Deck 16: Fiscal Policy and the Government Budget

Question 1

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)

Answer 1

George W. Bush (2001-2009)

Question 2

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 2

16th Amendment to the U.S. Constitution.

Question 3

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 3

national defense.

Question 4

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 5

The government budget constraint says that ________.

A) the difference between spending and revenues must equal the sum of new bond issues and new money creation
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 6

A 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 7

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 8

In 2009, direct government purchases equaled ________ percent of expenditures of all levels of government.

A) 71
B) 44
C) 29
D) 55

Question 9

Among 31 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 10

In 2009, direct government purchases equaled ________ percent of federal outlays.

A) 44
B) 71
C) 29
D) 55

Question 11

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 12

The smallest component of government outlays is ________.

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

Question 13

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 14

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 15

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 16

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 17

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 18

Total spending by all levels of government in the United States in 2009 amounted to roughly ________ per person.

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

Question 19

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.

Question 20

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 real GDP

Question 21

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 22

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 23

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

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

Question 24

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 25

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 26

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 27

The Congressional Budget Office projects that Social Security spending will rise from 4.8% of GDP to 5.7% over the next four decades. Why is that a problem?

Question 28

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 29

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 30

Private saving + Government saving equals ________.

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

Question 31

As of 2008, government debt as a percentage of GDP was ________ in the United States, compared to 29 other major economies.

A) at a moderate level
B) extremely low
C) exceptionally high
D) much lower than average

Question 32

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 33

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 34

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 35

As of 2010, the debt of the U.S. government amounted to roughly ________ per person.

A) $25,000
B) $8 million
C) $800,000
D) $800

Question 36

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 37

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 38

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 39

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 40

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 41

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 42

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 43

Payroll taxes levy taxes on ________.

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

Question 44

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 45

Fiscal Policy Analysis

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 Y .]

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

Question 46

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 47

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 48

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 49

Fiscal Policy Analysis

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 Y .]

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

Question 50

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 51

Fiscal Policy Analysis

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 52

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 53

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 54

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 55

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

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

Question 56

Fiscal Policy Analysis

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 57

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 58

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 59

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 60

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 61

Violations of the Stability and Growth Pact of 1997 were subject to a penalty of ________.

A) a deposit of $12.5 billion with the Federal Reserve System
B) termination of their participation in the Euro system of central banks
C) required sale of government securities at a discounted price
D) a fine equaling 0.2 to 0.5 percent of its GDP

Question 62

According to Ricardian equivalence, a long-run impact on the economy occurs when the government ________.

A) lowers taxes
B) issues more government bonds
C) increases spending on capital goods
D) raises taxes

Question 63

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 64

According to Ricardian Equivalence, a tax cut will not have a material impact on consumption spending since ________.

A) households will simply save the monies received from the tax cut.
B) the value of the tax multiplier is one.
C) a tax cut must lead to an increase in prices, which leaves the real value of consumption unchanged.
D) a decrease in taxes will be balanced, under current federal law, by a government spending increase.

Question 65

The Stability and Growth Pact of 1997 required member countries to ________.

A) perform bank stress tests to determine the soundness of their respective financial sectors
B) maintain an inflation rate within a band of 4 percentage points centered on the Eurozone average
C) avoid budget deficits greater than 3% of GDP
D) sell government debt exclusively to the European Central Bank

Question 66

According to Ricardian Equivalence, crowding-out ________.

A) is incomplete.
B) will raise the level of domestic income.
C) is complete.
D) does not play a role in influencing private investment levels.

Question 67

According to Ricardian Equivalence, consumers may not respond to a tax cut ________.

A) if that tax cut is directed solely at upper income groups.
B) if that tax cut is directed solely at lower income groups.
C) since they understand a tax cut today will lead to a tax increase in the future.
D) if they lack patriotic fervor.

Question 68

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 69

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

Question 70

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 71

Monetizing the debt is undesirable given its impact on ________.

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

Question 72

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 73

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

Question 74

According to Ricardian equivalence, the key consequence of an increase in the budget deficit that arises from a tax cut is ________.

A) a decrease in private investment
B) an increase in inflation
C) an increase in the public's holding of government bonds
D) an increase in the supply of money

Question 75

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 76

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

A) π x
B) △B + △M
C) r x
D) Y - T - C

Question 77

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

Question 78

Ricardian Equivalence theory is based on the view that ________.

A) the impact of a tax cut is felt primarily on domestic consumption spending.
B) households tend to take future events into account when engaging in economic decision-making.
C) the price of a commodity is negatively related to the quantity of that good demanded.
D) a trade-off exists between the use of monetary and fiscal policy in influencing the level of income.

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

Which government policy is the principal focus of Ricardian Equivalence?

A) tax cuts
B) government spending increases
C) government borrowing
D) seignorage