Mr. Beck

SUNY College at Oneonta

Review Questions for Chapter 28

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Review Questions for Economics 110

Major Topics Covered in Chapter 28

Government Spending, Net Taxes, and Total Spending:  #Q1#Q4  #Q6   #Q15

Government Spending, Net Taxes, and real GDP:  #Q2#Q3   #Q7  #Q10#Q12    #Q14

Supply Side Economics::   #Q5  #Q8  #Q13

Fiscal Policy and Government Size:    #Q9 #Q11


1. Which one of the following combinations would result in the greatest amount of increased spending [C + I + G +(X-IM)]?

  1. An increase in government spending (G) accompanied by an increase in government transfer payments.
  2. An increase in government spending (G) accompanied by a decrease in government transfer payments.
  3. decrease in government spending (G) accompanied by an increase in government transfer payments.
  4. A decrease in government spending (G) accompanied by a decrease in government transfer payments.

    5. Q1 answer
2. Which one of the following would result in the greatest increase in the level of real GDP (Y)?
  1. The government increases spending (G) by 10.
  2. The government decreases spending (G) by 10.
  3. The government increases net taxes (T) by 10.
  4. The government decreases spending (G) by 10 and increases net taxes (T) by 10.
  5. The government simultaneously increases spending (G) by 10 and increases net taxes (T) by 10.

    6. Q2 answer
3. Which one of the following combinations would cause the greatest resultant increase in the level of real GDP (Y)?
  1. An increase in government spending (G) accompanied by an increase in net taxes (T).
  2. An increase in government spending (G) accompanied by a decrease in net taxes (T).
  3. A decrease in government spending (G) accompanied by an increase in net taxes (T).
  4. A decrease in government spending (G) accompanied by a decrease in net taxes (T).

    5. Q3 answer
4.    Applying which one of the following policies would potentially cause the largest resultant increase in prices?
  1. An increase in net taxes (T) of 10.
  2. An increase in government spending (G) of 10.
  3. An increase in government spending (G) of 10 accompanied by an increase in net taxes (T) of 10.
  4. A decrease in government spending (G) of 10.
  5. A decrease in government spending (G) of 10 accompanied by a decrease in net taxes (T) of 10.

    6. Q4 answer
5.    Supporters of supply-side economics prefer which one of the following policies to deal with an economic recession?
  1.     tax cuts.
  2.     increases in government spending.
  3.     increases in transfer payments.
  4.     decreases in transfer payments.

    5. Q5 answer
6. Which one of the following combinations would result in the greatest amount of increased spending?
  1. An increase in government spending (G) accompanied by an increase in taxes and an increase in transfer payments.
  2. An increase in government spending (G) accompanied by a decrease in taxes and a decrease in transfer payments.
  3. An increase in government spending (G) accompanied by a decrease in taxes and an increase in transfer payments.
  4. An increase in government spending (G) accompanied by an increase in taxes and a decrease in transfer payments.
  5. A decrease in government spending (G) accompanied by a decrease in taxes and a decrease in transfer payments.

    6. Q6 answer
7. If an economy has high inflation, then increasing which one of the following would help eliminate the inflation?
  1. Government spending (G)
  2. Investment (I)
  3. Taxes
  4. Transfer payments
  5. Consumption (C)

    6. Q7 answer
8. A successful supply-side tax cut would cause
  1. both the aggregate demand and supply curves to shift to the right.
  2. both the aggregate demand and supply curves to shift to the left.
  3. the aggregate demand curve to shift to the right and the aggregate supply curve to shift to the left.
  4. the aggregate demand curve to shift to the left and the aggregate supply curve to shift to the right.
  5. only the aggregate demand curve to shift to the right.
    Q8 answer
9. Advocates of smaller government would recommend a fiscal policy which
  1.     decreases taxes when the economy is in a recession and increases taxes when the economy is in an inflationary period.
  2.     decreases taxes when the economy is in a recession and decreases government spending when the economy is in an inflationary period.
  3.     decreases government spending when the economy is in a recession and decreases taxes when the economy is in an inflationary period.
  4.     increases taxes when the economy is in a recession and decreases taxes when the economy is in an inflationary period.

    5. Q9 answer
10.  Which one of the following policies would cause the greatest decrease in the level of real GDP (Y)?
  1. An increase in government spending (G) of 10.
  2. An increase in net taxes (T) of 10.
  3. A decrease in net taxes (T) of 10.
  4. An increase in government spending (G) of 10 accompanied by a decrease in net taxes (T) of 10.
  5. An increase in government spending (G) of 10 accompanied by an increase in net taxes (T) of 10.

    6. Q10 answer
11.    Advocates of larger government would recommend a fiscal policy which
  1.     decreases taxes when the economy is in a recession and increases government spending when the economy is in an inflationary period.
  2.     increases taxes when the economy is in a recession and increases government spending when the economy is in an inflationary period.
  3.     increases government spending when the economy is in a recession and increases taxes when the economy is in an inflationary period.
  4.     increases government spending when the economy is in a recession and decreases taxes when the economy is in an inflationary period.

    5. Q11 answer
12. Which one of the following combinations of policies would result in the greatest decrease in the level of real GDP (Y)?
  1. An increase in government spending (G) accompanied by an increase in net taxes (T).
  2. An increase in government spending (G) accompanied by a decrease in net taxes (T).
  3. A decrease in government spending (G) accompanied by an increase in net taxes (T).
  4. A decrease in government spending (G) accompanied by a decrease in net taxes (T).

    5. Q12 answer
13. For a government fiscal policy to cause the economy's real GDP to increase without resulting in undesirable inflationary price increases, the policy must succeed in having
  1. both the aggregate demand and supply curves shift to the right.
  2. both the aggregate demand and supply curves shift to the left.
  3. the aggregate demand curve shifts to the right and the aggregate supply curve shifts to the left.
  4. the aggregate demand curve shifts to the left and the aggregate supply curve shifts to the right.

    5. Q13 answer
14.    If an economy is in a recession, then decreasing which one of the following would help eliminate the recession?
  1. Government spending (G)
  2. Transfer payments
  3. Investment (I)
  4. Taxes
  5. Consumption (C)

    6. Q14 answer
15. An increase in net taxes (T) would cause which one of the following, if any, to increase?
  1. The level of real GDP (Y).
  2. Consumption (C)
  3. Saving (S)
  4. Disposable income (D.I.)
  5. The size of the federal government's budget deficit
  6. None of the above will increase.

    7. Q15 answer
     

Formulas

Output (GDP) always equals income (Y).

Disposable Income (DI) = Income (Y) – Net taxes (T)

Equivalently, Disposable Income (DI) = Income (Y) – Taxes + Transfer Payments
[Net Taxes (T) = Taxes - Transfer Payments]
Note: Unemployment compensation is a transfer payment.

Saving (S) = DI - C    (S is saving, DI is disposable income, C is consumption)

MPC = DC/DDI        (MPC is the marginal propensity to consume)

DC = MPC x  DDI

MPS = DS/DDI         (MPS is the marginal propensity to save)

DS = MPS x DDI

MPC + MPS = 1

MPS = 1 - MPC.

[C + I + G +  (X-IM)] is total spending
C is consumption, I is investment, G is government spending, (X-IM) is net exports (exports - imports).

Inventory Change  = Y - [C + I + G +  (X-IM)]

Government Budget Deficit = Amount by which G > T

Government Budget Surplus = Amount by which T > G
 

Answers



 

1. a  Return to Q1
Solution to Q1

 

2. a  Return to Q2
Solution to Q2

 

3.  b Return to Q3
Solution to Q3

 

4. b  Return to Q4
Solution to Q4

 

5. a  Return to Q5
Solution to Q5

 

6.   c Return to Q6
Solution to Q6

 

7.  c  Return to Q7
Solution to Q7

 

8. a   Return to Q8
Solution to Q8

 

9. b   Return to Q9
Solution to Q9

 

10. b  Return to Q10
Solution to Q10

 

11. c  Return to Q11
Solution to Q11

 

12.  c  Return to Q12
Solution to Q12

 

13. a  Return to Q13
Solution to Q13

 

14. d  Return to Q14
Solution to Q14

 

15.  f  Return to Q15
Solution to Q15

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