Deck 10: Fiscal Policy

Question 1

Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
According to the application, one implication of increasing the taxes to pay for the higher costs of entitlement programs is:

A) an increase in the disposable income of the nonretired individuals.
B) a smaller US Federal Budget.
C) a higher interest rate on US Treasury Bills.
D) the increased tax burden on firms and individuals.

Answer 1

the increased tax burden on firms and individuals.

Question 2

The basic idea of the fiscal multiplier is that an initial increase in government spending will have a:

A) more than a one- to- one impact on short run aggregate supply.
B) more than a one- to- one impact on aggregate demand.
C) more than a one- to- one impact on long run aggregate supply.
D) more than a one- to- one impact on the budget deficit.

Answer 2

more than a one- to- one impact on aggregate demand.

Question 3

The permanent income view of consumption spending postulate when households receive a tax cut that is deemed temporary, then their consumption spending

A) will not change and the tax rebate is saved.
B) will decrease.
C) will increase by the full amount of the tax cut.
D) will increase by less than the tax cut.

Answer 3

will not change and the tax rebate is saved.

Question 4

Recall Application 2, "The Confucius Curve?" to answer the following questions:
According to the application, when Yu Juo was asked what should be done when the government had insufficient funds, his response was:

A) raise tax rates from 20 to 10 percent.
B) cut tax rates from 20 to 10 percent.
C) cut tax rates from 50 to 20 percent.
D) print currency.

Question 5

During the 1930s, politicians did not use fiscal policy to counter the Great Depression because:

A) they feared the consequences of government budget deficits.
B) the Federal Reserve system opposed the idea.
C) the adherence to the gold standard prevented the necessary increase in the money supply.
D) they were concerned about the ensuing increase in interest rates.

Question 6

In fiscal policy, the inside lags can take a long time because:

A) macroeconomic data take time to gather and can be unreliable.
B) changes in taxes and government spending require approval from Congress and the president.
C) consumers are usually slow in spending their tax rebate checks.
D) A and B are both correct.

Question 7

Contractionary fiscal policy shifts the:

A) the short run aggregate supply curve to the left.
B) the aggregate demand curve to the right.
C) the short run aggregate supply curve to the right.
D) the aggregate demand curve to the left.

Question 8

Which of the following contributed to the U.S. budget deficit in 2009?

A) the large stimulus package in 2009.
B) the U.S. recession in 2007- 2009
C) the large expenses associated with the wars in Iraq and Afghanistan
D) All of the above are correct.

Question 9

What kind of active fiscal policy was implemented in early 2008 in response to a slowing economy?

A) decreased government spending on infrastructure
B) increased government spending on infrastructure
C) increased tax rates to the rich aimed at closing the budget deficit
D) tax rebates and investment incentives

Question 10

According to the Laffer curve, higher tax rates will result in lower tax revenues if:

A) only the poor are taxed.
B) workers are encouraged to work more hours.
C) economic activity is severely discouraged.
D) only the rich are taxed.

Question 11

The length of time that the U.S. Treasury Department takes to print and mail tax rebate checks to help the economy out of a recession is part of the:

A) inside lag.
B) inside- outside lag.
C) outside lag.
D) identification lag.

Question 12

Customs duties are:

A) taxes levied on nonresidents that enter the United States.
B) taxes levied on goods exported from the United States.
C) taxes levied on goods imported into the United States.
D) tax commitments approved by past sessions of Congress.

Question 13

Successful stabilization policies are very difficult to implement because all of the following reasons, except:

A) decision- makers are slow to respond to changes in the economy.
B) the difference in the length between inside and outside lags.
C) decision- makers are slow to recognize changes in the economy.
D) fiscal policy takes time to operate.

Question 14

The federal budget works as an automatic economic stabilizer because:

A) it does not require explicit action by the President or Congress.
B) budgetary lags are shorter than monetary lags.
C) it is activated by a constitutional amendment.
D) federal agencies can not be crowded out.

Question 15

Assume that the short- run AS is upward sloping. If the government chooses to reduce government expenditure or to increase taxes, according to the Aggregate Supply - Aggregate Demand model:

A) the price level will rise and GDP will decrease.
B) the price level will fall and GDP will increase.
C) the price level will fall and GDP will decrease.
D) the price level will rise and GDP will increase.

Question 16

Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
According to the application, increasing life expectancy would affect the budget because

A) as the population grows older, Medicare payments would increase.
B) as the population grows older, Medicaid payments would increase.
C) as the population grows older, the Social Security payments will increase.
D) all of the above are correct

Question 17

Figure 10.1
Refer to Figure 10.1 to answer this question. Which of the following fiscal policies would move the economy from point B to point A?

A) higher taxes
B) lower government spending
C) lower taxes
D) lower money supply

Question 18

In 2009, federal spending was about:

A) $2.7 trillion.
B) $2.9 trillion.
C) $3.52 trillion.
D) $4.2 trillion.

Question 19

Which of the following is included in "Entitlement and mandatory spending?"

A) Medicare
B) Medicaid
C) Social Security
D) All of the above are correct.

Question 20

The largest source of federal revenue is:

A) estate and gift taxes.
B) corporate income taxes.
C) social insurance taxes.
D) individual income taxes.

Question 21

Which of the following is an example of an expansionary fiscal policy?

A) decreasing taxes
B) decreasing government spending
C) less subsidies to encourage investment
D) increasing taxes

Question 22

Net interest spending consists of:

A) interest payments on commercial debt held by the government.
B) interest payments on foreign debt held by the government.
C) interest payments on government debt held by the public.
D) all of the above

Question 23

An increased federal budget surplus during an expansion serves as an automatic economic stabilizer for all of the following reasons except:

A) higher personal income translates into a higher tax load and so consumption spending is slightly curbed.
B) higher corporate profits translate into a higher tax load and so investment spending is slightly curbed.
C) the positive government saving stimulates consumption spending.
D) reduced transfer payments from welfare programs partly offset the overall increase in household income.

Question 24

The key lesson to remember about budget deficits is that during a recession we should focus on:

A) what the monetary policy does to the economy and not on what it does to the deficit.
B) what the fiscal policy does to the economy and not on what it does to the deficit.
C) what the fiscal policy does to the deficit and not on what it does to the economy.
D) what the fiscal policy does to the deficit and not on what it does to the national debt.

Question 25

Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
According to the application, estimates of the size of spending for Social Security, Medicare and Medicaid is approximately _______ percent of GDP by 2075.

A) 7
B) 18
C) 22
D) 9

Question 26

All of the following are examples of outside lags associated with fiscal policy, except:

A) the time it takes for individuals to increase consumption when personal taxes are lowered.
B) the delays in the actual formulation of fiscal policy.
C) the delays in the working of the multiplier effect through the economy.
D) the time it takes for businesses to increase investment when corporate taxes are lowered.

Question 27

The lags associated with fiscal policy can:

A) stimulate output beyond full employment.
B) magnify economic fluctuations.
C) depress output below full employment.
D) all of the above

Question 28

Although government spending increased during the 1930s,

A) the money supply increased too, so there was no net monetary expansion.
B) taxes increased too, so there was no net fiscal expansion.
C) interest rates rose too, so there was no lending expansion.
D) the exchange rate rose too, so there was no net trade expansion.

Question 29

Figure 10.2
Refer to Figure 10.2 to answer the question below. Points A, B, and C correspond to a GDP level in Year 2. Suppose that in Year 1 the economy was projected to be at Pt. A by Year 2. Which of the following policies could bring the economy to Point B instead?

A) a correctly timed tax cut
B) a correctly timed tax increase
C) an ill- timed tax cut
D) an ill- timed tax increase

Question 30

Social insurance taxes are:

A) taxes levied on personal income to pay for Social Security and Medicare.
B) taxes levied on income from investment to pay for Social Security and Medicare.
C) taxes levied on personal income to pay for mandatory federal life insurance.
D) voluntary taxes to pay for selected social programs.

Question 31

Recall Application 2, "The Confucius Curve?" to answer the following questions:
According to the application, the central idea for the Laffer curve is:

A) cutting tax rates may increase GDP growth.
B) cutting tax rates may decrease inflation.
C) cutting tax rates may increase tax revenues.
D) cutting tax rates may decrease tax revenues.

Question 32

Fiscal policy shifts the:

A) the short run aggregate supply curve.
B) the aggregate demand curve.
C) full employment level of output.
D) the long run aggregate supply curve.

Question 33

At the end of the 1990s, the U.S. budget:

A) was in deficit.
B) was balanced.
C) was in surplus.
D) none of the above

Question 34

Because taxes and transfer payments such as unemployment insurance act to change GDP without the need for policymakers to take explicit action, then these taxes and transfer payments are called:

A) discretionary stabilizers.
B) automatic stabilizers.
C) mandatory stabilizers.
D) fluctuation stabilizers.

Question 35

During the Kennedy Era, the tax cut implemented resulted in

A) driving the economy deeper into a depression.
B) stimulating economic growth.
C) facilitating a recession.
D) pushed the economy into stagflation.

Question 36

In 2009, federal taxes were about _______ percent of GDP.

A) 14.7
B) 25
C) 33
D) 71

Question 37

A reduction in government expenditure or an increase in taxes is defined as:

A) expansionary fiscal policy.
B) contractionary monetary policy.
C) expansionary monetary policy.
D) contractionary fiscal policy.

Question 38

An increase in government spending or a decrease in taxes will cause:

A) the aggregate demand curve to the right.
B) the SR aggregate supply curve to the right.
C) the aggregate demand curve to the left.
D) the SR aggregate supply curve to the left.

Question 39

Maintaining a balanced budget during an economic recession would be the difficult to implement because:

A) corporate income taxes would have to be raised in order to compensate for lower tax revenues.
B) personal income taxes would have to be raised in order to compensate for lower tax revenues.
C) transfer payments would have to be reduced in order to curb spending.
D) all of the above

Question 40

The smallest category of federal spending is:

A) entitlements and mandatory spending.
B) net interest.
C) discretionary spending.
D) none of the above

Question 41

As a large proportion of the population retire in the next few years, what would happen to the federal revenue?

A) It would decrease, as social security tax revenues decrease.
B) It would decrease, as estate and excise taxes decrease.
C) It would increase, as corporate tax revenues increase.
D) It would increase, as social security payments increase.

Question 42

Long- term budget deficits are bad for the economy for all the following reasons except:

A) they decrease investment spending.
B) they make costlier for businesses to raise funds in financial markets.
C) they are likely to lead to deflation.
D) they slow future economic growth.

Question 43

As the national debt of the United States becomes larger, which component of the Federal Spending would increase the most?

A) Net Interest
B) Defense Spending
C) Discretionary Spending
D) Entitlements and Mandatory Spending

Question 44

The discretionary spending component of federal spending includes all programs that:

A) is authorized by prior law.
B) Congress authorizes on a monthly basis.
C) is made mandatory by the president of the US.
D) Congress authorizes on an annual basis.

Question 45

A means tested program calculates the benefits of the recipient based on

A) the government's budget.
B) the government's income.
C) the recipient's income.
D) the recipient's tax payments.

Question 46

The smallest source of federal revenue is:

A) social insurance taxes.
B) estate and excise taxes.
C) corporate income taxes.
D) individual income taxes.

Question 47

The length of time from when households receive tax rebate checks to the time they spend the checks is part of the:

A) inside- outside lag.
B) inside lag.
C) identification lag.
D) outside lag.

Question 48

Federal discretionary spending consists of:

A) all the programs authorized by Congress on an annual basis.
B) all the spending that Congress authorized by prior laws.
C) interest payments on government debt held by the public.
D) all of the above

Question 49

Which of the following government policies is not considered a fiscal policy?

A) government policies regarding money supply in the economy
B) government policies regarding taxation
C) government policies regarding transfer payments and welfare benefits
D) government policies regarding the purchase of goods and services

Question 50

A government policy that leads to an increase in aggregate demand is called:

A) an expansionary policy.
B) a fiscal policy.
C) an aggregate demand policy.
D) an economic growth policy.

Question 51

Using data from 2009, rank the federal government revenue sources from largest to smallest:

A) individual income tax, corporate tax, estate tax, social insurance tax
B) estate tax, individual income tax, corporate tax, social insurance tax
C) individual income tax, estate tax, social insurance tax, corporate tax
D) individual income tax, social insurance tax, corporate tax, estate tax

Question 52

Which of the following is a federal and state health program that benefits the elderly?

A) Medicare
B) Medicaid
C) Defense
D) Social Security

Question 53

The largest category of discretionary federal spending is:

A) funding for the Interior Department.
B) funding for the Defense Department.
C) funding for the Environmental Protection Agency.
D) funding for the State Department.

Question 54

Expansionary fiscal policy shifts the:

A) the short run aggregate supply curve to the right.
B) the aggregate demand curve to the right.
C) the short run aggregate supply curve to the left.
D) the aggregate demand curve to the left.

Question 55

Fiscal policy affects aggregate demand because:

A) government purchases is a category of aggregate demand.
B) taxes affect disposable income and so consumption.
C) taxes affect corporate spending and so investment.
D) all of the above.

Question 56

Which of the following is considered as the largest fiscal policy in U.S. history?

A) the 2001 economic stimulus package in 2001
B) the 1992 expansionary stimulus package proposed by President Clinton in 1993
C) the New Deal in 1933
D) the $787 billion economic stimulus package in 2009

Question 57

Which of the following did not directly contribute to the U.S. budget deficit in 2009?

A) the large US trade deficit with China
B) the U.S. recession in 2007- 2009
C) the large stimulus package in 2009
D) the large expenses associated with the wars in Iraq and Afghanistan

Question 58

The largest category of federal spending is:

A) entitlements and mandatory spending.
B) discretionary spending.
C) net interest.
D) none of the above

Question 59

The Kennedy administration endorsed substantial tax cuts because:

A) the unemployment rate was considered to be above its natural rate.
B) tax rates were very high, compared to tax rates today.
C) the economy was considered to be below its full employment level.
D) all of the above

Question 60

Which of the following is a federal and state health program that benefits the poor?

A) Defense
B) Medicaid
C) Medicare
D) Social Security

Question 61

Federal spending consists of:

A) discretionary and mandatory spending.
B) defense and social security programs.
C) federal government purchases and transfer payments.
D) discretionary federal spending and debt payments.

Question 62

Recall Application 2, "The Confucius Curve?" to answer the following questions:
According to the application, if an economy experiences a recession, it should:

A) increase spending.
B) increase money supply.
C) devalue the currency.
D) cut taxes.

Question 63

The tax cuts enacted during the first term of President Reagan were designed primarily to:

A) decrease the supply of output.
B) increase aggregate demand.
C) increase the supply of output.
D) decrease aggregate demand.

Question 64

Federal discretionary spending

A) requires approval by the Federal Reserve.
B) requires the approval of Congress.
C) requires approval by the U.S. treasury.
D) requires approval by the U.S. Treasury and the president.

Question 65

The tax cuts enacted during the first term of President Reagan were proposed to:

A) decrease the supply of labor.
B) increase aggregate demand.
C) improve economic incentives.
D) decrease the supply of output.

Question 66

Stabilization policies are policies designed:

A) to raise or lower interest rates.
B) to close the budget deficit.
C) to close the trade deficit.
D) to move the economy closer to full employment.

Question 67

Which of the following is not included in "Entitlement and mandatory spending?"

A) Medicare
B) Social Security
C) Defense
D) Medicaid

Question 68

According to economic studies, the 2001 tax rebates under the presidency of G. W. Bush did not increase aggregate demand because:

A) consumers saved, instead of spending, the rebates.
B) the cost of the war in Iraq required an immediate increase in taxes.
C) the tax rebates were not large enough to have a significant impact on aggregate demand.
D) the Republican- controlled Congress rolled back the tax rebates the following year.

Question 69

If the government wants to reduce unemployment, government spending should be_______ and/or taxes should be _______.

A) decreased; increased
B) increased; increased
C) decreased; decreased
D) increased; decreased

Question 70

In fiscal policy, the outside lags:

A) take a long time because macroeconomic data take time to gather and can be unreliable.
B) take a long time because changes in taxes and government spending require approval from Congress and the president.
C) usually take a much shorter time than inside lags.
D) A and B are both correct.

Question 71

During the Kennedy Era, the highest tax rate for an individual was

A) 33 percent.
B) 10 percent.
C) 91 percent.
D) 40 percent.

Question 72

The federal government runs a budget surplus because:

A) it spends more than what it receives in tax revenues.
B) it spends less than what it receives in tax revenues.
C) the economy is in a recession.
D) it buys back fewer bonds than it issues.

Question 73

Figure 10.1
Refer to Figure 10.1 to answer this question. Suppose that the economy were at point A, and the government decreases government spending. In the short run , the economy will move to point:

A) E.
B) C.
C) D.
D) B.

Question 74

Recall Application 2, "The Confucius Curve?" to answer the following questions:
According to the application, the reason why Yu Juo advocated a tax cut if a famine occurs is because:

A) a tax cut allows people to buy more food.
B) a tax cut increases the government's mandatory spending.
C) a tax cut raises inflation and causes people to buy less.
D) a tax cut increases economic activity.

Question 75

Fiscal policy refers to:

A) the spending and taxing policies used by the government to influence the economy.
B) the techniques used by a business firm to reduce its tax liability.
C) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's money supply.
D) the government's ability to regulate a firm's behavior in the financial markets.

Question 76

The largest category of entitlements and mandatory federal spending is:

A) Medicare.
B) Medicaid.
C) mean- tested farm price supports.
D) Social Security.

Question 77

Recall Application 1, "Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs," to answer
the following questions:
According to the application, some economists suggest that in order to reduce the burden of entitlement programs on future generations, the government should:

A) make people save and invest for the future.
B) eliminate social security.
C) print money to help pay for the costs.
D) make retiring illegal.

Question 78

As the population of the United States becomes older, which component of the Federal Spending would increase the most?

A) Net Interest
B) Discretionary Spending
C) Entitlements and Mandatory Spending
D) Defense Spending

Question 79

The length of time that Congress takes to formulate a tax bill to help the economy is part of the:

A) inside lag.
B) outside lag.
C) inside- outside lag.
D) identification lag.

Question 80

In 2009, federal spending was about _______ percent of GDP.

A) 14.7
B) 33
C) 71
D) 25