2. Although the economy was in the Great Depression, the Hoover administration followed a fiscal policy of balancing the budget. A Keynesian would have found this policy
a. inappropriate because it probably would have depressed economic activity and led to further increases in unemployment.
b. appropriate because it probably would have led to a significant increase in the money supply and thereby increased employment.
c. inappropriate because it probably would have impaired the ability of monetary policy to end the Depression.
d. appropriate because it probably would have stimulated economic activity and helped end the Depression.

3. Suppose U.S. policy makers decide that to stimulate GDP growth, investment must be increased. What is needed, they conclude, is a reallocation of resources away from producing consumer goods and toward producing capital goods. Which of the following policy alternatives would most likely accomplish this objective?
a. a reduction in personal income taxes
b. a reduction in state sales taxes
c. a tax credit allowance for business investment in capital equipment
d. restrictive monetary policy

4. According to the Keynesian view, which of the following would most likely decrease aggregate demand?
a. a decrease in tax rates
b. a decrease in government expenditures
c. an increase in transfer payments
d. an increase in the budget deficit

5. Which of the following is an example of an automatic stabilizer?
a. Congress legislates lower tax rates to increase consumption and investment.
b. Tax rates are increased during a recession to maintain a balanced budget.
c. A regressive income tax system reduces tax revenues (as a share of income) as income expands.
d. Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation is enacted.

6. Keynesian analysis implies that a planned budget deficit is
a. always necessary to ensure full employment.
b. proper during slack economic conditions but highly inappropriate if the economy is already operating at capacity.
c. of little consequence unless there is a corresponding change in the money supply.
d. an effective method of dealing with inflation.

7. The crowding-out effect suggests that
a. expansionary fiscal policy causes inflation.
b. restrictive fiscal policy is an effective weapon against inflation.
c. reduction in private spending resulting from the higher interest rates caused by a budget deficit will largely offset the expansionary impact of a pure fiscal action.
d. a budget surplus will cause the private demand for loanable funds, the interest rate, and aggregate demand to fall.

8. Other things 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 reduce its productive efficiency.
c. encourage individuals to substitute less desired, tax-deductible goods for more desired, non-deductible goods.
d. cause all of the above.

9. The new classical model implies that substitution of debt for tax financing
a. increases aggregate demand and exerts a multiplier effect leading to an expansion in real output.
b. is highly effective against inflation.
c. reduces consumption because it increases both the current and future tax liability of households.
d. leaves wealth and therefore aggregate demand unchanged since the debt implies higher future taxes.

10. A balanced budget is present when
a. the economy is at full employment.
b. the actual level of aggregate spending equals the planned level of spending.
c. public sector spending equals private sector spending.
d. government revenues equal expenditures.