Deck 14: Fiscal Policy

Question 1

The benefits received principle suggests that those with the least ability to pay should be the ones to receive the benefits.

Answer 1

False

Question 2

In 2012-13, more than one quarter of federal government spending went to Social Security and income security programs in the United States.

Answer 2

True

Question 3

Supply-side economists encourage government to reduce taxes, deregulate, and increase spending on research and development because they think that these types of policies lead to greater long-run economic growth

Answer 3

False

Question 4

Taxes for the most part are efficient because they increase the incentive to work and align the values that buyers and sellers place on goods and services.

Question 5

Most flat tax proposals call for exempting income up to a certain minimum level

Question 6

Vertical equity is the concept that people with different levels of income should be treated differently

Question 7

Supply-siders are generally critical of government intervention and regulation because they believe that regulations can be costly impediments to economic growth

Question 8

Many economists believe that tax cuts increase incentives to work and invest, but current U.S. tax levels do not appear to be on the downward side of the Laffer curve

Question 9

The issuance of debt involves some intergenerational transfer of income.

Question 10

Robert lost his job during the last recession, and his annual income fell by 15 percent. As a result of the action of automatic stabilizers, his disposable income is likely to have fallen by less than 15 percent.

Question 11

Fiscal policy is a plan for taxing and spending that is designed to steer an economy in a desired direction

Question 12

A flat tax would increase the possibilities of abuses and misrepresentations that go with tax deductions.

Question 13

An investment tax credit, which lowers taxes for firms that invest in new capital equipment, would shift the long-run aggregate supply curve of an economy to the right over time.

Question 14

In a proportional tax system, each individual would pay the same dollar amount in taxes.

Question 15

When payroll taxes and Medicare are taken into consideration, the tax system in the United States becomes more progressive than when viewing the federal income tax individually

Question 16

If recession is the most significant issue in an economy, an appropriate fiscal policy response would be to decrease government purchases of goods and services.​

Question 17

An excise tax is an example of a regressive tax.

Question 18

If inflation is the most significant issue in an economy, an appropriate fiscal policy response would be to decrease taxes

Question 19

An excess of government revenues over expenditures results in a budget deficit

Question 20

In a recession, automatic stabilizers decrease taxes and increase transfer payments.

Question 21

A regressive tax

A)imposes a greater burden on those with higher incomes than on those with lower incomes
B)is based on the benefits received principle.
C)takes a greater percentage of the income of lower-income groups than of higher-income groups.
D)is considered to be the most equitable type of tax
E)is based on the ability to pay principle

Question 22

Suppose a flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages and the flat tax rate is 12 percent. An individual earning $20,000 a year would pay:

A)$2,400 in taxes
B)$1,200 in taxes
C)$3,000 in taxes
D)$0 in taxes
E)$2,000 in taxes

Question 23

The benefits received principle would not work well in which of the following cases?

A)A tax on gasoline
B)National defense
C)Movie tickets
D)Admission fees to a national park
E)Taxes on the imports of consumer goods

Question 24

Which of the following accounted for the highest percentage of federal government spending in the United States in 2013?

A)Net interest on national debt
B)National defense
C)Infrastructure
D)Social Security
E)Salaries of government employees

Question 25

If Jim earns $300,000 a year and pays $75,000 in taxes and Sharon earns $80,000 a year and pays $20,000 in taxes, this tax system would be an example of:

A)progressive taxation
B)proportional taxation
C)regressive taxation
D)Marshallian taxation
E)Pigouvian taxation

Question 26

Which of the following would be an example of an expansionary fiscal policy?

A)An increase in taxes
B)A decrease in government purchases
C)An increase in government purchases
D)An increase in the reserve requirement ratio
E)An increase in the discount rate

Question 27

Which of the following is generally considered the most regressive type of tax?

A)Gift tax
B)The federal income tax
C)Sales tax
D)Payroll tax
E)Estate tax

Question 28

The U.S. federal government relies more heavily on _____ than any other government in the world.

A)excise taxes
B)estate taxes
C)customs duties
D)income-based taxes
E)property taxes

Question 29

Suppose a flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages and the flat tax rate is 12 percent. Jonathan who earns $50,000 a year would have to pay

A)$0 in taxes.
B)$1,200 in taxes.
C)$3,000 in taxes
D)$6,000 in taxes
E)$4,000 in taxes

Question 30

The government's fiscal policy is its plan to regulate aggregate demand in an economy by manipulating:

A)the money supply.
B)the money supply
C)the treasury.
D)the unemployment rate.
E)the unemployment rate

Question 31

The ability to pay principle suggests that

A)tax exemptions should be removed because they are more frequently used by people with the ability to pay more taxes.
B)people with different levels of income should be treated in the same manner
C)individuals receiving the benefits should be those who pay for them.
D)people who can pay more taxes should pay more than people who are unable to pay high taxes.
E)tax exemptions should be increased because they encourage investment and savings

Question 32

The administrative burden of taxation refers to the

A)disincentive for individuals and businesses to work to generate income.
B)individuals' cost of preparing tax returns and the government's cost of enforcing tax laws.
C)opportunity cost of social programs
D)net interest that must be paid on the national debt
E)amount of taxes that has to be paid by individuals and corporates.

Question 33

A flat tax:

A)is designed so that everybody would pay the same number of dollars in taxes.
B)is designed in such a way that the tax rate decreases as a person's income rises.
C)is designed so that everybody would be charged the same percentage of their income in tax.
D)is designed to take a smaller percentage of higher incomes than of lower incomes
E)is designed in such a way that the tax rate increases as a person's income rises

Question 34

A progressive tax is:

A)designed to take a larger percentage of the income of higher-income groups than of lower-income groups
B)designed to take a greater percentage of the income of lower-income groups than of higher-income groups
C)designed so that everybody would be charged the same percentage of their income as taxes.
D)based on the benefits received principle.
E)not based on the ability to pay principle

Question 35

Which of the following accounted for the largest percentage of federal taxes in the United States in 2012?

A)Excise taxes
B)Social security taxes
C)Individual income taxes
D)Corporate income taxes
E)Property taxes

Question 36

If Stephen earns $100,000 a year and pays $20,000 in taxes and Chris earns $50,000 a year and pays $5,000 in taxes, the tax system is:

A)progressive
B)proportional
C)regressive
D)not based on the ability to pay principle
E)based on the benefits received principle

Question 37

Which of the following is an example of a progressive tax?

A)Estate tax
B)The federal income tax
C)Excise tax
D)Payroll tax
E)Sales tax

Question 38

Suppose a flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages and the flat tax rate is 10 percent. Above $25,000 in wages, the average tax rate:

A)would remain constant with an increase in income.
B)would increase with an increase in income.
C)would decrease by 2 percent with an increase in income
D)would decrease by 4 percent with an increase in income.
E)would decrease by 6 percent with an increase in income

Question 39

Which of the following is not an option that could be used to save Social Security?

A)Decreasing the age required for full-time benefits
B)Implementing means testing
C)Allowing individuals to opt out of the Social Security system
D)Increasing the return to Social Security funds
E)Increasing the payroll tax rates

Question 40

Suppose a flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages and the flat tax rate is 12 percent. If Jonathan's income increases to $100,000 a year, he would have to pay

A)$9,000 to the government.
B) $6,000 to the government
C)$3,000 to the government
D)$1,200 to the government
E)$8,000 to the government.

Question 41

A decrease in government purchases, other things constant, would:

A)increase unemployment in an economy in the short run
B)increase the price level in an economy in the short run
C)decrease unemployment in an economy in the short run.
D)increase the real gross domestic product in an economy in the short run.
E)decrease the market interest rate in an economy in the short run.

Question 42

A reduction in taxes, combined with an increase in government purchases in an economy, would:

A)increase aggregate demand and close a recessionary gap in the economy.
B)decrease aggregate demand and create a recessionary gap in the economy
C)leave aggregate demand unchanged and create a recessionary gap in the economy.
D)have an indeterminate effect on aggregate demand and close a recessionary gap in the economy.
E)have an indeterminate effect on aggregate demand and create a recessionary gap in the economy

Question 43

The figure below shows the aggregate demand curve along with both the long-run and the short-run aggregate supply curves in an economy. The economy can move from point E₀ to E₁ through:Figure 14-1​

A)a decrease in taxes and an increase in government purchases, other things constant.
B)an increase in taxes and government purchases, other things constant
C)a decrease in taxes and government purchases, other things constant.
D)an increase in taxes and a decrease in government purchases, other things constant.
E)an increase in taxes and an increase in the discount rate, other things constant.

Question 44

Suppose the federal government buys $10 million worth of aircraft engines from an aircraft engine building company. If the marginal propensity to consume (MPC) is 0.80, other things constant, aggregate demand will

A)increase by $8 million
B)increase by $12.5 million.
C)increase by $18 million.
D)increase by $50 million.
E)increase by $5 million

Question 45

Expansionary fiscal policy will result in _____ price level and _____ employment in the short run in an economy, other things constant

A)a higher; higher
B)a higher; lower
C)an indeterminate change; higher
D)a lower; lower
E)a higher; an indeterminate change in

Question 46

An increase in taxes in an economy, other things constant, will:

A)decrease unemployment in the economy in the long run
B)decrease the price level in the economy in the long run
C)increase real output in the economy in the long run.
D)create an inflationary gap in the economy
E)create a recessionary gap in the economy.

Question 47

If the government wants to decrease the price level and real output in an economy in the long run, it should engage in a(n):

A)increase in government purchases and transfer payments.
B)increase in taxes and transfer payments
C)decrease in taxes and an increase in transfer payments.
D)increase in taxes and a decrease in government purchases.
E)increase in government purchases and net exports.

Question 48

An expansionary fiscal policy consists of:

A)increased taxes and/or increased transfer payments.
B)decreased taxes and/or decreased transfer payments.
C)increased taxes and/or decreased transfer payments.
D)decreased taxes and/or increased transfer payments.
E)increased taxes and/or increased money supply.

Question 49

If the marginal propensity to consume is 0.8, the marginal propensity to save is:

A)0.8
B)0.4.
C)0.2.
D)0.3.
E)1.2.

Question 50

Contractionary fiscal policy consists of a(n):

A)increase in government purchases, an increase in taxes, and/or an increase in transfer payments.
B)decrease in government purchases, a decrease in taxes, and/or a decrease in transfer payments.
C)decrease in government purchases, an increase in taxes, and/or a decrease in transfer payments
D)increase in government purchases, a decrease in taxes, and/or an increase in transfer payments.
E)decrease in government purchases, a decrease in open market operations, and/or an increase in the discount rate

Question 51

Assume the marginal propensity to consume (MPC) is 0.8 and there is a $200 billion increase in government purchases in an economy, other things constant. In the first round of induced additional consumption, consumption expenditures will increase by:

A)$80 billion.
B)$160 billion.
C)$200 billion.
D)$800 billion.
E)$280 billion

Question 52

Among the following marginal propensity to consume (MPC) values, which one would have the highest multiplier effect?

A)1/3
B)2/3
C)3/4
D)2/5
E)1/5​

Question 53

If the marginal propensity to consume is 4/5, the value of the multiplier is:

A)20.
B)5.
C)1
D)1/5
E)0.8.

Question 54

If unemployment is the most significant problem in an economy, which of the following actions would be an appropriate fiscal policy response?

A)A decrease in taxes
B)A decrease in transfer payments
C)A decrease in the federal budget deficit
D)An increase in the federal budget surplus
E)A decrease in government purchases

Question 55

If the marginal propensity to consume is 0.75, a $40 billion decrease in government purchases, all other things constant, would:

A)reduce consumption by $160 billion in the first round and overall aggregate demand by $640 billion.
B)reduce consumption by $120 billion in the first round and overall aggregate demand by $480 billion.
C)reduce consumption by $40 billion in the first round and overall aggregate demand by $160 billion.
D)reduce consumption by $30 billion in the first round and overall aggregate demand by$160 billion.
E)reduce consumption by $25 billion in the first round and overall aggregate demand by $640 billion.

Question 56

Suppose the marginal propensity to consume (MPC) is 0.8. To achieve a $500 billion increase in aggregate demand, other things constant, government purchases in an economy should increase by:

A)$625 billion.
B)$500 billion.
C)$400 billion
D)$100 billion
E)$200 billion

Question 57

If policy makers were worried about the inflationary potential of an economy, which of the following would be an appropriate fiscal policy measure?

A)A decrease in consumption taxes
B)A decrease in government purchases
C)An increase in transfer payments
D)Open market operations
E)Deficit spending

Question 58

If the marginal propensity to consume is 0.8, a $200 billion increase in government purchases, other things constant, would:

A)increase consumption in the first round by $80 billion and overall aggregate demand by $400 billion.
B)increase consumption in the first round by $160 billion and overall aggregate demand by $1 trillion.
C)increase consumption in the first round by $200 billion and overall aggregate demand by $1 trillion.
D)increase consumption in the first round by $800 billion and overall aggregate demand by $4 trillion
E)increase consumption in the first round by $400 billion and overall aggregate demand by $4 trillion.

Question 59

Suppose the U.S. economy experiences a recessionary gap. Which of the following would be the most appropriate policy measure to close the recessionary gap?

A)Eliminating a budget deficit through a decrease in government expenditures
B)Increasing government purchases, decreasing taxes, and/or increasing transfer payments
C)Decreasing government purchases, increasing taxes, and/or reducing transfer payments
D)Increasing government purchases and increasing taxes by more than the increase in government purchases
E)Ensuring a budget surplus by increasing taxes

Question 60

A $100 billion decrease in government purchases in an economy, other things constant, would:

A)increase aggregate demand by approximately $500 billion if the marginal propensity to consume were 0.8
B)decrease aggregate demand by approximately $300 billion if the marginal propensity to consume were 2/3
C)increase aggregate demand by $ approximately 200 billion if the marginal propensity to consume were 0.5.
D)decrease aggregate demand by approximately $40 billion if the marginal propensity to consume were 0.4
E)increase aggregate demand by approximately $400 billion if the marginal propensity to consume were 0.4.

Question 61

Supply-side economics stresses that a tax cut and an investment tax credit would shift:​

A)only the aggregate demand curve.
B)the short-run aggregate supply curve to the left.
C)both the aggregate supply and the aggregate demand curves.
D)neither the aggregate supply nor the aggregate demand curve.
E)the long-run aggregate supply curve to the left

Question 62

Supply-side advocates believe that when taxes and regulations are too burdensome, people will:​

A)save more.
B)work less
C)provide less capital for investment
D)consume less
E)consume more

Question 63

A substantial cut in marginal tax rates, other things constant, would:

A)increase real gross domestic product in the short run and the long run.
B)increase real gross domestic product in the short run but not in the long run.
C)increase the price level in the short run.
D)decrease the price level in the short run.
E)decrease real gross domestic product in the short run and the long run

Question 64

Which of the following is one of the most important automatic stabilizers?

A)Open market operations
B)The reserve requirement ratio
C)The tax system
D)Deficit spending
E)Quantitative easing

Question 65

If the marginal propensity to consume (MPC) is 4/5, a decrease in government purchases by $10 billion, other things constant, will ultimately lead to a:

A)$30 billion increase in aggregate demand in an economy.
B)$10 billion increase in aggregate demand in an economy
C)$10 billion decrease in aggregate demand in an economy.
D)$50 billion decrease in aggregate demand in an economy.
E)$8 billion decrease in aggregate demand in an economy.

Question 66

A proponent of supply-side economics would be most likely to stress that:

A)high marginal tax rates would lead to a reduction in the budget deficit and lower interest rates in an economy
B)high marginal tax rates would promote economic inefficiency and decrease aggregate output in an economy.
C)income redistribution payments would have little impact on real aggregate supply in an economy.
D)a tax reduction would reduce incentives to work and invest in an economy.
E)government purchases rather than tax cuts would be better suited to stimulate aggregate demand in an economy

Question 67

Which of the following is true if the government cuts taxes in a way that reduces marginal tax rates as opposed to a way that does not reduce marginal tax rates if the impact on tax revenues is the same in both cases?

A)Both actions will exert the same impact on aggregate supply and demand
B)Lower marginal tax rates will increase the incentive to earn income and, thereby, stimulate aggregate supply.
C)Both cases will increase people's incentive to save in the expectation of higher future taxes and, thereby, offset the stimulus effect of lower taxes.
D)Interest rates will increase if marginal tax rates are lowered, whereas they will decrease if marginal tax rates are left unchanged.
E)Interest rates will increase if marginal tax rates are lowered, whereas they will decrease if marginal tax rates are left unchanged

Question 68

Which of the following best describes the effect of automatic stabilizers during a period of recession in an economy?

A)Aggregate demand in the economy will be less than it would be without automatic stabilizers.
B)Aggregate demand in the economy will be the same as it was before the recession.
C)Aggregate demand in the economy will be more than it would be without automatic stabilizers.
D)The price level in the economy will decrease less than it would without automatic stabilizers. ​
E)The government revenue will be the same as it was before the recession.

Question 69

Which of the following is true of multipliers?

A)The tax multiplier is smaller than the government spending multiplier.
B)The government cannot stimulate consumer spending using the tax multiplier.
C)The government spending multiplier is smaller than the tax multiplier.
D)The multiplier effect is restricted to changes in government purchases only.
E)The multiplier effect is restricted to changes in taxes only.

Question 70

A substantial increase in marginal tax rates in an economy is most likely to encourage individuals:

A)to choose work over leisure.
B)to invest more.
C)to spend more of their scarce resources looking for tax shelters.
D)to depend on transfer payments.
E)to contribute to Social Security payments.

Question 71

Economists agree that the multiplier effect on real output is close to zero when

A)inflation is very low in an economy
B)an economy is at or near full employment
C)the national debt is relatively small.
D)"shovel-ready" projects exist.
E)an economy is in an inflationary gap.

Question 72

A cut in marginal tax rates, all other things constant, would:

A)increase the price level and decrease real gross domestic product in the short run if it has no effect on short-run aggregate supply.
B)increase the price level and real gross domestic product in the short run, even if possible aggregate supply effects are included.
C)increase real gross domestic product in the short run, but there is an indeterminate effect on the price level if there are no supply-side effects on aggregate supply.
D)increase real gross domestic product in the short run, but there is an indeterminate effect on the price level if the supply-side effects on aggregate supply are included.
E)decrease the price level in the short run, but the effect on real gross domestic product is indeterminate if supply-side effects are included.

Question 73

A change in taxes primarily affects aggregate demand by altering:

A)exports and net exports
B)investment by an equal and opposite amount.
C)disposable income and consumption spending.
D)government purchases by an equal amount.
E)imports and net exports

Question 74

Which of the following is true of automatic stabilizers?

A)They increase aggregate demand during a recession and decrease aggregate demand during an economic expansion
B)They decrease aggregate demand during a recession and increase aggregate demand during an economic expansion
C)They do not have any effect on aggregate demand during a recession but increase aggregate demand during an economic expansion
D)They decrease aggregate demand during a recession but do not have any effect on aggregate demand during an economic expansion.
E)They decrease the price level during a recession but do not have any effect on the price level during an economic expansion.

Question 75

Each additional round of the multiplier process will tend to be larger:

A)the smaller the marginal propensity to consume.
B)the greater the rate of taxes.
C)the less people save from increases in their incomes
D)the larger the fraction of each dollar of domestic income spent on imported goods
E)the larger the marginal propensity to save.

Question 76

Other things equal, the multiplier will be greater

A)the larger the fraction of each dollar earned that goes to taxes.
B)the larger the marginal propensity to consume.
C)the larger the fraction of each dollar of disposable income that goes to saving.
D)the larger the marginal propensity to save.
E)the steeper the aggregate demand curve.

Question 77

The primary benefit of automatic stabilizers is that:

A)they provide public assistance through legislative decision making.
B)there is no legislative lag before these tools respond to fluctuations in the business cycle
C)they take time to come into effect and there is time to identify the spillover effects
D)they help control hyperinflation in an economy.
E)they help prevent deflation in an economy.

Question 78

A supply-side economist would be most likely to favor:

A)lower investment tax credits.
B)an increase in capital gains taxes
C)lower marginal income tax rates.a flat tax rate on all personal income.
D)an increase in the personal income tax rate for high-income individuals.
E)a flat tax rate on all personal income.

Question 79

A decrease in government purchases will have a smaller effect on aggregate demand:

A)the larger the marginal propensity to consume.
B)the larger the average propensity to consume.
C)the larger the marginal propensity to save.
D)the larger the average propensity to save.
E)the smaller the marginal rate of taxation.

Question 80

The extent of the multiplier effect visible within a short time will be _____ the total effect indicated by the multiplier formula.

A)significantly higher than
B)equal to
C)less than
D)slightly higher than
E)insignificant compared to