Multiple Choice Questions:
1. The federal government buys $20 million worth of computers from Dell. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal?
a. Aggregate demand will increase $12 million.
b. Aggregate demand will increase $13.33 million.
c. Aggregate demand will increase $20 million.
d. Aggregate demand will increase $50 million.
e. Aggregate demand will not change.
2. When taxes are increased, disposable income _____________, and hence consumption _____________.
a. Increases; increases
b. Increases; decreases
c. Decreases; increases
d. Decreases; decreases
e. Stays the same; stays the same
3. If the MPC is 0.5, a $1 million change in taxes will have _____________ effect as a $1 million change in government spending.
a. The same
b. Half the
c. Double the
d. None of the above
4. Lower marginal tax rates stimulate people to work, save, and invest, resulting in more output and a larger tax base. This statement most closely reflects which of the following views?
a. The Keynesian
b. The crowding-out theory of budget deficits
c. The aggregate demand theory
d. The supply-side view
5. Other things being constant, an increase in marginal tax rates will?
a. Decrease the supply of labor and reduce its productive efficiency.
b. Decrease the supply of capital and decrease its productive efficiency.
c. Encourage individuals to buy goods that are tax deductible instead of those that are more desired but nondeductible.
d. Do all of the above.
6. According to the Laffer curve?
a. Decreasing tax rates on income will always increase tax revenues.
b. Decreasing tax rates on income will always decrease tax revenues.
c. Decreasing tax rates are more likely to increase tax revenues the higher tax rates are to start with.
d. Decreasing tax rates are more likely to increase tax revenues the lower tax rates are to start with.
7. One of the real-world complexities of countercyclical fiscal policy is that?
a. Fiscal policy is based on forecasts, which are not foolproof.
b. A lag occurs between a change in fiscal policy and its effect.
c. How much of the multiplier effect will take place in a given amount of time is uncertain.
d. All of the above are correct.