Deck 10: Fiscal Policy

Question 1

The time it takes for a policy to actually work is known as

A) fiscal policy.
B) crowding out.
C) inside lags.
D) outside lags.

Answer 1

outside lags.

Question 2

The fact that it takes time for government to identify and recognize a problem is one reason for the occurrence of

A) inside lags.
B) outside lags.
C) implementation lags.
D) structural lags.

Answer 2

inside lags.

Question 3

The idea that a $1 increase in infrastructure spending will generate more than $1 in economic growth is a representation of

A) the multiplier effect.
B) an outside lag.
C) an inside lag.
D) an automatic stabilizer.

Answer 3

the multiplier effect.

Question 4

Tax cuts aimed at businesses can stimulate

A) social spending.
B) private consumption.
C) investment spending.
D) net exports.

Question 5

Contractionary policies are policies designed to

A) increase the level of real GDP.
B) reduce the level of real GDP.
C) increase government spending.
D) increase the federal deficit.

Question 6

When the government develops policies to stabilize the economy

A) these policies are unaffected by the multiplier effect.
B) only expansionary fiscal policy is impacted by the multiplier effect.
C) it needs to consider the multiplier effect for all fiscal policies.
D) only contractionary fiscal policy is impacted by the multiplier effect.

Question 7

The time it takes to formulate a policy is known as

A) fiscal policy.
B) crowding out.
C) inside lags.
D) outside lags.

Question 8

Expansionary policies are government policies that

A) increase aggregate supply.
B) decrease aggregate supply.
C) decrease aggregate demand.
D) increase aggregate demand.

Question 9

As a result of an increase in the personal income tax rate, consumers are likely to

A) spend less.
B) spend more.
C) save more.
D) earn more money.

Question 10

In order to ________, a government must decrease spending and increase taxation.

A) increase aggregate demand
B) decrease aggregate demand
C) increase aggregate supply
D) decrease aggregate supply

Question 11

What are the two tools of fiscal policy that governments can use to stabilize an economy?

A) government spending and technology improvements
B) government spending and taxation
C) taxation and controlling imports
D) taxation and controlling exports

Question 12

A decrease in the personal income tax rate ________ disposable income which ________ consumption.

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

Question 13

Contractionary policies are government policies that

A) increase aggregate supply.
B) decrease aggregate supply.
C) decrease aggregate demand.
D) increase aggregate demand.

Question 14

In order to ________, a government must increase spending and decrease taxation.

A) increase aggregate demand
B) decrease aggregate demand
C) increase aggregate supply
D) decrease aggregate supply

Question 15

Expansionary policies are policies designed to

A) increase the level of real GDP.
B) reduce the level of real GDP.
C) decrease government spending.
D) reduce the federal deficit.

Question 16

Policies taken to move the economy closer to potential output

A) must necessarily be expansionary policies.
B) must necessarily be contractionary policies.
C) are called stabilization policies.
D) are lagging policies or automatic policies.

Question 17

Due to the ________ effect, the final shift in aggregate demand is larger than the initial shift in aggregate demand.

A) income
B) multiplier
C) substitution
D) crowding-out

Question 18

What are the two tools of fiscal policy that governments can use to affect the level of aggregate demand?

A) government spending and taxation
B) government spending and technology improvements
C) taxation and controlling imports
D) taxation and controlling exports

Question 19

Stabilization policies are policies designed to

A) keep output constant.
B) keep prices constant.
C) move the economy closer to potential output.
D) increase trade.

Question 20

What is the reason that stabilization policies do not have an immediate effect on an economy?

A) Consumers are slow to catch up on spending.
B) There is a time lag for policies to take effect.
C) Imports come into the country too fast.
D) Exports often are not shipped fast enough.

Question 21

Stabilization policies are actions taken to bring the economy closer to full employment.

Question 22

Which component of federal spending is included in GDP?

A) net exports
B) transfer payments
C) government purchases
D) capital supply

Question 23

The fact that it takes time for government to take action, even after a problem has been diagnosed, is one reason for the occurrence of

A) inside lags.
B) outside lags.
C) crowding out.
D) the multiplier effect.

Question 24

Name two actions that a government could take if it wants to implement an expansionary fiscal policy.

Question 25

An inside lag is the time period it takes for the stabilization policies to take effect after they have been implemented.

Question 26

Spending on programs that Congress authorizes ________ is known as discretionary spending.

A) by prior law
B) on an annual basis
C) on an off-budget emergency basis
D) after approval from the Federal Reserve

Question 27

Briefly explain how a change in the personal income tax rate affects aggregate demand.

Question 28

Economic advisers who fear that the economy is growing too rapidly would recommend that the government decrease spending and/or increase taxes.

Question 29

President Obama needs to get Congressional approval to enact measures to boost the economy. The time involved to formulate and get approval for these policies are called

A) inside lags.
B) outside lags.
C) automatic stabilization.
D) crowding in.

Question 30

When the government conducts activist fiscal policy, what type of spending does it usually use?

A) entitlement and mandatory spending
B) net interest spending
C) discretionary spending
D) strategic spending

Question 31

An outside lag is the time period it takes economists to formulate a stabilization policy.

Question 32

Why is it difficult to implement fiscal policies?

Question 33

Even when the Obama administration succeeds with its effort to gain Congressional approval for its stimulus proposals, it will still take time for these policies to actually work. The time it takes for these policies to work is known as

A) inside lags.
B) outside lags.
C) automatic stabilization.
D) crowding out.

Question 34

What is meant by the term "inside lags"?

Question 35

Why are transfer payments not included in GDP?

A) The amount is too low to have any effect.
B) Unemployment varies and can't be tracked.
C) They do not represent payments to those who contributed resources to currently produced goods or services.
D) Money companies receive from the government isn't reported.

Question 36

Taxation and government spending are examples of fiscal policy tools used to stabilize an economy.

Question 37

What is meant by the term "outside lags"?

Question 38

Name two actions a government could take if it wants to implement a contractionary fiscal policy.

Question 39

Changes in government purchases affect aggregate demand only indirectly through consumption spending.

Question 40

What are the two basic reasons inside lags occur?

Question 41

Proponents of the estate and gift tax argue that the tax is necessary because

A) it generates a large portion of total federal revenue.
B) it prevents "unfair" accumulation of wealth across generations.
C) it is only applied to items that have not previously been taxed.
D) it is the primary source of funding for Medicare and Medicaid.

Question 42

Which of the following is an example of government discretionary spending?

A) Social Security retirement payments
B) Medicare benefits for the elderly
C) defense spending
D) net interest paid on government debt held by the public

Question 43

Does the term "mandatory spending" mean that spending must go on forever?

A) Yes, once appropriated, spending is indefinite.
B) No, once appropriated, spending is for the life of the program only or until it changes.
C) Yes, the laws which authorized this spending cannot be changed.
D) Yes, Congress has no right to change these spending programs.

Question 44

One school of thought that emphasizes the role that taxes play in an economy's supply of output is known as

A) demand-pull economics.
B) classical economics.
C) tax-and-spend economics.
D) supply-side economics.

Question 45

Individual income tax is the ________ single component of federal revenue.

A) largest
B) second largest
C) smallest
D) least important

Question 46

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem.
According to this Application, current spending on federal retirement and health programs accounts for 10 percent of GDP. Experts estimate that this spending component's share of GDP ________ by the year 2075.

A) is likely to shrink
B) will more than double
C) will remain constant
D) will grow moderately initially then taper off

Question 47

Which of the following sources of revenue is used to fund government spending?

A) interest
B) taxation
C) corporate contributions
D) political party contributions

Question 48

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem.
According to this Application, which of the following is NOT a strategy that the government can pursue to address the rising cost of federal retirement and health care programs?

A) reform the health care system to encourage more competition to reduce health care expenditures
B) increase the age at which retirement benefits begin to be paid
C) borrow from the public to finance the programs
D) promote government saving and investment to increase real GDP over time

Question 49

The share of corporate tax in total federal revenues

A) is larger than the other components of federal revenue.
B) is the smallest of all the components of federal tax revenue.
C) has declined over the past few decades to a relatively low level.
D) has grown significantly in each of the past 10 years.

Question 50

A White House proposal to lower business taxes by increasing tax deductions is an example of

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) automatic stabilization.
D) progressive taxation.

Question 51

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem.
According to this Application, one solution proposed to deal with the rising expenses of government entitlement programs is to raise taxes. An increase in taxes to help cover the rising expenses of entitlement programs would

A) increase aggregate demand, shifting the AD curve to the right.
B) increase aggregate demand, shifting the AD curve to the left.
C) decrease aggregate demand, shifting the AD curve to the right.
D) decrease aggregate demand, shifting the AD curve to the left.

Question 52

Spending on programs that ________, such as Social Security and Medicare, is classified as entitlement and mandatory spending.

A) is authorized by Congress on an annual basis
B) has been authorized by prior law
C) is authorized only in times of budget surpluses
D) is authorized only in times of budget deficits

Question 53

Entitlements and net interest are the ________ the U.S. federal budget.

A) only two declining components of
B) two fastest-growing components of
C) two slowest-growing components of
D) only two components with negative values in

Question 54

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem.
According to this Application, one strategy proposed to deal with the rising expenses of government entitlement programs is for the government to save and invest now so as to reduce the burden on future generations. This strategy would

A) increase GDP, and entitlement programs would increase along with GDP.
B) increase GDP and entitlement programs would decrease.
C) increase GDP and eliminate entitlement programs.
D) not change GDP, but shrink entitlement programs.

Question 55

What is the largest component of the federal budget?

A) discretionary spending
B) entitlements and mandatory spending
C) net interest
D) defense spending

Question 56

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem.
According to this Application, how will an increase in government spending on entitlement programs affect the macroeconomy?

A) It will increase aggregate demand.
B) It will decrease aggregate demand.
C) It will increase aggregate supply.
D) It will decrease aggregate supply.

Question 57

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem.
According to this Application, in the year 2075, the portion of GDP devoted to spending on Social Security, Medicare and Medicaid is expected to be

A) significantly less than the share of GDP devoted to these programs today.
B) roughly equal to the total amount of GDP today.
C) larger than total federal spending's share of GDP today.
D) greater than the consumption spending component's share of GDP in 2075.

Question 58

Who sets the rules for entitlements when spending is authorized under this category?

A) the President
B) the agency involved
C) the Congress when it appropriates the spending
D) each individual state

Question 59

Special taxes levied on earnings for Social Security and Medicare are called

A) withholding tax on wages.
B) social insurance tax.
C) unfair tax on low-income families.
D) an exception tax for corporations.

Question 60

A White House proposal to increase infrastructure spending on roads, rail lines and runways is an example of

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) automatic stabilization.
D) insourcing policies.

Question 61

During a recession, tax revenues ________ while government transfer payments ________, thereby mitigating part of the adverse effects of a recession and stabilizing the economy.

A) fall; increase
B) fall; decrease
C) rise; increase
D) rise; decrease

Question 62

Recall the Application about the relationship between tax rates and tax revenues which was proposed by Yu Juo, one of the twelve wise men who succeeded Confucius in ancient China, to answer the following question(s).
According to this Application, Yu Juo proposed that the Chinese government should ________ the tax rate in the case of a famine if the government had insufficient funds, and this would ________ the standard of living.

A) increase; increase
B) cut; increase
C) cut; decrease
D) increase; decrease

Question 63

A federal budget ________ occurs when the federal government spends more than it collects in taxes.

A) surplus
B) deficit
C) equilibrium
D) ceiling

Question 64

Automatic stabilizers

A) minimize fluctuations in the economy.
B) must be authorized by the President.
C) decrease taxes during expansions.
D) increase welfare payments during expansions.

Question 65

The relationship between tax rates and tax revenues is shown on the

A) IRS curve.
B) Laffer curve.
C) production possibilities frontier.
D) Discretionary Spending curve.

Question 66

An increased federal budget deficit resulting from a recession can actually help stabilize an economy, because corporate profits tend to fall in a recession which, in turn, results in ________ corporate taxes and ________.

A) higher; more tax revenue for the government
B) higher; larger profits for businesses
C) lower; fewer spending cuts for businesses
D) lower; increases in the price level

Question 67

Suppose an economy has a balanced federal budget, and a large increase in oil prices plunges the economy into a recession. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________.

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

Question 68

When the economy slows down and national income falls, the government will have ________ tax revenue to fund programs.

A) more
B) less
C) about the same
D) a rapid increase in

Question 69

The Laffer curve illustrates that

A) high tax rates could lead to lower tax revenues if economic activity is severely discouraged.
B) lowering tax rates will always increase tax revenues.
C) high tax rates would increase tax revenue and increase the labor supply as people work harder to maintain their standard of living.
D) lowering tax rates will always decrease tax revenues.

Question 70

Recall the Application about the relationship between tax rates and tax revenues which was proposed by Yu Juo, one of the twelve wise men who succeeded Confucius in ancient China, to answer the following question(s).
This Application addresses the idea that

A) cutting tax rates will decrease tax revenue.
B) cutting tax rates may actually increase tax revenues.
C) increasing tax rates is necessary to increase tax revenues.
D) there is ultimately no relationship between tax rates and tax revenues.

Question 71

Suppose an economy has a balanced federal budget, and a favorable supply shock hits the economy. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________.

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

Question 72

Which of the following is an example of an automatic stabilizer?

A) Congress authorizes spending increases during a recession.
B) Congress increases the tax rate during an expansion.
C) More unemployment benefits are paid during a recession.
D) Welfare payments decrease during a recession.

Question 73

An increased federal budget deficit resulting from a recession can actually help stabilize an economy through transfer payments because an increased budget deficit will ________ transfer payments and thereby ________ the income of some households.

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

Question 74

Automatic stabilizers

A) require explicit actions by policy makers to become active.
B) work without the need for decisions from Congress or the White House.
C) magnify fluctuations in the economy.
D) increase taxes during recessions.

Question 75

Recall the Application about the relationship between tax rates and tax revenues which was proposed by Yu Juo, one of the twelve wise men who succeeded Confucius in ancient China, to answer the following question(s).
Recall the Application. The idea regarding the relationship between tax rates and tax revenues proposed by Yu Juo is very similar to the idea proposed by economist

A) Adam Smith.
B) Arthur Laffer.
C) David Ricardo.
D) Ben Bernanke.

Question 76

The government strives to operate at neither a deficit nor surplus budget in order to keep the federal budget

A) balanced.
B) equal to inflation.
C) in line with the stock market.
D) equal to that of other countries.

Question 77

Suppose the government runs a budget surplus in a given year. It can reduce its overall federal debt by

A) not buying anything on credit.
B) buying back bonds it sold to the public.
C) forcing a change in net exports.
D) increasing taxes on luxury items.

Question 78

A federal budget ________ occurs when the government spends less than it collects in taxes.

A) surplus
B) deficit
C) equilibrium
D) floor

Question 79

Suppose initially the federal budget is balanced. The economy then enters a period of expansion. What is likely to happen to the federal budget?

A) It will show a surplus.
B) It will show a deficit.
C) It will remain balanced.
D) It will automatically stabilize.

Question 80

According to supply-side economics, a(n)________ in the tax rate tends to increase the labor supply and ________ aggregate output.

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