Deck 6: The Role of Government in the Macroeconomy

Question 1

The impact of the government sector on the economy needs to be studied because:

A) government expenditures comprise more than one fourth of total spending.
B) the federal government is the largest single purchaser of goods and services in the U.S
C) government taxing and spending policies can affect the economy's levels of output and employment.
D) all of the above.

Answer 1

all of the above.

Question 2

Total government expenditures currently account for:

A) over 50 percent of GDP, but have been falling as a percentage of GDP since 1985.
B) approximately 30 percent of GDP, and have averaged over 30 percent of GDP since 1985.
C) approximately 10 percent of GDP, and that percentage has been relatively stable since 1985.
D) less than 5 percent of GDP, but have been generally increasing as a percentage of GDP since 1985.

Answer 2

approximately 30 percent of GDP, and have averaged over 30 percent of GDP since 1985.

Question 3

Over the last 25 years the dollar amount of government expenditures has been:

A) increasing.
B) decreasing.
C) relatively constant.
D) fluctuating widely up and down.

Answer 3

increasing.

Question 4

Over the last 20 years, federal government expenditures have been:

A) equal to state and local government expenditures.
B) less than state and local government expenditures.
C) greater than state and local government expenditures.
D) greater than local government expenditures, but less than state government expenditures.

Question 5

The main categories into which government expenditures can be classified are:

A) public works and private works.
B) public goods and defense goods.
C) salaries to government officials, welfare payments, and defense expenditures.
D) purchases of goods and services, transfer payments, and interest paid on borrowed funds.

Question 6

Which of the following is a public good?

A) A lighthouse.
B) A private hospital.
C) A commercial airliner.
D) A corporation's charitable redevelopment of a city neighborhood.

Question 7

Which of the following statements about public goods is FALSE?

A) Public goods are provided for all of society.
B) A defense system is an example of a public good.
C) No one is excluded from the use of a public good.
D) A government loan to a farmer is an example of a public good.

Question 8

A good or service that is provided for all of society, and no one is excluded from its use, is called:

A) a necessity.
B) a public good.
C) a private good.
D) an entitlement.

Question 9

When government provides a good or service that could be sold in a private market, such as education, it is providing a:

A) public good.
B) quasi-public good.
C) partially-private good.
D) transferable-benefit good.

Question 10

Which of the following is NOT an example of a public good?

A) Toll roads.
B) Street lights.
C) National defense.
D) Information from the National Weather Service.

Question 11

A state toll road is not a public good because:

A) it is a state project and only federal projects are public goods.
B) the only public goods are defense systems.
C) drivers cannot use the road without paying a charge.
D) private companies can get involved in the road's construction.

Question 12

You would not expect private businesses to provide public goods because:

A) these goods are not desired by society.
B) people can use these goods without paying for them.
C) the government prohibits private companies from providing these goods.
D) all of the above.

Question 13

Since 1985, the largest percentage of federal expenditures has been for:

A) interest payments.
B) transfer payments.
C) financial assistance.
D) purchases of goods and services.

Question 14

Which of the following is a government transfer payment?

A) A tax refund.
B) Unemployment compensation.
C) An expenditure for the construction of a public park.
D) All of the above.

Question 15

Since 1985, interest payments on funds borrowed by the federal government have generally:

A) increased as a percentage of total federal expenditures.
B) decreased as a percentage of total federal expenditures.
C) increased and then decreased as a percentage of total federal expenditures.
D) fallen to zero because changes in the tax law allow the government to cover its borrowing expenses in other ways.

Question 16

On which function does the federal government spend the most money?

A) Net interest.
B) Social Security and Medicare.
C) Education.
D) Energy, transportation, and environment.

Question 17

On which function do state and local governments spend the most money?

A) Education.
B) Public welfare.
C) Health and hospitals.
D) Police and fire protection.

Question 18

Which of the following statements about government social insurance programs is true?

A) Social Security is an example of such a program.
B) Persons who participate in such a program pay into a fund.
C) Payment into such a program is considered a contribution, not a tax.
D) All of the above.

Question 19

The majority of federal revenues comes from:

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

Question 20

The main source of revenue for the federal government is:

A) corporate income taxes.
B) individual income taxes.
C) contributions for social insurance.
D) excise, customs, estate, and gift taxes.

Question 21

On which of the following has the federal government primarily relied as a source of revenue since 1985?

A) Households.
B) Corporations.
C) State governments.
D) Foreign governments.

Question 22

Since 1985 individual income taxes and corporate income taxes have accounted for approximately:

A) 20% of federal government revenues each.
B) 25% and 62% of federal revenues, respectively.
C) 45% and 12% of federal revenues, respectively.
D) 90% and 10% of federal revenues, respectively.

Question 23

State and local government revenues:

A) are roughly equal from one state to the next.
B) come exclusively from the collection of taxes.
C) come from a wider variety of sources than do federal revenues.
D) are sent to the federal government through federal grants-in-aid.

Question 24

A progressive tax is one:

A) where the rate charged on a particular level of income increases each year.
B) that supports economic progress by giving tax relief to high growth areas of the economy.
C) that is moved from state to state so that no one group is unfairly burdened with its payment.
D) where there is a direct relationship between the percentage of income taxed and the size of the income.

Question 25

For which of the following taxes is there a direct relationship between the tax rate and the amount of income earned?

A) Regressive tax.
B) Progressive tax.
C) Proportional tax.
D) Consumption tax.

Question 26

A tax where the percentage of income taxed is the same regardless of the size of the income is called a:

A) regressive tax.
B) progressive tax.
C) proportional tax.
D) consumption tax.

Question 27

A regressive tax is:

A) unconstitutional.
B) based on the average income an individual earned over several prior years.
C) one where low taxes are imposed on consumers, and higher taxes are imposed on manufacturers.
D) one where the percentage of income taxed is inversely related to the size of the taxpayer's income.

Question 28

A personal income tax that takes 5% of incomes under $50,000, 15% of incomes between $50,000 and $100,000, and 25% of incomes over $100,000 is an example of:

A) an excise tax.
B) a regressive tax.
C) a progressive tax.
D) a proportional tax.

Question 29

A regressive tax results in lower income individuals paying:

A) more taxes than higher income individuals.
B) the same percentage of their income in a tax as higher income individuals.
C) a higher percentage of their income in a tax than higher income individuals.
D) none of the above.

Question 30

Karen pays a tax of $300 on her income of $60,000, while Bill pays a tax of $120 on his income of $40,000. This tax is:

A) a flat tax.
B) regressive.
C) progressive.
D) proportional.

Question 31

A city wage tax of one percent of earned income, regardless of income size, is an example of:

A) an excise tax.
B) a regressive tax.
C) a progressive tax.
D) a proportional tax.

Question 32

Which of the following is a regressive tax?

A) The federal individual income tax.
B) A state tax of 5 percent of earned income.
C) A local tax of $75.00 per person per year for fire protection.
D) None of the above.

Question 33

Which of the following is a proportional tax?

A) A 5 percent sales tax on food.
B) The federal personal income tax.
C) A 2 percent earnings tax on income.
D) None of the above.

Question 34

The federal personal income tax is a:

A) regressive tax.
B) progressive tax.
C) proportional tax.
D) consumption tax.

Question 35

John pays a local income tax of 5 percent, regardless of the size of his income, and a sales tax of 5 percent on his purchases, regardless of the value of his purchases. The income tax:

A) and the sales tax are both proportional.
B) is proportional and the sales tax is regressive.
C) is regressive and the sales tax is proportional.
D) none of the above.

Question 36

The Social Security tax is a specified percentage of wages up to a certain amount. Above that amount, no social security tax is levied. The Social Security tax is a:

A) progressive tax.
B) consumption tax.
C) proportional tax up to a certain amount, then becomes regressive.
D) regressive tax up to a certain amount, then becomes proportional.

Question 37

The federal personal income tax, a 1 percent city earnings tax, and a 6 percent sales tax on food are, respectively:

A) progressive, proportional, and regressive taxes.
B) proportional, regressive, and proportional taxes.
C) proportional, proportional, and regressive taxes.
D) progressive, proportional, and proportional taxes.

Question 38

The distinction between a progressive, a proportional, and a regressive tax is based on the percentage of:

A) income the tax represents.
B) a good's price the tax represents.
C) the tax's revenue that goes to civic development projects.
D) people in different occupational groups that must pay that particular tax.

Question 39

In Up for Debate: "Should the Federal Income Tax Be Changed to a Flat Tax?", it is argued that

A) a flat tax on income is a regressive tax.
B) the current system works well with its exemptions and brackets and should be retained.
C) with all of the shelters and exemptions, the federal income tax has lost its progressive nature.
D) a flat tax is always good because it relieves the tax burden on low income earners.

Question 40

The policy of adjusting income tax brackets to account for inflation is called:

A) tax bracket indexation.
B) tax bracket advancing.
C) indexation retooling.
D) income compression.

Question 41

Tax bracket indexation refers to the:

A) higher tax rates applied to higher income individuals.
B) across the board increase in tax rates for all tax payers.
C) shift of taxpayers into a higher tax bracket as a result of increases in real income.
D) setting higher tax brackets as a result of increases in money incomes, or inflation.

Question 42

The adjusting of federal personal income tax brackets to offset the effects of inflation is called:

A) paydown adjustment.
B) tax bracket indexation.
C) bracket-creep correction.
D) inflation-adjustment allowance.

Question 43

One of the major changes brought about by the Tax Reform Act of 1986 was:

A) the abolition of the corporate income tax.
B) the abolition of import duties on goods coming from Canada and Mexico.
C) a restructuring of the federal personal income tax to make it a proportional tax.
D) a significant reduction in the number of tax brackets for the federal personal income tax.

Question 44

The Tax Reform Act of 1986 reduced:

A) the top tax rate.
B) the number of tax brackets.
C) both the top tax rate and the number of tax brackets.
D) none of the above.

Question 45

It was pointed out in Application 6.1, "A Chronology of Federal Income Tax Policies" that:

A) federal income tax rates and charges were increased during World War I, World War II, and Vietnam.
B) at one time the individual income tax rate increased to 94% on income over $200,000.
C) in the 1940s taxes began to be paid on income when it was earned rather than in the following year.
D) all of the above.

Question 46

According to Application 6.1, "A Chronology of Federal Income Tax Policies":

A) the federal personal income tax has remained largely unchanged since its imposition in 1909.
B) the maximum rates on personal and corporate income taxes have fluctuated up and down over the years.
C) the maximum federal personal income tax rate has continually increased since the imposition of the tax in 1913.
D) corporate income taxes have been imposed since 1865, but personal income taxes did not come into existence until 1941.

Question 47

The term "tax base"refers to the:

A) legislation justifying a particular tax.
B) lowest rate that must be paid on a particular tax.
C) physical location out of which government tax officials work.
D) particular thing on which a tax is levied, such as earned income or a product that is sold.

Question 48

A tax base is the:

A) object on which a tax is levied.
B) minimum tax an individual must pay.
C) minimum tax rate an individual can qualify for.
D) multiplier used to determine the amount of tax due.

Question 49

The income on which an income tax is levied, and the value of a good on which a sales tax is levied, are examples of:

A) tax bases.
B) tax brackets.
C) tax multipliers.
D) revenue indexes.

Question 50

A major tax concern for many large cities in the U.S. is:

A) a decline in their tax bases.
B) the departure of businesses to other locations.
C) their abilities to raise revenues through taxes imposed on smaller, generally poorer, populations.
D) all of the above.

Question 51

A policy of reducing or eliminating a tax that would normally be charged is:

A) roll down.
B) tax buyback.
C) tax abatement.
D) illegal in most states.

Question 52

Which of the following statements about government taxes and revenues is FALSE?

A) A tax base is the object on which a tax is levied.
B) In recent years there have been proposals to reform, and changes in, the federal tax system.
C) In recent years, many state and local governments have had difficulties raising sufficient revenues to carry out their functions.
D) Recent legislation has made developments that require tax abatement illegal in order to hold down the tax burden faced by individuals.

Question 53

Which of the following statements is true?

A) Municipalities are never willing to use tax abatement to attract new businesses.
B) The Tax Reform Act of 1986 raised the maximum tax rate on incomes to 70 percent.
C) Many large U.S. cities are having difficulties raising revenues because of declining affluent populations and the departure of businesses to other locations.
D) All of the above.

Question 54

Given the following tax table, what is the income tax on an income of $40,000?

A) $6,000.
B) $8,080.
C) $11,200.
D) $14,800.

Question 55

Fiscal policy tools include changes in each of the following EXCEPT:

A) taxes.
B) interest rates.
C) transfer payments.
D) government expenditures.

Question 56

Influencing the levels of aggregate output and employment or prices through changes in federal government expenditures and/or taxes is known as:

A) fiscal policy.
B) physical policy.
C) monetary policy.
D) the classical approach to economic stabilization.

Question 57

Fiscal policy is carried out primarily by:

A) local governments.
B) state governments.
C) the federal government.
D) state and local governments.

Question 58

Fiscal policy is carried out by the federal government through changes in:

A) taxes.
B) transfer payments.
C) its purchases of goods and services.
D) all of the above.

Question 59

An appropriate fiscal policy response to demand-pull inflation would be to:

A) increase government expenditures and taxes.
B) decrease government expenditures and taxes.
C) increase government expenditures and decrease taxes.
D) decrease government expenditures and increase taxes.

Question 60

An appropriate fiscal policy response to an unacceptably high rate of unemployment would be to:

A) increase government expenditures and taxes.
B) decrease government expenditures and taxes.
C) increase government expenditures and decrease taxes.
D) decrease government expenditures and increase taxes.

Question 61

An increase in government purchases of goods and services and a decrease in taxes would be an appropriate policy for dealing with:

A) cost-push inflation.
B) demand-pull inflation.
C) unacceptably high rates of unemployment.
D) unacceptably high rates of economic growth.

Question 62

An increase in taxes and a decrease in government purchases of goods and services would be an appropriate policy for dealing with:

A) chronic deflation.
B) demand-pull inflation.
C) high rates of unemployment.
D) lagging rates of economic growth.

Question 63

To encourage higher employment, the government should increase:

A) taxes.
B) interest rates.
C) its purchases of goods and services.
D) all of the above.

Question 64

To restrain inflation, the government should reduce:

A) taxes.
B) interest rates.
C) transfer payments.
D) all of the above.

Question 65

An increase in government taxes and transfer payments would be an:

A) inconsistent fiscal policy.
B) appropriate fiscal policy for dealing with cost-push inflation.
C) appropriate fiscal policy for dealing with demand-pull inflation.
D) appropriate fiscal policy for dealing with high rates of unemployment.

Question 66

The greatest expansionary effect on the economy would result from:

A) a decrease in taxes of $100 million.
B) an increase in transfer payments of $100 million.
C) an increase in government purchases of $100 million.
D) any of the three; they all have the same impact on the economy.

Question 67

If the government reduces its purchases of goods and services by $100 billion, total economic activity will:

A) decrease by $100 billion.
B) decrease by less than $100 billion.
C) decrease by more than $100 billion.
D) be unchanged since government purchases are nonincome-determined spending.

Question 68

The expansionary impact of an increase in government purchases is:

A) equal to the impact of an increase in transfer payments or a decrease in taxes by the same amount.
B) smaller than the impact of an increase in transfer payments or a decrease in taxes by the same amount.
C) greater than the impact of an increase in transfer payments or a decrease in taxes by the same amount.
D) greater than the impact of an increase in transfer payments, but smaller than the impact of a decrease in taxes by the same amount.

Question 69

If the federal government were to increase its purchases of goods and services by $1 billion, and increase income tax collections by $1 billion, the two policies would:

A) have no effect on output and employment since they are both equal to $1 billion and would therefore cancel out.
B) cause output and employment to fall since the effect of the increase in purchases on total spending would be less than the effect of the increase in taxes.
C) cause output and employment to expand since the effect of the increase in purchases on total spending would be greater than the effect of the increase in taxes.
D) none of the above.

Question 70

If the government withdrew $50 billion from the spending stream, the level of economic activity would:

A) remain unchanged.
B) decrease by $50 billion.
C) decrease by less than $50 billion.
D) decrease by more than $50 billion.

Question 71

Deliberate Congressional action to change government purchases, transfer payments, and/or taxes to affect the level of economic activity is:

A) automatic stabilization.
B) discretionary fiscal policy.
C) executive branch authority.
D) nondiscretionary fiscal policy.

Question 72

Discretionary fiscal policy requires explicit action by:

A) Congress to raise or lower tax rates in response to changes in economic activity.
B) Congress to raise or lower interest rates in response to changes in economic activity.
C) the Federal Reserve to raise or lower tax rates in response to changes in economic activity.
D) the Federal Reserve to raise or lower interest rates in response to changes in economic activity.

Question 73

Each of the following is an example of the use of discretionary fiscal policy EXCEPT:

A) Congress levied a 10% surcharge on income taxes in 1968 for spending on the Vietnam War.
B) a tax cut was passed in 1975 to counteract a recession.
C) in 2008, the U.S. Treasury sent payments of up to $600 for those that filed a 2007 federal tax return.
D) in 2009 Congress levied increases in taxes across all income levels to support the recession that began in 2008.

Question 74

If the economy were to slip into a recession, you would expect personal income taxes and transfer payments such as unemployment compensation to automatically:

A) increase.
B) decrease.
C) increase and decrease, respectively.
D) decrease and increase, respectively.

Question 75

If the economy were approaching full employment and experiencing demand-pull inflationary pressure, you would expect personal income taxes and transfer payments such as unemployment compensation to automatically:

A) increase.
B) decrease.
C) increase and decrease, respectively.
D) decrease and increase, respectively.

Question 76

Suppose that, without any legislative action, personal income tax payments automatically fall and unemployment compensation payments automatically increase. Based on these changes in taxes and compensation payments, you would expect that the economy is:

A) slipping into a recession.
B) approaching full employment.
C) experiencing demand-pull inflation.
D) in the recovery phase of the business cycle.

Question 77

Automatic stabilization:

A) can be enacted by the executive branch without the involvement of the legislative branch.
B) occurs when downturns in economic activity result in higher government revenues and lower government expenditures.
C) results from changes in transfer payments and personal income tax payments that occur with changes in the level of employment.
D) all of the above.

Question 78

The automatic stabilization process can be described as follows:

A) increasing output leads to higher taxes, which leads to higher transfers, which leads to higher employment and income.
B) increasing output leads to higher employment and income, which leads to lower taxes, which leads to higher transfers.
C) falling output leads to lower employment and income, which leads to higher taxes, which leads to higher transfers.
D) falling output leads to lower taxes and higher transfers, which keeps employment and income from falling as much as it otherwise would.

Question 79

Automatic stabilization:

A) increases economic activity during recessions and has no effect during expansions.
B) restrains economic activity during expansions and has no effect during recessions.
C) increases economic activity during recessions and restrains economic activity during expansions.
D) restrains economic activity during recessions and increases economic activity during expansions.

Question 80

The change in government payments for unemployment compensation that occurs as the economy moves into a recession is an example of:

A) monetary policy.
B) automatic stabilization.
C) a tax incentive program.
D) discretionary fiscal policy.