AP Economics
Chapter 30
Practice Test
1. When the Federal government uses taxation and spending actions to stimulate the
economy it is conducting:
A. Fiscal policy
B. Incomes policy
C. Monetary policy
D. Employment policy
2. When the Federal government takes budgetary action to stimulate the economy or rein
in inflation, such policy is:
A. Active Monetary Policy
B. Automatic Fiscal Policy
C. Discretionary Fiscal Policy
D. Active Federal Policy
3. When changes in taxes and government spending occur in the economy without
explicit action by Congress, such policy is:
A. Cyclical
B. Implicit
C. Discretionary
D. Nondiscretionary
7. If Congress passes legislation to increase government spending to counter the effects
of a recession, then this would be an example of a(n):
A. Supply-side fiscal policy
B. Expansionary fiscal policy
C. Contractionary fiscal policy
D. Nondiscretionary fiscal policy
9. The set of fiscal policies that would be most contractionary would be a(n):
A. Increase in government spending and taxes
B. Decrease in government spending and taxes
C. Increase in government spending and a decrease in taxes
D. Decrease in government spending and an increase in taxes
10. The intent of contractionary fiscal policy is to:
A. Increase aggregate demand
B. Decrease aggregate demand
C. Increase aggregate supply
D. Decrease aggregate supply
11. The goal of expansionary fiscal policy is to increase:
A. The price level
B. Aggregate supply
C. Real GDP
D. Unemployment
13. Refer to the above graph. What combination would most likely cause a shift from
AD1 to AD2?
A. An increase in taxes and an increase in government spending
B. A decrease in taxes and an increase in government spending
C. An increase in taxes and no change in government spending
D. A decrease in taxes and a decrease in government spending
14. Refer to the above graph. What combination would most likely cause a shift from
AD1 to AD3?
A. An increase in taxes and an increase in government spending
B. A decrease in taxes and an increase in government spending
C. An increase in taxes and a decrease in government spending
D. A decrease in taxes and a decrease in government spending
21. The economy starts out with a balanced Federal budget. If the government then
implements expansionary fiscal policy, then there will be a:
A. Trade deficit
B. Trade surplus
C. Budget deficit
D. Budget surplus
22. Contractionary fiscal policy would tend to make a budget deficit become:
A. Bigger
B. Smaller
C. A trade deficit
D. A trade surplus
27. When government spending is increased, the amount of the increase in aggregate
demand primarily depends on:
A. The average propensity to consume
B. The size of the multiplier
C. Income taxes
D. Exchange rates
32. An economy is experiencing a high rate of inflation. The government wants to reduce
consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how
much should the government raise taxes to achieve its objective?
A. $6 billion
B. $9 billion
C. $12 billion
D. $16 billion
35. In an economy, the government wants to increase aggregate demand by $60 billion at
each price level to increase real GDP and reduce unemployment. If the MPC is 0.9, then
it could:
A. Decrease taxes by $6 billion
B. Decrease taxes by $12 billion
C. Increase government spending by $6 billion
D. Increase government spending by $12 billion
36. In an economy, the government wants to decrease aggregate demand by $48 billion at
each price level to decrease real GDP and control demand-pull inflation. If the MPS is
0.25, then it could:
A. Increase taxes by $16 billion
B. Increase taxes by $24 billion
C. Decrease government spending by $10 billion
D. Decrease government spending by $16 billion
37. As the economy declines into recession, the collection of personal income tax
revenues automatically falls. This relationship best describes how the progressive income
tax system:
A. Increases crowding out in the economy
B. Decreases real interest rates in the economy
C. Offsets the timing problem for fiscal policy
D. Serves as an automatic stabilizer for the economy
38. Which of the following is an example of built-in stability? As real GDP decreases,
income tax revenues:
A. Increase and transfer payments decrease
B. Decrease and transfer payments increase
C. And transfer payments both decrease
D. And transfer payments both increase
45. Refer to the above graph. A budget surplus would be associated with GDP level:
A. H
B. J
C. K
D. L
46. In the above graph, tax revenues vary:
A. Directly with the level of GDP
B. Inversely with the level of GDP
C. Directly with the level of government spending
D. Inversely with the level of government spending
47. Refer to the above graph. Automatic stability in this economy could be enhanced by:
A. Changing the tax system so that the tax line has a steeper slope
B. Changing the tax system so that the tax line is shifted upward but parallel to its present
position
C. Changing the government expenditures line so that it has a positive slope
D. Changing the tax system so that the tax line has a flatter slope
50. The built-in stabilizers in the economy tend to:
A. Fully offset irregular swings in real GDP
B. Magnify somewhat the irregular swings in real GDP
C. Dampen the irregular swings in real GDP
D. Overcompensate for the irregular swings in real GDP
51. Which of the following serves as an automatic stabilizer in the economy?
A. Interest rates
B. Exchange rates
C. The inflation rate
D. The progressive income tax
75. One timing problem with fiscal policy to counter a recession is a "recognition lag"
that occurs between the:
A. Start of the recession and the time it takes to recognize that the recession has started
B. Start of a predicted recession and the actual start of the recession
C. Time fiscal action is taken and the time that the action has its effect on the economy
D. Time the need for the fiscal action is recognized and the time that the action is taken
76. One timing problem with fiscal policy to counter a recession is an "operational lag"
that occurs between the:
A. Start of the recession and the time it takes to recognize that the recession has started
B. Start of a predicted recession and the actual start of the recession
C. Time fiscal action is taken and the time that the action has its effect on the economy
D. Time the need for the fiscal action is recognized and the time that the action is taken
81. During a recession, fiscal policy is typically:
A. Pro-cyclical at the Federal level and pro-cyclical at the state level
B. Counter-cyclical at the Federal level and pro-cyclical at the state level
C. Pro-cyclical at the Federal level and counter-cyclical at the state level
D. Counter-cyclical at the Federal level and counter-cyclical at the state level
82. State and local governments are limited in their ability to respond to recessions
because of:
A. Local politics and politicians
B. Their desire to always run budget surpluses
C. The lack of proper economic research and assistance
D. Constitutional and other requirements to balance their budgets
84. If people expected that a tax cut was temporary, then this fiscal policy's effect on the
economy will tend to be:
A. Stronger
B. Weaker
C. The exact opposite of what was intended
D. As the multiplier effect would predict
85. The crowding-out effect suggests that:
A. Increases in consumption are always at the expense of saving
B. Increases in government spending will close a recessionary expenditure gap
C. Increases in government spending may reduce private investment
D. High taxes reduce both consumption and saving
86. The crowding-out effect arises when:
A. Government lends in the money market, thus decreasing interest rates
B. Government borrows in the money market, thus decreasing interest rates
C. Government lends in the money market, thus increasing interest rates
D. Government borrows in the money market, thus causing an increase in interest rates
89. The crowding-out effect tends to be stronger when the economy:
A. Has a lot of excess productive capacity
B. Is at, or close to, full employment
C. Has a very small net exports or foreign sector
D. Is a very open economy with a large foreign sector
98. A Federal budget deficit exists when:
A. Federal government assets are less than liabilities
B. Federal government spending exceeds tax revenues
C. Federal government spending is increasing
D. Federal government taxation is decreasing
100. The public debt is the:
A. Amount of U.S. paper currency in circulation
B. Ratio of all past deficits to all past surpluses
C. Total of all past deficits minus all past surpluses
D. Difference between current government expenditures and revenues
108. As of 2009, most of the U.S. Federal debt was owed to:
A. Americans
B. Foreign governments
C. The Chinese people
D. The Japanese people
117. The two reasons why bankruptcy is a false concern regarding the public debt are:
A. Government spending and taxation
B. Refinancing and taxation
C. Investment and refinancing
D. Saving and investment
123. Which of the following is an important real consequence of the public debt of the
United States?
A. It will threaten to bankrupt the Federal government
B. It discourages saving among the general public
C. It decreases the inequality in the distribution of income in the U.S
D. Its consequent higher interest rates lead to fewer incentives to bear risk and innovate
126. A public debt which is owed to foreigners can be burdensome because:
A. Foreign interest rates are persistently higher than domestic interest rates
B. Payment of interest reduces the volume of goods and services available for domestic
uses
C. Payment of interest will conflict with a nation's foreign aid programs
D. Payment of interest will necessarily have a deflationary effect on prices in the paying
nation
128. Crowding out is a decrease in private investment caused by:
A. A contractionary fiscal policy
B. An expansionary fiscal policy
C. A cyclically-adjusted budget surplus
D. The political business cycle
140. The Social Security Program is designed to pay:
A. Current retirees using funds from their past contributions
B. Current retirees using funds from current contributions
C. The lower income groups using funds collected from high-income groups
D. Older current workers using funds from younger current workers
144. Medicare and Social Security are similar in the following respects, except:
A. They are both "pay-as-you-go" plans
B. Their trust funds are both projected to be depleted within the next 30 years
C. Contributions are collected from both employers and employees
D. They are both intended to benefit older current workers