Deck 18: Fiscal Policy

Question 1

The largest source of federal government revenue in 2016 was

A) sales taxes.
B) corporate income taxes.
C) individual income taxes.
D) payroll taxes to fund Social Security and Medicare programs.

Answer 1

individual income taxes.

Question 2

Automatic stabilizers refer to

A) the money supply and interest rates that automatically increase or decrease along with the business cycle.
B) government spending and taxes that automatically increase or decrease along with the business cycle.
C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Answer 2

government spending and taxes that automatically increase or decrease along with the business cycle.

Question 3

Federal government purchases as a percentage of GDP

A) have risen since the early 1950s.
B) have fallen since the early 1950s.
C) have remained roughly the same since the early 1950s.
D) rose from the early 1950s until the mid 1980s, and then fell.

Answer 3

have fallen since the early 1950s.

Question 4

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

A) automatic stabilizers.
B) discretionary fiscal policy.
C) discretionary monetary policy.
D) automatic monetary policy.

Question 5

Which of the following provides health-care coverage to people age 65 and over?

A) Medicaid
B) Medicare
C) Social Security
D) Health-Aid

Question 6

Government transfer payments include which of the following?

A) interest on the national debt
B) grants to state and local governments
C) Social Security and Medicare programs
D) national defense

Question 7

Which of the following is more likely to be effective in increasing the growth rate of real GDP?

A) temporary cuts in income taxes
B) permanent cuts in business taxes
C) a one-time personal income tax rebate
D) All cuts in taxes are equally likely to increase the growth rate of real GDP.

Question 8

The three categories of federal government expenditures,in addition to government purchases,are

A) interest on the national debt, grants to state and local governments, and transfer payments.
B) interest on the national debt, defense spending, and transfer payments.
C) defense spending, budgets of federal agencies, and transfer payments.
D) defense spending, Social Security, and Medicare.

Question 9

Before the Great Depression of the 1930s,the majority of government spending took place at the ________ and after the Great Depression the majority of government spending took place at the ________.

A) state and local levels; federal level
B) local level; federal level
C) federal level; state and local levels
D) federal level; state level

Question 10

Fiscal policy refers to changes in

A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
C) federal taxes and purchases that are intended to fund the war on terrorism.
D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

Question 11

The largest and fastest-growing category of federal government expenditures is

A) grants to state and local governments.
B) interest on the national debt.
C) national park spending.
D) transfer payments.

Question 12

Which of the following would be classified as fiscal policy?

A) The federal government passes tax cuts to encourage firms to reduce air pollution.
B) The Federal Reserve cuts interest rates to stimulate the economy.
C) A state government cuts taxes to help the economy of the state.
D) The federal government cuts taxes to stimulate the economy.
E) States increase taxes to fund education.

Question 13

Vulcan Materials stock price soared in the days following the election of President Trump.Vulcan's products,such as asphalt and concrete,are used in construction and President Trump had pledged to bring about increased spending on infrastructure projects that would require such products.Spending on infrastructure projects is an example of ________ aimed at increasing real GDP and employment.

A) discretionary fiscal policy
B) an automatic stabilizer
C) contractionary fiscal policy
D) a transfer payment

Question 14

Since the Social Security system began in 1935,the number of workers per retiree has

A) stayed roughly the same.
B) continually risen.
C) continually declined.
D) risen and declined with different generations.

Question 15

From the 1960s to 2016,transfer payments

A) have risen from 25 percent to about 49 percent of federal government expenditures.
B) remained the same percentage of total federal government expenditures.
C) have declined by half as a percentage of total federal government expenditures.
D) have grown very slowly as a percentage of total federal government expenditures.

Question 16

Federal government expenditures as a percentage of GDP

A) have risen since the early 1950s to the present.
B) have fallen since the early 1950s to the present.
C) rose from 1950 to 1991, fell from 1992 to 2001, rose again until 2011, and have fallen from 2011 to the present.
D) rose from 1950 to 2001 and then fell from 2001 to the present.
E) rose from 1950 to 1980, fell from 1981 to 2001, and have risen from 2001 to the present.

Question 17

Social Security began as a "pay-as-you-go" system,meaning that payments to current retirees were paid

A) from taxes collected from current workers.
B) from taxes collected from retired workers.
C) as long as the government had funds available.
D) as the government collected revenues from tariffs and excise taxes in the years Social Security payments were made.

Question 18

Which of the following would not be considered an automatic stabilizer?

A) legislation increasing funding for job retraining passed during a recession
B) decreasing unemployment insurance payments due to decreased joblessness during an expansion
C) rising income tax collections due to rising incomes during an expansion
D) declining food stamp payments due to more persons finding jobs during an expansion

Question 19

Which of the following is an objective of fiscal policy?

A) energy independence from Middle East oil
B) health care coverage for all Americans
C) discovering a cure for Alzheimer's
D) high rates of economic growth
E) homeland security

Question 20

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of

A) automatic stabilizers.
B) discretionary fiscal policy.
C) discretionary monetary policy.
D) automatic monetary policy.

Question 21

Social Security

A) has not been successful in reducing poverty among elderly Americans.
B) is a system whereby current retirees are paid from taxes collected from current workers.
C) has a greater number of workers per retiree today as compared to when it started.
D) currently pays retirees benefits equal to what they paid into the system.

Question 22

The majority of dollars spent by government prior to the Great Depression was spending at the ________.In the post World War II period,two-thirds to three quarters of all dollars spent by government in the United States are spent at the ________.

A) federal level; state and local levels
B) state and local levels; federal level
C) state and local levels; state level
D) local level; state level

Question 23

The income tax system serves as an automatic stabilizer over the course of the business cycle.

Question 24

President Trump's proposed increase in spending on infrastructure projects is an example of discretionary fiscal policy aimed at increasing

A) real GDP and employment.
B) tax revenues and the federal budget surplus.
C) disposable income and interest rates.
D) the money supply and money demand.

Question 25

A decrease in the marginal income tax rate is a fiscal policy which will increase aggregate demand.

Question 26

Active changes in tax and spending by government intended to smooth out the business cycle are called ________,and changes in taxes and spending that occur passively over the business cycle are called ________.

A) automatic stabilizers; discretionary fiscal policy
B) discretionary fiscal policy; automatic stabilizers
C) automatic stabilizers; monetary policy
D) discretionary fiscal policy; conscious fiscal policy

Question 27

Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability,high rates of economic growth,and high employment.

A) taxes; interest rates
B) taxes; the money supply
C) interest rates; money supply
D) taxes; expenditures

Question 28

Which of the following statements about the Social Security,Medicare,and Medicaid programs is true?

A) Spending on these three programs will rise from 10.4% of GDP currently to 19.7% of GDP by 2040.
B) Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially.
C) Some economists have argued for decreasing taxes to help with these programs' funding problems.
D) Some economists have argued for increasing benefits to help with these programs' funding problems.

Question 29

________ and ________ are the largest sources of revenue collected by the federal government.

A) Individual income taxes; corporate income taxes
B) Individual income taxes; social insurance taxes
C) Corporate income taxes; excise and other taxes
D) Excise and other taxes; individual income taxes

Question 30

An increase in the money supply is a discretionary fiscal policy which will increase aggregate demand.

Question 31

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

A) an increase in unemployment insurance payments during a recession
B) an increase in income tax receipts with rising income during an expansion
C) the tax cuts passed by Congress in 2001 to combat the recession
D) a decrease in food stamps issued during an expansion or boom

Question 32

Which of the following would be considered a fiscal policy action?

A) The Fed increases the money supply.
B) Tax incentives are offered to encourage the purchase of fuel efficient cars.
C) Spending on the war in Afghanistan is increased to promote homeland security.
D) A tax cut is designed to stimulate spending during a recession.

Question 33

Which of the following is the largest category of federal government expenditures?

A) defense spending
B) transfer payments
C) interest on the debt
D) grants to state and local governments

Question 34

The fastest growing category of government expenditure is

A) grants to state and local governments.
B) defense spending.
C) transfer payments.
D) government purchases.

Question 35

As a percentage of GDP,federal expenditures ________ from 1992 to 2001,________ from 2001 to 2011,and have ________ since 2011.

A) rose; fell; risen
B) fell; fell; risen
C) rose; rose; fallen
D) fell; rose; fallen

Question 36

Included in government expenditures are government purchases and transfer payments.

Question 37

Which of the following is a government expenditure,but is not a government purchase?

A) The federal government buys a Humvee.
B) The federal government pays the salary of an FBI agent.
C) The federal government pays out an unemployment insurance claim.
D) The Federal government pays to support research on AIDS.

Question 38

When the Social Security program was in its infancy in 1940,the ratio of workers to retirees was more than 150 to 1.Currently,the ratio of workers to retirees is

A) more than 300 to 1.
B) 50 to 1.
C) less than 3 to 1.
D) an even 1 to 1.

Question 39

Forecasts by the Congressional Budget Office show spending on Social Security,Medicare,and Medicaid rising from 10.4 percent of GDP in 2017 to ________ percent of GDP in 2090,and by 2090 the federal government will be spending,as a fraction of GDP,________ on these three programs as it currently spends on all programs combined.

A) 16.2 percent; nearly as much
B) 16.2 percent; half as much
C) 19.7 percent; nearly as much
D) 19.7 percent; half as much

Question 40

The Social Security and Medicare programs have been a failure in terms of reducing poverty among elderly U.S.citizens.

Question 41

Figure 18-1

Refer to Figure 18-1.Suppose the economy is in a recession and expansionary fiscal policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

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

Question 42

What is the difference between federal purchases and federal expenditures?

Question 43

Figure 18-1

Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising.If contractionary policy is used to move the economy back to long run equilibrium,this would be depicted as a movement from ________ using the basic AD-AS model in the figure above.

A) D to C
B) C to B
C) A to E
D) B to A
E) E to A

Question 44

Figure 18-1

Refer to Figure 18-1.Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

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

Question 45

An increase in government purchases will increase aggregate demand because

A) government expenditures are a component of aggregate demand.
B) consumption expenditures are a component of aggregate demand.
C) the decline in the price level will increase demand.
D) the decline in the interest rate will increase demand.

Question 46

Tax cuts on business income ________ aggregate demand.

A) would decrease
B) would increase
C) would not change
D) may increase or decrease

Question 47

Figure 18-1

Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

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

Question 48

Prior to the 1930s,the majority of dollars spent by government was spent at the state and local levels.

Question 49

What is fiscal policy,and who is responsible for fiscal policy?

Question 50

What is the difference between fiscal policy and monetary policy?

Question 51

List the five categories of federal government expenditures.

Question 52

Expansionary fiscal policy involves

A) increasing government purchases or decreasing taxes.
B) increasing taxes or decreasing government purchases.
C) increasing the money supply and decreasing interest rates.
D) decreasing the money supply and increasing interest rates.

Question 53

Figure 18-1

Refer to Figure 18-1.Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

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

Question 54

Figure 18-1

Refer to Figure 18-1.An increase in taxes would be depicted as a movement from ________,using the basic AD-AS model in the figure above.

A) E to B
B) B to C
C) A to B
D) B to A
E) C to D

Question 55

Tax cuts on business income increase aggregate demand by increasing

A) business investment spending.
B) consumption spending.
C) government spending.
D) wage rates.

Question 56

Congress and the president carry out fiscal policy through changes in

A) interest rates and the money supply.
B) taxes and the interest rate.
C) government purchases and the money supply.
D) government purchases and taxes.

Question 57

Figure 18-1

Refer to Figure 18-1.Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued.Using the basic AD-AS model in the figure above,this would be depicted as a movement from

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

Question 58

Fiscal policy is determined by

A) the Federal Reserve.
B) the president and the Federal Reserve.
C) Congress and the Federal Reserve.
D) Congress and the president.

Question 59

An increase in individual income taxes ________ disposable income,which ________ consumption spending.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 60

Give an example of an automatic stabilizer.Explain how automatic stabilizers work in the case of recession.

Question 61

Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation.

Question 62

Figure 18-2

Refer to Figure 18-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by Congress and the president would be to

A) lower the discount rate of interest.
B) execute an open market sale of government securities.
C) increase government transfer payments.
D) increase marginal income tax rates.

Question 63

Which of the following is considered contractionary fiscal policy?

A) Congress increases the income tax rate.
B) Congress increases defense spending.
C) Legislation removes a college tuition deduction from federal income taxes.
D) The New Jersey legislature cuts highway spending to balance its budget.

Question 64

To combat a recession with discretionary fiscal policy,Congress and the president should

A) decrease government spending to balance the budget.
B) decrease taxes to increase consumer disposable income.
C) lower interest rates and increase investment by increasing the money supply.
D) raise taxes on interest and dividends, but not on personal income.

Question 65

Expansionary fiscal policy will

A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) not shift the aggregate demand curve.
D) shift the short-run aggregate supply curve to the left.

Question 66

The problem causing most recessions is too little

A) money (currency plus checking accounts).
B) spending.
C) unemployment.
D) taxes.

Question 67

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 68

Figure 18-4

Refer to Figure 18-4.In the graph above,suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?

A) an increase in transfer payments
B) an increase in interest rates
C) an increase in the marginal income tax rate
D) an open market purchase of Treasury bills

Question 69

If the economy is falling below potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices.
D) taxes.

Question 70

Decreasing government spending ________ the price level and ________ equilibrium real GDP.

A) decreases; increases
B) increases; decreases
C) increases; increases
D) decreases; decreases

Question 71

Figure 18-3

Refer to Figure 18-3.In the graph above,suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?

A) a decrease in income taxes
B) a decrease in interest rates
C) a decrease in government purchases
D) an increase in the money supply

Question 72

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

A) an increase in government purchases
B) an increase in the supply of money
C) an increase in individual income taxes
D) a decrease in transfer payments

Question 73

Lowering the individual income tax rate will increase household disposable income and consumption spending.

Question 74

Tax increases on business income decrease aggregate demand by decreasing

A) business investment spending.
B) consumption spending.
C) government spending.
D) wage rates.

Question 75

If the economy is growing beyond potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices.
D) taxes.

Question 76

A decrease in individual income taxes ________ disposable income,which ________ consumption spending.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question 77

Figure 18-2

Refer to Figure 18-2.In the graph above,if the economy is at point A,an appropriate fiscal policy by Congress and the president would be to

A) decrease the required reserve ratio.
B) sell government securities.
C) increase government expenditures.
D) decrease transfer payments.

Question 78

Expansionary fiscal policy involves increasing government purchases or increasing taxes.

Question 79

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 80

Which of the following is considered expansionary fiscal policy?

A) Congress decreases the income tax rate.
B) Congress increases defense spending.
C) Legislation increases a college tuition deduction from federal income taxes.
D) The Arizona legislature cuts highway spending to balance its budget.