Krugman Macroeconomics 3e (Econ) Chapter 13

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Total score: 19 out of 20, 95%

1. Discretionary fiscal policy is the use of:

a. interest rate changes to affect aggregate demand.
b. interest rate changes to affect aggregate supply.
c. government spending or tax policy to manage aggregate demand.
d. government spending or tax policy to manage aggregate supply.

1 out of 1
Correct! Congress may elect to enact fiscal policy measures when
the economy is either sluggish or overheated. Section: Fiscal Policy:
The Basics
2. The largest categories of government purchases of goods and services
are:
a. national defense and education.
b. scientific research and foreign aid.
c. border patrol and interstate highway maintenance.
d. law enforcement and environmental protection.

1 out of 1
Correct! National defense accounts for about 15% (as of 2007) and
education about 17% of government purchases of goods and
services. Section: Fiscal Policy: The Basics
3. When the government makes a payment to an individual for which no
good or service is provided in return, this is referred to as a:
a. public exchange.
b. private exchange.
c. reverse tax.
d. transfer payment.

1 out of 1
Correct! Social Security is a transfer payment program. Section:
Fiscal Policy: The Basics
4. Social Security, Medicare, and Medicaid are the three main:
a. tools of discretionary fiscal policy.

b. social insurance programs.

c. sources of aggregate demand.
d. sources of disposable income.

0 out of 1
Incorrect! Consider the intent of these federal programs. Section:
Fiscal Policy: The Basics
5. Disposable income is the:
a. amount of household income collected as tax revenue.
b. total income households have available to spend.
c. portion of household income saved.
d. portion of household income invested.

1 out of 1
Correct! This is commonly referred to as after-tax income. Section:
Fiscal Policy: The Basics
6. A recessionary gap occurs when:
a. aggregate output falls below potential output.
b. potential output falls below aggregate output.
c. transfer payments undermine incentives to work.
d. taxes on corporate profits undermine incentives to invest.

1 out of 1
Correct! Unemployment is likely to arise in this situation, and there
will be pressure on the federal government to stimulate economic
activity. Section: Fiscal Policy: The Basics
7. To address a recessionary gap, the appropriate fiscal policy would be an
increase in:
a. personal taxes.
b. corporate taxes.
c. government spending.
d. interest rates.

1 out of 1
Correct! Added government spending will increase aggregate
demand. Section: Fiscal Policy: The Basics

8. The effect of expansionary fiscal policy is to shift aggregate:

a. supply to the left.
b. supply to the right.
c. demand to the left.
d. demand to the right.

1 out of 1
Correct! The demand shift to the right will generate a higher level of
real GDP, if the economy is starting from a position of a
recessionary gap. Section: Fiscal Policy: The Basics
9. Which of the following is NOT an example of contractionary fiscal policy?
a. decreasing the money supply
b. decreasing government spending
c. decreasing transfer payments
d. increasing taxes

1 out of 1
Correct! A decrease in the money supply might dampen economic
activity, but it is not a fiscal policy measure. Section: Fiscal Policy:
The Basics
10. Which of the following would shift aggregate demand to the left?
a. an increase in government transfer payments that affects disposable income
b. a decrease in taxes that affects disposable income
c. an increase in taxes that affects disposable income
d. an increase in private investment spending, funded by tax cuts

1 out of 1
Correct! Such a policy measure might be appropriate when the
economy is in an inflationary gap. Section: Fiscal Policy: The Basics
11. Lags that arise in the implementation of fiscal policy mean that:
a. expansionary fiscal policy will actually shift aggregate demand to the left, rather than
to the right.
b. expansionary fiscal policy will actually shift aggregate supply, rather than aggregate
demand.
c. increases in government spending will actually have a contractionary effect.
d. policy measures may not have an impact when they are most needed.

1 out of 1
Correct! When lags are present, it means that a stimulative policy

may only take effect when the economy is already recovering on its
own. Section: Fiscal Policy: The Basics
12. The 2009 Recovery Act was an example of:
a. shifting aggregate demand to the left.
b. shifting short-run aggregate supply to the right.
c. contractionary fiscal policy.
d. expansionary fiscal policy.

1 out of 1
Correct! The stimulus package was a combination of tax decreases
and increased government spending. Section: Fiscal Policy and the
Multiplier
13. The amount of the aggregate demand shift in response to an increase in
government spending depends on:
a. the slope of the short-run aggregate supply curve.
b. the slope of the long-run aggregate supply curve.
c. the size of the multiplier.
d. whether the increase in government spending is supported by both political parties.

1 out of 1
Correct! It also depends to some extent on how the additional
spending is directed within the economy. Section: Fiscal Policy and
the Multiplier
14. A $75 billion tax cut will:
a. increase GDP by the same amount as a $75 billion increase in government purchases
of goods and services.
b. increase GDP by a smaller amount than would a $75 billion increase in government
purchases of goods and services.
c. not affect aggregate demand, as it will only shift aggregate supply.
d. increase the marginal propensity to consume, thereby decreasing the value of the
multiplier.

1 out of 1
Correct! Not all of the tax cut will be spent. Section: Fiscal Policy
and the Multiplier
15. Because transfer payments rise when the economy is contracting and fall
when it is expanding, they are referred to as:
a. automatic stabilizers.
b. discretionary policy measures.

c. fiscal lags.
d. zero-balance accounts.

1 out of 1
Correct! Transfer programs such as unemployment benefits serve to
boost aggregate demand above what it would be otherwise during
periods of high unemployment. Section: Fiscal Policy and the
Multiplier
16. Which of the following statements is true?
a. The presence of a budget deficit is proof that government is trying to expand
aggregate demand.
b. Tax cuts will not boost aggregate demand unless the money is saved by consumers
and then invested by businesses.
c. Because transfer payments typically rise during an economic recovery, they
destabilize the economy.
d. When the marginal propensity to consume is high, an increase in government
spending will have a larger effect on aggregate demand than when it is low.

1 out of 1
Correct! A higher value for the marginal propensity to consume
means a larger value for the multiplier. Section: The Budget
Balance
17. The government budget deficit is MOST likely to rise when the:
a. interest rate falls.
b. interest rate rises.
c. unemployment rate rises.
d. economy recovers from a recession.

1 out of 1
Correct! This relationship is supported by empirical
evidence. Section: The Budget Balance
18. A requirement to have an annually balanced federal budget would mean
that:
a. there would be no more recessionary gaps or inflationary gaps.
b. the role of taxes and transfers as automatic stabilizers would be undermined.
c. total household disposable income would be the same every year.
d. actual GDP would equal potential GDP every year.

1 out of 1
Correct! In a recession year, when tax receipts are low, transfer

payments would have to be cut in order to maintain an annually

balanced federal budget. Section: The Budget Balance
19. The implicit liabilities of the U.S. government:
a. cannot continually be honored as they are designed, given demographic trends.
b. are a problem in the short run, but not in the long run.
c. are not a cause for worry unless they lead to crowding out.
d. are designed to offset an inflationary gap when it arises.

1 out of 1
Correct! Within a few years, the number of workers paying into the
Social Security system will not be enough to sustain benefit
payments at current levels. Section: Long-Run Implications of Fiscal
Policy
20. A cyclically adjusted budget:
a. is made during a business cycle.
b. estimates what budget balance would be if the economy were at potential output.
c. Includes years in which the economy had recessionary gaps.
d. fluctuates more than an actual budget deficit.

1 out of 1
Correct! Recessions move the budget balance towards deficit and
expansions move it towards surpluses. Cyclically adjusted budgets
remove the impacts of the business cycle. Section: The Business
Cycle and the Cyclically Adjusted Budget Balance.