.

If potential output is equal to actual aggregate output, which of the following is true?
Question

Which of the following is true about the long-run aggregate supply curve?
A.
It is horizontal.
B.
It is the result of nominal wages being fully flexible.
C.
It is the result of sticky prices.
D.
It is upward sloping.
E.
It intersects the horizontal axis at the actual level of real GDP.

Which of the following is true about the lon
Question

Short-run equilibrium aggregate output is the quantity of aggregate output produced when
A.
the aggregate demand curve and the short-run aggregate supply curve are identical.
B.
the quantity of aggregate output supplied is equal to the quantity demanded.
C.
the economy reaches its potential output.
D.
the short-run aggregate supply curve is vertical.
E.
all prices, including nominal wages, are fully flexible.

Shor
Question

The collapse of wealth and business and consumer confidence that caused the Great Depression is an example of which type of shock?
A.
negative supply shock
B.
positive supply shock
C.
negative demand shock
D.
positive demand shock
E.
negative recessionary shock

The collapse of wealth and business and consumer confidence that caused the Great Depression is an example of which type of shock?
Question

Which of the following is an example of a positive demand shock?
A.
a large increase in defense spending
B.
the stock market crash of 1929
C.
the discovery of a large, previously unknown oil field
D.
a reduction in the aggregate price level
E.
an increase in nominal wages

Which of the following is an example of a positive demand shock?
Question

A positive supply shock will lead to which of the following?
A.
stagflation
B.
an increase in the aggregate price level
C.
a recession
D.
a rightward shift of the short-run aggregate supply curve
E.
an increase in aggregate output along with inflation

A positive supply shock will lead to which of the following?
Question

Which of the following is an example of a negative supply shock?
A.
Production costs decrease.
B.
Information technologies lead to productivity growth.
C.
The stock market collapses.
D.
The government runs a budget deficit.
E.
World oil supplies are disrupted.

Which of the following is an example of a negative supply shock?
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Question

Which of the following is true when the economy is experiencing a recessionary gap?
A.
Potential output is below aggregate output.
B.
Aggregate demand is below aggregate supply.
C.
There is high unemployment.
D.
The aggregate price level is rising.
E.
The economy has self-corrected.

Which of the following is true when the economy is experiencing a recessionary gap?
Question

When the economy is experiencing an inflationary gap, the output gap is
A.
positive.
B.
negative.
C.
zero.
D.
decreasing.
E.
increasing.

When the economy is experiencing an inflationary gap, the output gap is
Question

Which of the following leads to self-correction when the economy is experiencing a recessionary gap?
A.
Nominal wages and prices rise.
B.
The short-run aggregate supply curve decreases.
C.
The long-run aggregate supply curve decreases.
D.
The short-run aggregate supply curve shifts to the right.
E.
Unemployment leads to an increase in aggregate demand.

Which of the following leads to sel
Question

Which type of policy can be used to address a decrease in aggregate output to below potential output?
A.
expansionary
B.
contractionary
C.
indiscretionary
D.
recessionary
E.
inflationary

Which type of policy can be used to address a decrease in aggregate output to below potential output?
Question

If the marginal propensity to consume is equal to 0.80, the spending multiplier is
A.
0.80
B.
1.25
C.
4.00
D.
−4.00
E.
5.00

If the marginal propensity to consume is equal to 0.80, the spending multiplier is
Question

If the marginal propensity to consume is 0.75, an initial increase in aggregate spending of $1,000 will lead to a total change in real GDP equal to
A.
$750
B.
$1,000
C.
$1,333
D.
$4,000
E.
$7,500

If the marginal propensity to consume is 0.75, an initial increase in aggregate spending of $1,000 will lead to a total change in real GDP equal to
Question

If the marginal propensity to consume is 0.9, every $10 billion increase in taxes will cause a change in spending equal to
A.
$100 billion.
B.
$90 billion.
C.
$9 billion.
D.
−$10 billion.
E.
−$90 billion.

If the marginal propensity to consume is 0.9, every $10 billion increase in taxes will cause a change in spending equal to
Question

Compared to an increase in taxes, an equal-sized increase in government spending will have what effect on real GDP?
A.
a larger, negative effect
B.
a smaller, negative effect
C.
a larger, positive effect
D.
a smaller, positive effect
E.
an equal, offsetting effect

Compared to an increase in taxes, an equa
Question

Which of the following is an example of an automatic stabilizer?
A.
the Works Progress Administration established during the Great Depression
B.
lump-sum taxes
C.
a balanced budget requirement for the government
D.
sales taxes
E.
economic stimulus checks from the government

Which of the following is an example of an automatic stabilizer?