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PRACTICE TEST #1:
Consumption, Savings & Investment, Multiplier, Phillips Curve
1. Which of the following tends to makes expansionary fiscal policy less effective?
a. unemployment benefits
c. state and local taxes
e. All listed
b. the multiplier effect
d. automatic stabilizers
2. Which of the following tends to makes expansionary fiscal policy more effective?
a. crowding out
c. state and local taxes
e. Both B & D
b. the multiplier effect
d. automatic stabilizers
3. If the MPC = .80 , then the absolute value of the tax multiplier is:
a. 5
b. 4
c. 3
d. 2
e. none listed
4. If the stock market suddenly fell 50%, what would happen to the consumption function and savings function
a. They both would increase
b. They both would decrease
c. consumption would increase and savings would decrease
d. consumption would decrease and savings would increase
e. None listed
5. Suppose the MPC is .75. If the government increases expenditures by $200 billion, real GDP would increase by
________ billion.
a. $200
b. $400
c. $600
d. $800
e. $1000
6. Suppose the MPC is .90 If the government increases expenditures by $100 billion & increased income taxes by
$100 billion, real GDP would increase by ________ billion.
a. $0
b. $100
c. $200
d. $1,000
e. $2,000
1-A Economic Information: Suppose that in a closed economy GDP (Y) is $15 trillion, consumption (C) is $10
trillion, Government Spending (G) is 4 trillion and taxes (T) are $5 trillion.
7. Using the information in 1-A, What are national savings:
a. $4 trillion
b. $3 trillion
c. $2 trillion
d. $1 trillion
e. $0 trillion
8. Using the information in 1-A, What are private savings:
a. $4 trillion
b. $3 trillion
c. $2 trillion
d. $1 trillion
e. $0 trillion
9. Assuming MPC = .90, then a reduction of income taxes of 1 billion should increase real GDP by ______ billion
a. 10
b. 9
c. 8
d. 5
e. 1
10. If the marginal propensity to consume (MPC) is .80, a $20 billion increase in government expenditures would
increase real GDP by
a. $80 billion, but the effect would be larger if there were crowding out.
b. $80 billion, but the effect would be smaller if there were crowding out
c. $80 billion regardless of crowding out
d. $100 billion, but the effect would be larger if there were crowding out
e. $100 billion, but the effect would be smaller if there were crowding out
11. If the government reduced taxes on capital goods, then you should expect:
a. Demand to increase in the loanable funds market => Investment to rise
b. Demand to decrease in the loanable funds market => Investment to fall
c. Supply to increase in the loanable funds market => Investment to rise
d. Supply to decrease in the loanable funds market => Investment to fall
e. Both A & C
12. Which helps Expansionary Fiscal Policy be more effective
a. crowding out
d. the multiplier effect is small
b. policy lag is short
e. Both A & C
c. prices and wages are flexible
13. What causes inflation in the long run
a. the amount of goods produced
b. the tax rate of a country
c. the level of savings
d. the quantity of money
e. the skills of the labor force
14. There is:
a. a short-run tradeoff between inflation and unemployment.
b. no long-run tradeoff between inflation and unemployment.
c. only a long-run tradeoff between inflation and unemployment.
d. Both A & B are True
15. According to the Short Run Phillips Curve, Expansionary Fiscal Policy can achieve:
a. a lower unemployment rate and a lower inflation rate
b. a lower unemployment rate and a higher inflation rate
c. a lower unemployment rate and an unchanged inflation rate
d. no change in either unemployment or inflation
16. If the short run SRAS shifts to the right => then the short run Phillips Curve will _________
a. shift right
b. shift left
c. not shift
17. The consumption function would decrease for which of the following reasons
a. wealth increases
d. Both A & C
b. income taxes are lowered
e. None listed
c. unexpected debt is suddenly incurred
18. If the Government reduces income taxes, economic theory would argue:
a. consumption would rise
d. Both A & B are true
b. savings would rise
e. Both A & C are true
c. savings would fall
19. If the economy was in recessionary gap, which statements are true.
a. The expected price level is higher than the actual price level
b. Classical economists would argue that the recession will correct itself
c. Keynesian economists would argue for a tax decrease
d. All listed are true
e. None listed are true
PRACTICE TEST #1:
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
C
E
B
D
D
B
D
E
B
E
A
B
D
D
B
B
C
D
Consumption, Savings & Investment, Multiplier, Phillips Curve