Week 7 Quiz

Which of these actions is fiscal policy?

Select one.

• The legislature cuts the income-tax rate for every household
• The central bank buys government bonds from banks
• The central bank lowers the reserve requirement for banks
• A bank lends out its excess reserves to a builder

The legislature funds a new road project, so government purchases rise. On the AD–AS diagram, what happens?

Select one.

• Aggregate demand shifts left, so the price level and real output both fall
• Aggregate demand shifts right, so the price level and real output both rise
• Short-run aggregate supply shifts right, so the price level falls and real output rises
• The economy moves along aggregate demand, and neither curve shifts

A rise in the income-tax rate is contractionary fiscal policy: it shifts aggregate demand to the left, so the price level and real output both fall.

True or false.

• True
• False

In the illustrative economy, the marginal propensity to consume is 0.8. What is the spending multiplier?

Select one.

• 1.25
• 4
• 5
• 10

In the illustrative economy, the marginal propensity to consume is 0.8 and the government spends 20 billion dollars more on a road project. In the simple model, by how much does real output rise?

Select one.

• 16 billion dollars
• 20 billion dollars
• 25 billion dollars
• 100 billion dollars

In the illustrative economy, the marginal propensity to consume is 0.8, so the tax multiplier is −4. The government cuts taxes by 20 billion dollars. In the simple model, by how much does real output rise?

Select one.

• 100 billion dollars
• 80 billion dollars
• 20 billion dollars
• 200 billion dollars

A news story asks how much a new 20-billion-dollar road project will add to the economy's output. Which formula belongs on that question?

Select one.

• The spending multiplier, which scales new spending into output
• The money multiplier, which scales new bank reserves into money
• The marginal propensity to consume by itself, with no multiplier
• The tax multiplier, which scales a change in taxes into output

Select every change that is an automatic stabilizer.

Select every option that applies.

• Income-tax collections fall as paychecks shrink in a slump
• Unemployment-insurance payments rise as layoffs spread
• The legislature passes a new bill to fund bridge repairs
• The central bank lowers its interest-rate target
• The legislature votes a one-time tax rebate

In the illustrative budget, the government collects revenue of 400 billion dollars and spends 450 billion dollars in a year. It began the year owing 1,000 billion dollars. What does it owe at the end of the year?

Select one.

• 50 billion dollars
• 950 billion dollars
• 1,050 billion dollars
• 1,450 billion dollars

Economists disagree about using fiscal policy in a recession. Which statement is a positive claim, one that evidence could test?

Select one.

• The government ought to cut spending until the debt stops growing
• Protecting jobs in a slump matters more than keeping the debt small
• Every recession is a good time for the government to spend more
• Extra government borrowing can raise interest rates and reduce private investment