Deck 16: Fiscal Policy and the Government Budget

Question 1

The major component of federal government consumption is spending on ________.

A)Social Security,Medicare and Medicaid
B)foreign aid
C)capital goods,e.g.highways and schools
D)national defense

Answer 1

national defense

Question 2

Transfer payments,like Social Security,are known as entitlements since ________.

A)they are locked up by earlier legislation
B)the individuals who receive these payments are poor and deserve our support
C)the individuals who receive these payments made payments to the federal government in excess of the monies they draw from the system
D)these monies tend to rise in an economic downturn

Answer 2

they are locked up by earlier legislation

Question 3

Income taxes were made constitutional in the United States by the ________.

A)Recovery Act of 2009
B)16th Amendment to the U.S.Constitution
C)Sherman Anti-Trust Act of 1890
D)Gramm-Leach-Bliley Act of 1999

Answer 3

16th Amendment to the U.S.Constitution

Question 4

A federal government deficit is said to exist in the event that ________.

A)federal outlays are less than federal revenues
B)federal outlays are equal to federal revenues
C)federal outlays are greater than federal revenues
D)any of the above conditions exists

Question 5

The most recent U.S.President to preside over an annual federal budget surplus was ________.

A)George H.W.Bush (1989-1993)
B)Gerald Ford (1974-1977)
C)Dwight Eisenhower (1953-1961)
D)George W.Bush (2001-2009)

Question 6

Among 33 major economies,government spending (relative to GDP)in the United States is ________.

A)relatively low
B)remarkably high
C)about average
D)lowest of all

Question 7

The government budget constraint says that ________.

A)the difference between spending and revenues must equal the amount of new bond issues
B)increases in spending must be matched by increases in revenue
C)interest on government debt must be paid before tax revenues are spent on goods and services or disbursed as transfer payments
D)state and local governments,in aggregate,cannot spend more than the federal government

Question 8

Federal government outlays include ________.

A)transfer payments,grants to states,interest payments on the national debt and income tax revenues
B)grants to states,interest payments on the national debt,income tax revenues and government purchases
C)interest payments on the national debt,income tax revenues,government purchases and transfer payments
D)government purchases,transfer payments,grants to states and interest payments on the national debt

Question 9

In 2012,direct government purchases equaled ________ percent of federal outlays.

A)42
B)71
C)26
D)55

Question 10

What is the formula for the government budget deficit? Why might it be appropriate for most governments,most of the time,to have a deficit (rather than surplus)?

Question 11

Which of the following is not a category of state and local government outlays?

A)purchases of goods and services
B)grants in aid
C)transfer payments
D)interest payments

Question 12

Total spending by all levels of government in the United States in 2012 amounted to roughly ________ per person.

A)$20,000
B)$2,000
C)$200,000
D)$200

Question 13

The primary source of revenue for the federal government of the United States are taxes tied to ________.

A)property values
B)rents and dividends
C)export and import flows
D)income

Question 14

Tariffs are ________.

A)taxes levied on goods imported into the United States
B)levied by state and local governments
C)the primary source of federal revenues
D)taxes on goods exported from the United States

Question 15

In the postwar era,the federal budget has typically been ________.

A)balanced
B)in surplus
C)in deficit
D)the largest component of Gross Domestic Product

Question 16

One of the consequences of inflation between 1950 and the 1970s was ________.

A)a large increase in the federal deficit as a percentage of GDP
B)a relaxation of the government budget constraint
C)an increase in the dependency ratio
D)a reduction in the ratio of debt to GDP

Question 17

At the federal level,transfer payments make up ________.

A)about 98 percent of total outlays
B)about half of total outlays
C)less than one percent of total outlays
D)the gap between government purchases and borrowing

Question 18

A federal government surplus is said to exist in the event that ________.

A)federal outlays are greater than federal revenues
B)federal outlays are equal to federal revenues
C)federal outlays are less than federal revenues
D)any of the above conditions exists

Question 19

In 2012,direct government purchases equaled ________ percent of expenditures of all levels of government.

A)71
B)42
C)26
D)55

Question 20

The smallest component of federal outlays is ________.

A)government purchases
B)transfer payments
C)interest on government debt
D)grants to states

Question 21

In this causal schematic of a sovereign debt crisis:
,austerity measures attempt to break the adverse feedback loop at point ________.

A)4
B)3
C)2
D)5

Question 22

As of 2013,the debt of the U.S.government amounted to roughly ________ per person.

A)$50,000
B)$8 million
C)$500,000
D)$800

Question 23

Suppose total government spending is increased permanently by ten percent,with no change in tax rates.In the long run,the resulting deficit will disappear,________.

A)only if government spending is brought back down to the original level
B)if economic growth raises tax revenue by ten percent
C)if the government debt is sold to foreigners
D)unless the money is spent entirely on government consumption

Question 24

As of 2011,government debt as a percentage of GDP was ________ in the United States,compared to 29 other major economies.

A)higher than average
B)extremely low
C)highest
D)lower than average

Question 25

Federal transfers are expected to grow significantly in the coming decades,due especially to increases in ________.

A)federal government consumption
B)federal deficits
C)Medicare and Medicaid
D)Social Security payments

Question 26

Sovereign debt crises are triggered ________.

A)by innovations in subprime real estate markets
B)when a country's debt-to-GDP ratio becomes excessively high
C)when austerity measures cause a sharp fall in the supply of government bonds
D)by the adoption of a common currency,such as the euro

Question 27

Tax smoothing is intended to ________.

A)reduce income inequality
B)avoid fluctuations in the ratio of the government deficit to GDP
C)shift the burden from current taxpayers onto future generations
D)keep the tax wedge from shrinking

Question 28

In this causal schematic of a sovereign debt crisis:
,austerity measures designed to reduce the government deficit (point 4)may have the undesired effect of intensifying the adverse feedback loop at point 5.The source of this danger is ________.

A)contraction of the macroeconomy
B)income received by owners of the government debt is reduced
C)a sharp increase in the value of the government's debt
D)political opposition and toppling of the ruling party

Question 29

Sustained federal deficits tend,other things the same,________.

A)to decrease income inequality in the United States
B)to decrease income inequality in Europe but not the United States
C)to increase income inequality in the United States
D)have little effect on the distribution of income in market economies

Question 30

The pay-as-you-go system for the Social Security System entails.________.

A)a transfer of payments from those currently working to retirees
B)taxing the import and export of goods and services into an out of the United States
C)a number of current retirees that exceeds the number of employed individuals
D)issuing additional government debt in the event of budget surplus

Question 31

The phenomenon of crowding-out suggests that the positive impact of budget deficits on economic activity are reduced by ________.

A)the impact produced by government spending on the environment
B)an increase in national savings
C)the interest rate effects associated with federal deficits
D)the increase in pork barrel projects deficit spending entails

Question 32

The Congressional Budget Office projects that Social Security spending will rise from 5% of GDP to 6% over the next four decades.Why is that a problem?

Question 33

The negative impact of government debt on the economy is mitigated by ________.

A)the impact of the debt on national saving
B)government spending on schools and highways
C)the interest rate effects of government budget deficits
D)the phenomenon of crowding-out

Question 34

________ refers to a government's failure to repay its debt.

A)Intolerance
B)Distortion
C)Seignorage
D)Repudiation

Question 35

In the next several decades,the dependency ratio relevant to the Social Security system is expected to ________.

A)remain largely unchanged
B)rise
C)fall
D)fluctuate unpredictably

Question 36

The term "sovereign debt crisis" applies when ________.

A)private businesses cannot borrow money because the government is borrowing so much
B)nations compete fiercely with each other to increase their borrowing
C)a government finds that the cost of borrowing is higher than it had anticipated
D)the debt of a particular government quickly loses value

Question 37

The ratio of retirees to workers who make contributions to the Social Security system ________.

A)has increased over the years
B)increased as a result of the baby boom following World War II,but has subsequently declined
C)has fallen with the decline in U.S.birth rates
D)determines the size of contributions to the system

Question 38

Sovereign debt crisis,a short-run phenomenon,may lead to the long-run consequence of debt ________.

A)intolerance
B)distortion
C)seignorage
D)repudiation

Question 39

In this causal schematic of a sovereign debt crisis:
,liquidity support from a central bank attempts to break the adverse feedback loop at point ________.

A)4
B)3
C)2
D)5

Question 40

Private saving + Government saving equals ________.

A)Taxes + Investment
B)Output minus Consumption
C)Government capital + human capital
D)Investment + Net exports

Question 41

A cut in the payroll tax will tend to cause,other things the same,________.

A)a change in aggregate demand,with no effect on supply
B)a change in both aggregate demand and supply
C)a change in aggregate supply,with no effect on demand
D)no change in either aggregate demand or supply

Question 42

Most state governments in the United States operate under constitutional provisions that severely restrict expenditures financed by borrowing.Suppose this were to change,so that state governments' access to credit markets was no different from the federal government.What consequences would you predict for the nation's aggregate debt burden?

Question 43

Fiscal policy involves manipulating ________.

A)the supply of money
B)consumption spending
C)federal subsidies and minimum wage values
D)government spending and taxes

Question 44

The American Recovery and Reinvestment Act of 2009 provided ________.

A)tax cuts of $288 million and a government spending increase of $499 million
B)tax cuts of $288 million and a government spending increase of $499 billion
C)tax cuts of $288 billion and a government spending increase of $499 billion
D)tax cuts of $288 trillion and a government spending increase of $499 trillion

Question 45

Fiscal policy is the responsibility of ________.

A)the Federal Reserve System
B)the Comptroller of the Currency
C)the President and U.S.Congress
D)High Commissioner for Refugees

Question 46

When a government has decided on a permanent spending increase,a valid reason to increase borrowing rather than taxes might be to ________.

A)to avoid an unnecessary stimulus to aggregate demand
B)to shift the burden from domestic taxpayers to foreign bond holders
C)to avoid distortions that might reduce long-run aggregate supply
D)to avoid an increase in income inequality

Question 47

What is the relationship between fiscal multipliers and the "zero lower bound"?

A)Fiscal multipliers cannot fall below zero.
B)When monetary policy has hit the zero lower bound,fiscal multipliers are likely to be larger than normal.
C)At the zero lower bound,a fiscal contraction is actually expansionary.
D)At the zero lower bound,fiscal policy works by shifting the aggregate supply curve,rather than shifting the aggregate demand curve.

Question 48

In the wake of the financial crisis of 2007-2009,the debt-to-GDP ratio has risen in many countries around the world.Should the expenditures enabled by this debt be considered government consumption or government investment?

Question 49

According to the IS curve,the tax multiplier is always ________.

A)larger in absolute value than the expenditure multiplier
B)equal to the expenditure multiplier
C)smaller in absolute value than the expenditure multiplier
D)equal to one

Question 50

The impact of a change in taxes on income is likely to be less than the effect resulting from a change in government spending since ________.

A)the federal government typically operates in a deficit situation
B)exports and imports can only assume positive values,but net exports can be positive or negative
C)changes in the supply of money will be necessary if government spending is increased
D)changes in taxes exert an indirect impact on total spending through changes in consumption

Question 51

The tax multiplier is most likely to be larger than the expenditure multiplier when ________.

A)monetary policy is at the zero lower bound
B)rising inflation causes the real interest rate to decline
C)when the change in tax revenue is large relative to the change in government purchases
D)the expansionary fiscal policy is expected to be followed by higher taxes

Question 52

The American Recovery and Reinvestment Act of 2009 ________.

A)offered a mix of tax cuts and spending increases
B)relied primarily on monetary expansion to achieve its ends
C)was consistently opposed by the Obama Administration
D)provided direct subsidy support to troubled financial institutions such as hedge funds

Question 53

Taxes on wages,such as Social Security taxes,are known as ________.

A)payroll taxes
B)lump sum taxes
C)capitol hill gains
D)cost of living adjustments (COLAs)

Question 54

The policy of keeping tax rates stable as government spending fluctuates is known as ________.

A)Ricardian equivalence
B)tax smoothing
C)crowding-out
D)a tax smoothie

Question 55

A tax wedge is ________.

A)the difference between the tax rate on income and capital gains
B)equal to the difference between what people earn before and after taxes are accounted for
C)the size of the decrease in labor force participation when labor income is taxed
D)the difference between the rate on Treasury securities and the income tax rate

Question 56

Supply-side economics focuses on ________.

A)the positive effect of tax cuts on aggregate supply
B)the impact of an increase in the rate of inflation on aggregate supply
C)the impact of changes in aggregate supply on market demand
D)the trade-off between aggregate demand and aggregate supply

Question 57

Payroll taxes levy taxes on ________.

A)consumption
B)imports
C)wages
D)exports

Question 58

A government debt larger than the economy's GDP ________.

A)is an example of debt repudiation
B)is a predictor of future large budget deficits
C)is a consequence of debt intolerance
D)is a possible consequence of tax smoothing

Question 59

A default in the past makes it much more likely that a government will default again,even if the current government is a new regime with every intention of honoring its debts.Why might that be?

Question 60

A(n)________ in aggregate demand will result from a decrease in ________.

A)decrease;inflation
B)increase;taxes
C)increase;the budget deficit
D)increase;government purchases

Question 61

On the graph above,a permanent tax reduction,assuming that there is a permanent effect on aggregate supply,is likely to move the economy from point 1 to point ________.

A)2
B)8
C)6
D)3

Question 62

According to Ricardian Equivalence theory,a tax cut ________.

A)will tend to have little economic effect
B)will tend to reduce the magnitude of the trade-off between inflation and the rate of unemployment
C)can be an effective policy tool in the midst of an economic downturn
D)must be used in conjunction with money supply changes over the course of the business cycle

Question 63

What is the relationship between debt intolerance and the inflation tax?

Question 64

Why might the tax multiplier be smaller than the expenditure multiplier? Under what circumstances might the reverse be true?

Question 65

On the graph above,suppose the economy is at point 1.Which sequence of points best illustrates the short-run and then long-run impacts if taxes are reduced for one year,then returned to the original level? [Assume that potential output remains constant at
.]

A)7,2,5
B)2,4,1
C)2,7,6
D)7,8,1

Question 66

According to supply-side theory,a cut in taxes will tend to cause ________.

A)a decline in the amount of total tax revenue collected
B)no change in the amount of total tax revenue collected
C)an increase in the amount of total tax revenue collected
D)individual workers to devote more time to leisure activities

Question 67

Fiscal Policy Analysis
On the graph above,an increase in government spending,with no change in taxes,is likely to move the economy from point 1 to point ________.

A)8
B)6
C)3
D)5

Question 68

On the graph above,suppose the economy is at point 6.Which sequence of points best illustrates the short-run and then long-run impacts of an "expansionary fiscal contraction"?

A)2,7,8
B)4,7,1
C)1,4,5
D)1,4,2

Question 69

Seignorage is also known as an inflation tax since ________.

A)money balances lose value in real terms
B)inflation can be caused by rising energy costs
C)higher interest rates can crowd-out investment spending
D)budget deficits entail an increase in the size of the national debt

Question 70

Monetizing the debt is undesirable given its impact on ________.

A)investment
B)nominal income
C)tariff rates
D)prices

Question 71

According to supply-side theory,if one starts from a balanced budget,a cut in taxes will tend to cause ________.

A)a budget deficit
B)no change in the federal government budget
C)a decrease in aggregate supply and an increase in aggregate demand
D)a budget surplus

Question 72

On the graph above,suppose the economy is at point 1.Which sequence of points best illustrates the short-run and then long-run impacts of a permanent tax reduction? [Assume that potential output remains constant at
.]

A)2,4,1
B)7,2,5
C)2,7,6
D)7,8,1

Question 73

According to supply-side economics,a cut in taxes will affect total tax revenue,because ________.

A)the level of productivity should fall precipitously with a tax cut
B)a tax cut will be followed by an even larger decrease in government spending
C)of the resulting increase in saving
D)of the positive impact on the level of income

Question 74

Government austerity measures are more likely to resolve a sovereign debt crisis if ________.

A)the real interest rate falls along with inflation
B)the fiscal multipliers are especially large
C)no aid is available from other countries,so the government is not tempted to abandon the austerity plan
D)citizens,also,adopt austerity

Question 75

A measure of seignorage,in real terms,is ________.

A)π ×
B)ΔB + ΔM
C)r ×
D)Y - T - C

Question 76

Monetizing the debt occurs when ________.

A)government securities are issued
B)government securities are sold by the central bank
C)government securities are bought by the central bank
D)tax revenues fall short of government expenditures

Question 77

A tax ________ is more likely to cause a permanent increase in investment and worker productivity in an economy with a ________.

A)increase;small government budget deficit
B)decrease;large government budget deficit
C)decrease;high inflation rate
D)increase;large government budget deficit

Question 78

In the long-run,the inflation rate will move very closely with ________.

A)the growth rate of the money supply
B)the change in government debt
C)the growth rate of government expenditures
D)changes in tax rates

Question 79

Government revenue generated by the issue of currency is known as ________.

A)monetizing the debt
B)triage
C)seignorage
D)hyperinflation

Question 80

Apply the concept of tax smoothing to the debate over tax-based versus spending-based fiscal stimulus.