QUESTION 1

1. Assume the economy is initially in equilibrium with real GDP equal to potential GDP. Other things equal, if the economy enters a recession and there are automatic stabilizers, theinitialdecrease in investment expenditure resulting from the recession is ________ what the decrease would be without automatic stabilizers, and the multiplier is ________ what the multiplier would be without automatic stabilizers.

A. less than; smaller than

B. greater than; larger than

C. equal to; smaller than

D. equal to; greater than

QUESTION 2

1. By rescuing large, troubled institutions, as happened during the 2007-2009 financial crisis and recession with institutions like AIG and General Motors, policymakers attempted to achieve financial and economic stability in the short run, but their actions may encourage even riskier behavior on the part of these large institutions in the future if these institutions believe that they, too, will be bailed out if they get in trouble. This risk faced by policymakers is known as

A. asymmetric information.

B. quantitative easing.

C. too-big-to-fail policy.

D. moral hazard.

QUESTION 3

1. The difference between the pretax and posttax return to an economic activity is known as the

A. tax multiplier.

B. net tax.

C. tax burden.

D. tax wedge.

QUESTION 4

An increasing federal budget deficit will ________ the federal government debt as this will ________ the total value of U.S. Treasury bonds outstanding.

A. increase; increase

B. increase; decrease

C. not impact; not change

D. not impact; be offset by

QUESTION 5

1. Suppose the economy is in a recession and the government decides it needs to reduce the budget deficit. Other things equal, this would tend to

A. increase the output gap and make the recession worse.

B. decrease the output gap and make the recession worse.

C. help to eliminate the recession, but at the cost of a much higher inflation rate.

D. keep output from declining further, but increase the real interest rate and the inflation rate.