Question 1

Supply-side theorists presented evidence that after the 1964 tax cut, tax revenues ________. But at the time, ________ monetary policy helped to produce that result, a factor ignored or not understood by the Reagan administration.

Accepted Answer

Supply-side theorists argued that the 1964 tax cut incentivized economic growth, leading to an increase in tax revenues. However, this argument ignores the fact that an expansionary monetary policy was also implemented at the time, which helped to stimulate economic activity and increase tax revenues. The Reagan administration focused solely on the tax cut aspect of supply-side theory and overlooked the role of monetary policy in producing the desired results.

Question 2

Most economists would consider it sensible for the federal government to ________ its current operating and capital expenditure budgets and then ________.

Accepted Answer

The answer of Most economists would consider it sensible for...

Question 3

The Barro-Ricardo equivalence theorem argues that ________ stimulate the economy in the short run.

Accepted Answer

The Barro-Ricardo equivalence theorem argues that changes in government expenditure or taxation policy do not have an effect on economic growth in the long run. However, it is believed that tax cuts are not effective in stimulating the economy in the short run as they do not immediately increase consumer spending.

Question 4

The government can continuously issue new bonds to pay the interest on its outstanding bonds so long as

Accepted Answer

When the real GDP growth rate exceeds the real interest rate, the economy grows faster than the cost of debt, making it sustainable for the government to issue new bonds to pay interest on its outstanding bonds without increasing the debt burden relative to the economy's size.

Question 5

The "solvency condition" states that the debt-GDP ratio will rise continuously so long as

Accepted Answer

The solvency condition states that the debt-GDP ratio will rise continuously if the real interest rate exceeds the real GDP growth rate. This is because the interest on the debt will accumulate faster than the economy can grow, leading to an unsustainable debt burden. Therefore, choice B is the correct answer.

Question 6

Suppose that many families consider consumer durables such as houses and cars as potential bequests. This ________ Barro's argument that current tax cuts, which imply ________ future taxes, mainly go to increasing ________.

Accepted Answer

If families view consumer durables as potential bequests, current tax cuts may not necessarily lead to increased current consumer spending. Instead, families may choose to save the extra income for future generations through bequests. This weakens Barro's argument that tax cuts lead to increased current consumption. Additionally, the answer must include "higher" for the implication of future taxes, as tax cuts imply higher future taxes due to the need to finance the resulting budget deficit. Option A is also tempting, but it is contradictory to Barro's argument that tax cuts mainly go to increasing saving for future generations since it suggests that the increased saving is due to bequests rather than saving for future consumption.

Question 7

From the end of the World War II, the debt-GDP ratio in the United States fell almost without interruption to a low point in ________, which marked the beginning of a long-run climb.

Accepted Answer

According to the sentence, the debt-GDP ratio fell continuously after World War II and reached a low point before beginning a long-term climb. The only year mentioned as a possible answer that fits this description is 1974, making C the correct choice.

Question 8

A central cause of the rising debt-GDP ratio in the United States during the 1980s and 1990s was

Accepted Answer

The answer of A central cause of the rising debt-GDP...

Question 9

The personal saving rate in the U.S. ________ after the tax cuts of the early 1980s, evidence ________ the Barro-Ricardo equivalence theorem.

Accepted Answer

According to the Barro-Ricardo equivalence theorem, tax cuts should not affect the personal saving rate because individuals will anticipate future tax increases to finance the tax cuts and save accordingly. However, the fact that the personal saving rate fell after the tax cuts of the early 1980s contradicts this theory and therefore opposes it, leading us to choose option D.

Question 10

If the economy is to the right of the peak of the Laffer curve,

Accepted Answer

When the economy is to the right of the peak of the Laffer curve, it means that tax rates are so high that they discourage economic activity and reduce total tax revenue. Therefore, a tax rate cut can lead to an increase in tax revenue by stimulating economic activity.

Question 11

In the wake of the Reagan "supply-side" tax cuts of the early 1980s, growth in the labor-force participation rate ________ and the personal saving rate ________.

Accepted Answer

The answer of In the wake of the Reagan "supply-side"...

Question 12

An annually balanced federal budget ________ macro- stabilization policy by requiring ________ fiscal policy during recessions.

Accepted Answer

An annually balanced federal budget inhibits macro-stabilization policy by requiring tighter fiscal policy during recessions. This is because a balanced budget requires the government to have equal amounts of revenue and expenditure, meaning that during a recession when there is less revenue, the government will have to cut expenditure to maintain a balanced budget. This tighter fiscal policy during recessions can worsen the recession and is therefore not an effective macro-stabilization policy.

Question 13

According to the Barro-Ricardo equivalence theorem, a tax cut that increases the deficit will end up mainly increasing current ________ and so is ________ in raising output in the short run.

Accepted Answer

The Barro-Ricardo equivalence theorem suggests that a tax cut financed by increased government borrowing will lead individuals to save more in anticipation of future tax increases to pay off the debt, thus leaving consumption unchanged and making the tax cut ineffective in raising output in the short run.

Question 14

The rise in the U.S. debt-GDP ratio after 1980 must be blamed primarily on a ________ ratio of ________ to GDP.

Accepted Answer

The question states that the debt-GDP ratio began to rise after 1980, meaning that the U.S. government began accumulating more debt relative to the size of the economy. The best explanation for this is a rising ratio of government expenditures to GDP, as the government's spending increased faster than economic growth during this time period. This led to larger budget deficits and more borrowing by the government, which in turn increased the debt-GDP ratio.

Question 15

In a recession, automatic stabilization ________ tax revenues and ________ the debt-GDP ratio.

Accepted Answer

Automatic stabilization lowers tax revenues because incomes fall during a recession, leading to lower tax collections. It raises the debt-GDP ratio because lower tax revenues and higher automatic spending (like unemployment benefits) increase the budget deficit, thus increasing the debt relative to GDP.

Question 16

Economist Robert Barro drew attention to how people ________ to argue that tax cuts ________ saving and thus are ________ as a stabilization tool.

Accepted Answer

Barro argued that people tend to save more when they receive tax cuts, but instead of spending that money, they tend to leave it as bequests to their children. This means that tax cuts do not stimulate consumption and thus are ineffective as a stabilization tool. Choice B correctly summarizes Barro's argument.

Question 17

Throughout U.S. history, the debt-GDP ratio has jumped sharply higher during

Accepted Answer

The debt-GDP ratio has historically increased during wars, as the government needs to borrow more money to finance military operations and defense spending.

Question 18

The Social Security System

Accepted Answer

The Social Security System operates on a "pay-as-you-go" principle, where current workers' taxes fund the benefits of current retirees, rather than benefits being directly tied to an individual's contributions or the interest accrued on those contributions.

Question 19

The one uncontroversial statement at the foundation of "supply-side" theory is that

Accepted Answer

The one uncontroversial statement at the foundation of "supply-side" theory is that income taxes reduce the after-tax reward to work and saving. This statement is the basis for the argument that reducing tax rates will lead to increased incentives to work and save, which will ultimately lead to economic growth. However, the other statements (A, C, and D) are more controversial and have been subject to debate and criticism.

Question 20

The "Laffer curve" is the relationship between

Accepted Answer

The Laffer curve shows the relationship between the tax rate and tax revenue. It suggests that as tax rates increase beyond a certain point, tax revenue will actually decrease because taxpayers will have less incentive to work and invest.

Quiz 12: The Government Budget, the Public Debt, and Social Security

Supply-side theorists presented evidence that after the 1964 tax cut, tax revenues . But at the time, monetary policy helped to produce that result, a factor ignored or not understood by the Reagan administration.

Most economists would consider it sensible for the federal government to its current operating and capital expenditure budgets and then .

The Barro-Ricardo equivalence theorem argues that ________ stimulate the economy in the short run.

The government can continuously issue new bonds to pay the interest on its outstanding bonds so long as

The "solvency condition" states that the debt-GDP ratio will rise continuously so long as

Suppose that many families consider consumer durables such as houses and cars as potential bequests. This Barro's argument that current tax cuts, which imply future taxes, mainly go to increasing .

From the end of the World War II, the debt-GDP ratio in the United States fell almost without interruption to a low point in ________, which marked the beginning of a long-run climb.

A central cause of the rising debt-GDP ratio in the United States during the 1980s and 1990s was

The personal saving rate in the U.S. after the tax cuts of the early 1980s, evidence the Barro-Ricardo equivalence theorem.

If the economy is to the right of the peak of the Laffer curve,

In the wake of the Reagan "supply-side" tax cuts of the early 1980s, growth in the labor-force participation rate and the personal saving rate .

An annually balanced federal budget macro- stabilization policy by requiring fiscal policy during recessions.

According to the Barro-Ricardo equivalence theorem, a tax cut that increases the deficit will end up mainly increasing current and so is in raising output in the short run.

The rise in the U.S. debt-GDP ratio after 1980 must be blamed primarily on a ratio of to GDP.

In a recession, automatic stabilization tax revenues and the debt-GDP ratio.

Economist Robert Barro drew attention to how people to argue that tax cuts saving and thus are as a stabilization tool.

Throughout U.S. history, the debt-GDP ratio has jumped sharply higher during

The Social Security System

The one uncontroversial statement at the foundation of "supply-side" theory is that

The "Laffer curve" is the relationship between