Government Fiscal Policy

1. You are an advisor to the current President of the U.S. and the economy is currently experiencing 30% unemployment rates. What do you suggest that the President should do with taxes and government spending in order to decrease the unemployment rate.

A. The president should set government spending just equal to tax revenue no matter what the unemployment rate is.

B. increase taxes and decrease government spending.

C. increase both taxes and government spending.

D. decrease both taxes and government spending.

E. decrease taxes and increase government spending.

2. An increase in government spending of $1 will increase equilibrium national output and income by _______ than $1 because:

A. more, because the government always increases its spending by increasing the money supply.

B. less, since the government must also increase taxes in order to increase its spending.

C. more, because as income increases individuals in the economy will be induced to consume more as well.

D. less, because interest rates must rise as the government increases its spending which will in turn lower investment spending.

Use the following information to answer question 3

3. Suppose the government decided to increase taxes from 100 B to 200 B and, at the same time, increases government spending to $500 B. What is the new equilibrium level of income and consumption (all numbers are rounded to the nearest billion).

A. $4250 B (Y), $3795 B (C)

B. $8050 B (Y), $7395 B (C)

C. $8050 B (Y), $7215 B (C)

D. $4450 B (Y), $3975 B (C)

E. none of the above.

4. The fact that the Great Depression ended when government spending soared at the start of World War II:

A. disproved Keynesian macroeconomic theory.

B. proved classical macroeconomic theory.

C. was predicted by Keynesian macroeconomic theory.

D. was predicted by classical macroeconomic theory.

5. If the MPC = .6 and you wanted equilibrium output to rise by $60 Billion, the appropriate cut in autonomous taxes would be:

A. $15 B.

B. $24 B.

C. $36 B.

D. $40 B.

E. none of the above.

6. If the MPC = .6 and the government budget must be balanced (G = T), a fiscal policy intended to increase output by $60 billion would be to raise G and T each by:

A. $15 B.

B. $24 B.

C. $36 B.

D. $40 B.

E. $60 B.

7. Government efforts to achieve stability by changing tax and spending policies are part of:

A. fiscal policy.

B. monetary policy.

C. wage and price controls.

D. industrial policy.

E. discretionary policy.

8. Suppose that the government spends $10 billion on a new space station and assume that the simple Keynesian multiplier equals 5. Count the initial $10 B as the first round. Total new income generated after three rounds of spending would be:

A. $30 B.

B. $24.4 B.

C. $20 B.

D. $50 B.

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