Deck 27: Government and Fiscal Policy

Question 1

The government has a budget deficit if

A)its total revenues are equal to its total expenditures.
B)its total revenues are less than its total expenditures.
C)its total revenues are greater than its total expenditures.
D)the money supply is less than total expenditures.

Answer 1

B

Question 2

Which of the following statements characterizes government purchases in the United States between the early 1990s and 2005?

A)Government purchases as a share of GDP have declined.
B)Government purchases as a share of GDP have steadily increased.
C)Government purchases as a share of GDP have remained constant.
D)Government purchases have fluctuated widely over this period.

Answer 2

A

Question 3

The government purchases component of aggregate demand includes
I.all purchases by government agencies of goods and services produced by firms.
II.direct production by government agencies themselves.
III.government expenditures on transfer payments.

A)I only
B)I and II only
C)I and III only
D)I, II, and III

Answer 3

B

Question 4

Which of the following statements characterizes government transfer payment spending in the United States between 1960 and 2007?

A)Transfer payment spending by the federal government and by state and local governments has decreased as a percentage of GDP.
B)Transfer payment spending by the federal government and by state and local governments has more than doubled as a percentage of GDP.
C)Transfer payment spending by the federal government and by state and local governments has remained constant as a percentage of GDP.
D)Transfer payment spending by the federal government and by state and local governments has fluctuated widely over this period.

Question 5

The bulk of transfer payment spending in the United States is undertaken by

A)non-profit organizations in the private sector.
B)state governments.
C)local governments.
D)the federal government.

Question 6

State and local tax receipts are dominated by

A)property taxes and state income taxes.
B)state income taxes and sales taxes.
C)property taxes and sales taxes.
D)sales taxes and business taxes.

Question 7

Taxes assessed on firms and employees on wages and salaries earned are called

A)dividend taxes.
B)payroll taxes.
C)corporate profits taxes.
D)earned income taxes.

Question 8

Government tax and expenditure policies affect real GDP are called

A)automatic fiscal policy.
B)discretionary fiscal policy.
C)fiscal policy.
D)supply-side policy.

Question 9

All of the following are instruments of fiscal policy except

A)rebate on payroll taxes.
B)education tax credits.
C)unemployment insurance benefits.
D)an interest rate cut.

Question 10

The bulk of federal receipts come from

A)property taxes and personal income tax.
B)personal income tax and from payroll taxes.
C)corporate income taxes and personal income tax.
D)personal income tax and property taxes.

Question 11

Transfer payments typically

A)rise during expansionary periods.
B)fall during recessions.
C)do not change as the economy expands and contracts during the business cycle.
D)fall during expansionary periods and rise during recessionary periods.

Question 12

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

A)consumption
B)gross private investment
C)government purchases
D)public investment

Question 13

The government has a balanced budget if

A)its total revenues are equal to its total expenditures.
B)its total revenues are less than its total expenditures.
C)its total revenues are greater than its total expenditures.
D)the money supply is less than total expenditures.

Question 14

The government has a budget surplus if

A)its total revenues are equal to its total expenditures.
B)its total revenues are less than its total expenditures.
C)its total revenues are greater than its total expenditures.
D)the money supply is less than total expenditures.

Question 15

Payments to households that do not require anything in exchange are called

A)transfer payments.
B)government purchases.
C)consumption expenditures.
D)investment expenditures.

Question 16

Which of the following statements is true regarding the government budget?

A)The government's budget has been in deficit since the 1960s.
B)The government's budget has been in deficit since World War II except for a brief period between 1998 and 2001.
C)The government's budget was generally in surplus until the 1980s, then mostly in deficit since except for a brief period between 1998 and 2001.
D)The government's budget was generally in surplus in the 1960s, then mostly in deficit since except for a brief period between 1998 and 2001.

Question 17

Medicaid, welfare payments, and Temporary Assistance to Needy Families are classified as

A)unilateral payments.
B)transfer payments.
C)gifts.
D)income redistribution payments.

Question 18

The three major categories of government spending are

A)government purchases, defense spending, and interest payments.
B)defense spending, Medicare and Medicaid, and net interest.
C)government purchases, transfer payments, and net interest.
D)government purchases, defense spending, and transfer payments.

Question 19

All of the following are examples of transfer payments except

A)welfare benefits to the poor.
B)dividend payments to the wealthy.
C)Social Security payments to the elderly.
D)unemployment compensation to the unemployed.

Question 20

In late 2008, the U.S.government extended unemployment insurance benefits for seven additional weeks, in recognition of the growing unemployment problem.This extension is an example of

A)automatic fiscal policy.
B)discretionary fiscal policy.
C)expansionary monetary policy.
D)supply-side fiscal policy.

Question 21

The national debt

A)is the difference between total government revenues and government expenditures.
B)is the sum of all past federal deficits plus any surpluses.
C)is the sum of all past federal deficits less any surpluses.
D)grows when government spending increases.

Question 22

One method of assessing the degree to which current fiscal policies affect future generations is through a device called

A)inter-temporal fiscal accounting.
B)generational accounting.
C)long-term debt assessment technique.
D)fiscal stabilization tool.

Question 23

Suppose in the beginning of 2006, a country has a national debt of $5,000 billion.Its GDP in
2006 is $20,000 billion and its budget surplus of $130 billion.Compute its debt-GDP ratio at the
End of the year.

A)2.6%
B)25%
C)24.4%
D)6.5%

Question 24

Generational accounting

A)is a method of assessing the impact of fiscal policy lags from one generation to another.
B)measures the number of generations it takes to pay off the national debt at a given point in time.
C)evaluates the impact of current fiscal policies on different generations in the economy, including future generations.
D)is an accounting method that defers to the future, the cost of any government policy the rewards of which will be reaped in the future.

Question 25

Generational accounting is useful for

A)assessing the effect of current monetary policy decisions on generations yet unborn.
B)assessing the effect of current fiscal policy decisions on generations yet unborn.
C)comparing local, state, and federal fiscal policies.
D)assessing the effect of government budget deficits on generations yet unborn.

Question 26

Generational accounting estimates for the United States for the year 2004 show that

A)the net burden on males is much lower than for females.
B)the net burden on females is much lower than for males.
C)the net burden on minorities is much greater than for Caucasians.
D)the net burden on college-educated Americans is lower than for those without a college education.

Question 27

Judged by international standards, the national debt of the United States, in terms of its national
Debt as a percentage of GDP is

A)the highest among the developed nations.
B)the lowest among the developed nations.
C)about average among the developed nations.
D)below average among the developed nations.

Question 28

Suppose a country's debt rises by 6% and its GDP rises by 5%.What happens to the debt-GDP ratio?

A)It rises if there is a budget deficit that period.
B)It falls.
C)It rises.
D)There is insufficient information to answer the question.

Question 29

The national debt

A)is the sum of all past federal deficits plus any surpluses.
B)grows when the government runs a deficit.
C)grows when government spending increases.
D)is a major problem facing the U.S.government.

Question 30

What is an automatic stabilizer?

A)It refers to a discretionary policy that is triggered when actual output is not equal to potential output to improve the economy's performance.
B)It refers to a stabilization program that keeps inflation in check automatically.
C)It refers to any government program that tends to reduce fluctuations in GDP automatically.
D)It refers to a government program that is automatically triggered when the economy enters a recession.

Question 31

If the federal budget is initially balanced and government expenditures remain constant, then an
Increase in GDP will _________ tax revenues and create a budget _________.

A)increase; surplus
B)increase; deficit
C)decrease; surplus
D)decrease; deficit

Question 32

If the federal budget is initially balanced and government expenditures remain constant, then a
Decrease in GDP will _________ tax revenues and create a budget _________.

A)decrease; surplus
B)increase; surplus
C)decrease; deficit
D)increase; deficit

Question 33

The sum of all past federal deficits minus any surpluses is called the

A)transfer balance.
B)national deficit.
C)national debt.
D)national budget.

Question 34

Suppose a country has a national debt of $2,000 billion, a GDP of $28,000 billion, and a
Budget deficit of $115 billion.How much will its new national debt be?

A)$2,115 billion
B)$1,885 billion
C)$28,115 billion
D)$25,885 billion

Question 35

Suppose in the beginning of 2006, a country has a national debt of $8,000 billion.Its GDP in
2006 is $32,000 billion and its budget deficit of $1,600 billion.Compute its debt-GDP ratio at the end of the year.

A)5%
B)20%
C)25%
D)28.6%

Question 36

Suppose a country's debt rises by 6% and its GDP rises by 8%.What happens to the debt-GDP ratio?

A)It rises if there is a budget deficit that period.
B)It falls.
C)It rises.
D)There is insufficient information to answer the question.

Question 37

Suppose a country has a national debt of $5,000 billion, a GDP of $20,000 billion, and a
Budget surplus of $130 billion.How much will its new national debt be?

A)$5,130 billion
B)$4, 870 billion
C)$15,130 billion
D)$19, 870 billion

Question 38

Which of the following statements is true about the national debt?
I.Relative to the level of economic activity, the debt is well below the levels reached during
World War II.
II.The ratio of debt to GDP rose from 1981 to 1996 and fell in the last years of the twentieth
Century; it began rising again in 2002.
III.Judged by international standards, the U.S.national debt relative to its GDP is about average
Among developed nations.

A)I only
B)II only
C)III only
D)I, II, and III

Question 39

The use of government expenditures and taxes to influence the level of economic activity is
Called

A)deficit management policy.
B)debt management policy.
C)financial policy.
D)fiscal policy.

Question 40

As populations age, the burden of current fiscal policy is increasingly borne by

A)younger people in the population.
B)older people in the population.
C)the government.
D)new immigrants into a country.

Question 41

All of the following are examples of automatic stabilizers except

A)personal income taxes.
B)means-tested federal transfer payments.
C)welfare benefits.
D)government emergency spending.

Question 42

Which of the following is an advantage of automatic stabilizers?

A)The lag for automatic stabilizers is relatively short.
B)It is much easier to measure the impact of automatic stabilizers compared to the impact of discretionary fiscal policy.
C)There is virtually no administrative cost to implementing automatic stabilizers.
D)Because they affect disposable personal income directly, automatic stabilizers act swiftly to reduce the degree of changes in real GDP.

Question 43

Changes in expenditures and taxes that occur through automatic stabilizers

A)shift the aggregate demand curve to the right in the event of an economic expansion.
B)shift the aggregate demand curve to the left in the event of an economic contraction.
C)do not shift the aggregate demand curve.
D)cause a movement up along the aggregate demand curve the event of an economic expansion and a movement down along the aggregate demand curve the event of an economic contraction.

Question 44

Personal income taxes and transfer payments

A)acts as automatic stabilizers.
B)magnify fluctuations in GDP.
C)are discretionary fiscal policy tools only.
D)are influenced by monetary policy.

Question 45

During a recession, unemployment insurance ensures that

A)firms layoff fewer of its employees than it would if there is no unemployment insurance.
B)disposable income increases as GDP falls.
C)disposable income does not fall by as much as GDP decreases.
D)the marginal propensity to consume increases.

Question 46

During a recession, rising transfer payments and falling tax collections
I.help cushion households from the impact of the recession.
II.buffers the fall in real GDP (relative to a situation where transfer payments do not rise and
Tax revenues do not fall).
III.tend to increase or budget deficit or reduce a budget surplus.

A)I only
B)I and II only
C)II and III only
D)I, II, and III

Question 47

Automatic stabilizers

A)increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)are changes in taxes or government spending that increase aggregate demand without requiring policymakers to act when the economy goes into recession.
C)are changes in taxes or government spending that policymakers agree to when the economy goes into recession.
D)are part of discretionary fiscal policy.

Question 48

A transfer payment that rises automatically during a recession is

A)interest payments on the national debt.
B)unemployment compensation.
C)Social Security payments to retired persons.
D)government payments to war veterans.

Question 49

During an expansion, which of the following occur because of automatic stabilizers?
I.Income tax revenues tend to rise.
II.Government transfer payments tend to rise.
III.The government's budget deficit tends to fall or its budget surplus tends to rise.
IV.They tend to amplify the rise in real GDP.

A)I and III only
B)I, II, and III only
C)I, III, and IV only
D)I, II, III, and IV

Question 50

Suppose Congress increases the corporate profit tax rates.This is an example of

A)discretionary fiscal policy of the expansionary variety.
B)automatic fiscal policy of the expansionary variety.
C)discretionary fiscal policy of the contractionary variety.
D)automatic fiscal policy of the contractionary variety.

Question 51

Which of the following is an automatic stabilizer?
I.inheritance taxes
II.government payments to war veterans
III.aid to families with dependent children
IV.sales taxes

A)I, II, III, and IV
B)I, II, and III only
C)II and III only
D)III only

Question 52

During an economic expansion, ______ income tax revenues tend to automatically increase a
________ or reduce a _________.

A)higher; budget deficit; budget surplus
B)higher; budget surplus; budget deficit
C)lower; budget deficit; budget surplus
D)lower; budget surplus; budget deficit

Question 53

During a contraction, ______ income tax revenues tend to automatically increase a ______or
Reduce a _________.

A)higher; budget deficit; budget surplus
B)higher; budget surplus; budget deficit
C)lower; budget deficit; budget surplus
D)lower; budget surplus; budget deficit

Question 54

Discretionary fiscal policy refers to

A)deliberate government efforts to stabilize the economy through government spending and taxes.
B)the use of automatic stabilizers and intervention policies to stabilize the economy.
C)any government policy that requires a lag period of at least three months.
D)the deliberate use of government spending and taxes to complement the effects of monetary policy in an effort to stabilize the economy.

Question 55

In general, personal income taxes

A)rise automatically during a recession.
B)rise automatically during an expansion.
C)rise automatically during a contraction.
D)are decreased during a recession through legislative actions of Congress.

Question 56

Which of the following describes a discretionary fiscal policy action/program?

A)the progressive income tax system
B)The government increases funding for the Dislocated Worker Program, a federal initiative that provides retraining and career counseling.
C)the unemployment compensation program
D)the system of welfare programs

Question 57

Automatic stabilizers are considered

A)discretionary fiscal policies.
B)discretionary monetary policies.
C)non-discretionary fiscal impacts.
D)non-discretionary monetary impacts.

Question 58

Which of the following describes a discretionary fiscal policy action/program?

A)the progressive income tax system
B)the unemployment compensation program
C)Congress authorizes a temporary increase in unemployment insurance benefits for an additional seven weeks.
D)the system of welfare programs

Question 59

In 2003, Congress passed a substantial cut in income taxes.The Federal Reserve also lowered interest rates.How can these two actions be categorized?

A)Both actions can be categorized as fiscal policy.
B)Both actions can be categorized as monetary policy.
C)The tax cut can be categorized as monetary policy and the lowering of interest rates can be categorized as fiscal policy.
D)The tax cut can be categorized as fiscal policy and the lowering of interest rates can be categorized as monetary policy.

Question 60

An example of an automatic stabilizer is

A)personal income taxes.
B)inheritance taxes.
C)veterans' benefits.
D)corporate dividends.

Question 61

Figure 12-1

Refer to Figure 12-1.If discretionary fiscal policy is used to eliminate the gap, policy actions
Will

A)shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P₁ and output level, Y_p.
B)shift the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level, P₁ and output level, Y_p.
C)shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P₂ and output level, Y_p.
D)shift the aggregate demand curve and the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level corresponding to point "d" and output level, Y_p.

Question 62

Figure 12-1

Refer to Figure 12-1.In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

A)lower personal income taxes to encourage savings
B)increase government spending
C)loosen environmental regulations to lower businesses cost of production
D)raise interest rates

Question 63

If there is an inflationary gap in the economy, discretionary fiscal policy would likely involve
An action to

A)shift the aggregate demand curve to the right.
B)shift the aggregate demand curve to the left.
C)shift both the aggregate demand curve and aggregate supply curve to the right.
D)shift both the aggregate demand curve and aggregate supply curve to the left.

Question 64

If there is a recessionary gap in the economy, discretionary fiscal policy would likely involve
An action to

A)shift the aggregate demand curve to the right.
B)shift the aggregate demand curve to the left.
C)shift both the aggregate demand curve and aggregate supply curve to the right.
D)shift both the aggregate demand curve and aggregate supply curve to the left.

Question 65

Figure 12-1

Refer to Figure 12-1.Assume that the economy is initially at Y₁.A nonintervention policy
Would result in the restoration of potential output by allowing the

A)the aggregate demand curve to shift to the right.
B)the short-run aggregate supply curve to shift to the right.
C)the aggregate demand curve to shift to the left.
D)the short-run aggregate supply curve to shift to the left.

Question 66

A contractionary fiscal policy
I.decreases a government budget deficit or increases a government budget surplus.
II.includes tax cuts.
III.may include discretionary cuts in transfer payments.

A)I, II, and III
B)I and II only
C)I and III only
D)II and III only

Question 67

A contractionary fiscal policy shifts the aggregate demand curve

A)to the right and is used to close an inflationary gap.
B)to the right and is used to close a recessionary gap.
C)to the left and is used to close an inflationary gap.
D)to the left and is used to close a recessionary gap.

Question 68

Contractionary fiscal policy includes

A)increasing taxes and increasing government purchases.
B)raising interest rates, increasing taxes, and decreasing transfer payments.
C)increasing taxes and decreasing government expenditures.
D)raising interest rates, decreasing taxes, and decreasing government spending.

Question 69

An expansionary fiscal policy shifts the aggregate demand curve

A)to the right and is used to close an inflationary gap.
B)to the right and is used to close a recessionary gap.
C)to the left and is used to close an inflationary gap.
D)to the left and is used to close a recessionary gap.

Question 70

Expansionary fiscal policy includes

A)increasing taxes and increasing government purchases.
B)lowering interest rates, decreasing taxes and increasing transfer payments.
C)decreasing taxes and increasing government expenditures.
D)lowering the interest rates, decreasing taxes and decreasing government spending.

Question 71

Figure 12-2

Refer to Figure 12-2.Suppose real GDP is equal to Y_r.If policymakers want to close the output gap with demand management policies, what should they do?

A)lower corporate profit tax rates to encourage investments
B)increase investment tax credits to businesses
C)decrease government spending on transfer payments and on final goods and services
D)lower interest rates

Question 72

In the United States, most of the government's taxing and spending is

A)to stabilize the economy and move it to its potential output.
B)to bring about greater income equality.
C)to keep inflation at a moderate level.
D)for purposes other than economic stabilization.

Question 73

An expansionary fiscal policy
I.includes an increase in government spending.
II.includes tax cuts.
III.increases a government budget deficit or reduces a government budget surplus.

A)I, II, and III
B)I and II only
C)I and III only
D)II and III only

Question 74

Figure 12-1

Refer to Figure 12-1.The economy is initially at output level Y₁ and there is

A)an inflationary gap.
B)a recessionary gap.
C)equilibrium at full employment.
D)a short-run and a long-run equilibrium.

Question 75

Figure 12-1

Refer to Figure 12-1.At output level Y₁,

A)potential output is greater than actual output.
B)the economy is operating at a point outside its production possibilities curve.
C)the actual unemployment rate is less than the natural rate of unemployment.
D)aggregate demand will fall to restore equilibrium.

Question 76

A recessionary gap can be closed with

A)using a contractionary monetary policy.
B)an increase in taxes.
C)a decrease in government purchases.
D)using an expansionary fiscal policy.

Question 77

An inflationary gap can be closed with

A)using an expansionary monetary policy.
B)using a policy action such as a reduction in government purchases.
C)using a policy action such as a reduction in government purchases.
D)imposing price controls to prevent prices from rising.

Question 78

Figure 12-2

Refer to Figure 12-2.If real GDP is equal to Y_r, there is

A)an inflationary gap.
B)a recessionary gap.
C)equilibrium at full employment.
D)a short-run and a long-run equilibrium.

Question 79

Figure 12-2

Refer to Figure 12-2.At output level Y_r,

A)potential output is greater than actual output.
B)the expected price level equals actual price level.
C)the actual unemployment rate is less than the natural rate of unemployment.
D)aggregate demand will fall over time to restore equilibrium.

Question 80

Suppose fiscal authorities raise state income tax rates.As a result, disposable income falls, thereby ____, and causing __________

A)decreasing consumption spending; the aggregate demand curve to shift to the left.
B)decreasing consumption spending; a movement along a given aggregate demand curve.
C)increasing saving; the aggregate demand curve to shift to the left.
D)increasing saving; a movement along a given aggregate demand curve.