Principles of Macroeconomics - Fiscal Policy Practice Set
1. Suppose in a simple economy with no foreign sector, the mpc is equal to 0.9. How much of a lump sum tax (ΔT) would be needed to raise output by 100 million?
a. 10 million b. 11.1 million
c. 33.3 million d. 100 million
2. Suppose in a simple economy with no foreign sector, the mpc is equal to 0.8. If the government increased government spending by $30 million, and it simultaneously raised taxes by $30 million, how much will be the change in output (ΔY)?
a. Output will increase by $15 million
b. Output will increase by $30 million
c. There will be no change in output
d. Output will decrease by $30 million
3. The government of Pakistan approves a budget proposal with new tax cuts and increases in government spending. This would be an example of:
a. Automatic stabilizers b. Discretionary policy
c. Contractionary fiscal policy d. Supply side policy
4. Fiscal policy refers to changes in
A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
C) federal taxes and purchases that are intended to fund the war on terrorism.
D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
5. The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of
A) automatic stabilizers. B) discretionary fiscal policy.
C) discretionary monetary policy. D) automatic monetary policy.
6. Which of the following would not be considered an automatic stabilizer?
A) legislation increasing funding for job retraining passed during a recession
B) decreasing unemployment insurance payments due to decreased jobless during an expansion
C) rising income tax collections due to rising incomes during an expansion
D) declining food stamp payments due to more persons finding jobs during an expansion
7. Expansionary fiscal policy involves
A) increasing government purchases or decreasing taxes.
B) increasing taxes or decreasing government purchases.
C) increasing the money supply and decreasing interest rates.
D) decreasing the money supply and increasing interest rates.
8. If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices.
D) taxes.
9. Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________ than otherwise.
A) higher; higher B) higher; lower
C) lower; higher D) lower; lower
10. Which of the following would be most likely to induce the Prime Minister of Pakistan conduct contractionary fiscal policy? A significant
A) decrease in oil prices. B) decrease in real GDP.
C) increase in inflation. D) increase in labor productivity.
11. If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.
A) $7.25 trillion B) $1 trillion
C) $500 billion D) $250 billion
12. If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.
A) $250 billion
B) $400 billion
C) $640 billion
D) None of the above are correct. Taxes should be increased in this case.
13. A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
A) increase; rise; falls
B) increase; fall; rises
C) decrease; rise; falls
D) decrease; fall; rises
14. An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
A) increase; rise; falls
B) increase; fall; rises
C) decrease; rise; falls
D) decrease; fall; rises
Problem
1.Assume that, without taxes, the consumption schedule for an economy is as shown below:
a. Graph this consumption schedule and determine the size of the MPC.
b. Assume a lump sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with that of the pretax consumption schedule.
c. Now suppose a proportional tax system with a 10 percent tax rate is imposed instead of the regressive system. Calculate the new consumption schedule, graph it, and note the MPC and the multiplier.
d. Impose a progressive tax system such that the tax rate is zero percent when GDP is $100, 5 percent at $200, 10 percent at $300, 15 percent at $400, and so forth. Determine and graph the new consumption schedule, noting the effect of the tax system on the MPC and multiplier.
e. Which tax system contributes to greater economic stability?