Deck 17: Macroeconomic Policy Debates

Question 1

An example of an automatic stabilizer is:

A) changing the tax laws to increase the marginal tax rates.
B) the interest the government pays on loans.
C) the food stamp program.
D) the indexation of social security benefits to the consumer price index.

Answer 1

the food stamp program.

Question 2

Which of the following events is expected to worsen the budget deficit in the years following 2008?

A) the expected improvement in the economy once the financial crisis is in order
B) the expiration of some of George Bush's tax cuts in 2010
C) the increased government spending to deal with the financial crisis in 2008
D) All of the above are correct.

Answer 2

the increased government spending to deal with the financial crisis in 2008

Question 3

Which of the following would lower the burden of increased government spending on future generations?

A) increased spending to subsidize the losses of government owned enterprises
B) increased spending to subsidize consumption
C) increased spending to subsidize imported consumption goods
D) increased spending to subsidize education

Answer 3

increased spending to subsidize education

Question 4

The "flat tax" designed by Robert Hall and Alvin Rabushka feature:

A) a single flat tax levied only on those individuals who earn more than $500,000 a year.
B) a flat tax for corporations that is lower than the flat tax for individuals.
C) a single flat tax for corporations and for individuals.
D) a flat tax for corporations that is higher than the flat tax for individuals.

Question 5

In 1998, the city of Canfield collected $500,000 in taxes and spent $550,000. In 1998, the city of Canfield had a:

A) budget surplus of $50,000.
B) budget surplus of $450,000.
C) budget deficit of $$50,000.
D) budget surplus of $5,000.

Question 6

A key feature of consumption taxation is that you should:

A) pay more taxes if you are richer.
B) pay more taxes if you are poorer.
C) not pay more taxes if you choose to save more of your income.
D) pay more taxes if you choose to save more of your income.

Question 7

Recall Application 3, "Is a VAT in our Future?" to answer the following questions.
According to the application, which industrialized country does not have a value- added tax (VAT)?

A) Canada
B) the U.S.
C) the U.K.
D) all of the above are correct.

Question 8

IRA, 401(k), 403(b), and Keogh plans:

A) encourage saving while limiting tax liabilities.
B) place no limits on the amount that individuals can deposit in these accounts.
C) impose added taxes on those who save.
D) are never taxed.

Question 9

An example of a consumption tax in the US is the:

A) property tax.
B) state income tax.
C) sales tax.
D) social security tax.

Question 10

Suppose that the flat tax is 20 percent. A worker who earns $1000 before taxes and puts all of the income net of taxes into a bond that earns 10 percent per annum will earn an additional _______ in one year.

A) $880
B) $800
C) $80
D) $8

Question 11

Recall Application 1, "New Methods to Measure the Long-Term Fiscal Imbalances for the United States," to answer the
following questions:
According to the application, Gokhale and Smetters method for measuring indebtedness:

A) included the present value of the gap between deficits and revenues, and added it to the current GDP.
B) included the present value of the gap between deficits and debts, and added it to the current national revenues.
C) included the future value of the gap between deficits and revenues, and added it to the current national debt.
D) included the present value of the gap between deficits and revenues, and added it to the current national debt.

Question 12

A higher rate of return to saving has:

A) income and substitution effects that both increase saving.
B) an income effect that discourages saving and a substitution effect that encourages saving.
C) an income effect that encourages saving and a substitution effect that discourages saving.
D) income and substitution effects that both decrease saving.

Question 13

Which of the following are ways to save money and still limit your taxes?

A) individual retirement accounts (IRAs)
B) Keogh plans
C) buying tax exempt bonds
D) All of the above are correct.

Question 14

If the government were to experience a budget deficit in the next three years, the government's total debt would:

A) increase over the next three years.
B) decrease over the next three years.
C) stay the same over the next three years.
D) would increase only on the third year.

Question 15

An increase in government spending and a decrease in taxes will cause the:

A) budget deficit to remain unchanged.
B) budget deficit to increase.
C) budget deficit to decrease.
D) budget deficit to increase slightly.

Question 16

Targeting a range of inflation rates, instead of a single inflation level, would:

A) give Congress some "wiggle room" to meet employment targets.
B) give the central bank some "wiggle room" to meet employment targets.
C) prevent Congress from meeting employment targets.
D) prevent the central bank from meeting employment targets.

Question 17

The proposition that states that whether government finances its deficit by borrowing or by increasing taxes is irrelevant is called:

A) the law of demand.
B) monetazing the deficit.
C) the Ricardian Equivalence.
D) the quantity theory of money.

Question 18

Suppose that the flat tax is 20 percent. A worker who earns $1000 before taxes and puts all of the income net of taxes into a bond that earns 10 percent per annum will pay an additional _______ in taxes from interest income next year.

A) $800
B) $8
C) $880
D) $80

Question 19

Recall Application 3, "Is a VAT in our Future?" to answer the following questions.
According to the application, what is the difference between a VAT and a sales tax?

A) The sales tax is a consumption tax while the VAT is not.
B) The VAT is already embedded in the price of the good, while sales taxes are paid upon purchase.
C) The sales tax is easy to collect while the VAT is not.
D) The sales tax is regressive while the VAT is not.

Question 20

Recall Application 2, "Would a Policy Rule Have Prevented the Housing Boom? ," to answer the following questions:
According to the application, which of the following did John Taylor identify as the cause of the housing boom from 2001- 2004?

A) the Treasury's bailout of banks
B) the Fed's "easy money" policy
C) the Fed's "tight money" policy
D) Congress' tax cuts

Question 21

In the late 1990s, the United States had:

A) a budget surplus, but no national debt.
B) a budget deficit, but no national debt.
C) a budget surplus and a national debt.
D) a budget deficit and a national debt.

Question 22

Recall Application 1, "New Methods to Measure the Long-Term Fiscal Imbalances for the United States," to answer the
following questions:
According to the application, a way to eliminate the fiscal imbalance is to:

A) scale back benefits.
B) double payroll taxes.
C) double income taxes.
D) all of the above are correct.

Question 23

If the Ricardian Equivalence were true, the effect of an increase in government expenditure

A) is effective only if done both by borrowing and by taxation.
B) is the better it is financed by borrowing instead of taxation.
C) is the same regardless on whether it is financed by borrowing or by taxation.
D) is the better it is financed by taxation instead of borrowing.

Question 24

Critics of a balanced- budget amendment believe that a balanced budget would not allow the government enough flexibility to:

A) fight inflation.
B) get the economy out of recessions.
C) raise wages for civil servants.
D) spend budget surpluses.

Question 25

Double taxation of corporate profits, first through the corporate tax on profits and later through the personal income tax on dividends, is likely to lead to:

A) larger capital gains, if the corporations pay dividends.
B) additional issues of stock shares, instead of additional issues of bonds.
C) less efficient investments, but more lightly taxed ones.
D) smaller capital inflows into real estate investment.

Question 26

Printing money to finance budget deficits ultimately leads to:

A) a drop in the price level.
B) higher interest rates.
C) lower levels of investment.
D) inflation.

Question 27

Capital gains are profits of investors when they:

A) sell used cars.
B) sell their services.
C) sell stocks and other assets.
D) sell their labor.

Question 28

The decrease in investment caused by an increase in government borrowing is called:

A) crowding out.
B) monetizing the debt.
C) Ricardian equivalence.
D) the reshuffle effect.

Question 29

Budget deficits can lead to inflation if:

A) the debt to GDP rises.
B) government borrowing pushes up interest rates.
C) crowding out occurs.
D) the government monetizes the deficit.

Question 30

If what a government spends exceeds what it collects in taxes in a year, then the government is experiencing a:

A) government net revenue.
B) government budget surplus.
C) government budget deficit.
D) government net expenditure.

Question 31

Recall Application 3, "Is a VAT in our Future?" to answer the following questions.
According to the application, what does VAT stand for?

A) value- added tax
B) vigorously administered tax
C) veto any tax
D) very annoying tax

Question 32

Which of the following contributed to the $455 billion budget deficit in 2008?

A) the recession that started in December 2007
B) the continuing wars in Iraq and Afghanistan
C) the tax cuts in January 2008 that were geared to stimulate the economy
D) All of the above are correct.

Question 33

Recall Application 1, "New Methods to Measure the Long-Term Fiscal Imbalances for the United States," to answer the
following questions:
According to the application, a government policy that increases Medicare coverage and benefits will cause:

A) the fiscal imbalance to decrease.
B) the government to cut social security benefits.
C) the fiscal imbalance to increase.
D) the government to undertake education reform.

Question 34

Critics of inflation targeting worry that if the Fed focuses only in fighting inflation:

A) Congress would have nothing left to fight.
B) Congress would have no tools to fight a boom.
C) Congress would have no tools left to fight a deficit.
D) Congress would have no tools to fight a recession.

Question 35

Suppose that the natural rate of unemployment is 4% and the current inflation rate is 2% per year. To bring the inflation rate down to zero, the actual unemployment rate in the economy would have to be:

A) 2%.
B) 6%.
C) 4%.
D) 8%.

Question 36

If the Ricardian Equivalence were true, the effect of an increase in government expenditure

A) will increase investment by the amount of the increased government spending.
B) will increase investment by more than the increase in government spending.
C) will have no effect on investment.
D) will decrease investment by the amount of the government spending.

Question 37

Replacing the personal income tax with a consumption tax would:

A) favor poor and low income individuals.
B) increase overall federal revenues from taxation.
C) favor all taxpayers equally, regardless of their personal wealth.
D) favor wealthy and high income individuals.

Question 38

If a government currently has a budget deficit:

A) its debt is increasing.
B) government expenditures exceed revenues.
C) it does not necessarily have a debt.
D) all of the above

Question 39

How large was the federal government deficit during the fiscal year 2010?

A) $160 billion
B) $700 billion
C) $3.7 trillion
D) $1.3 trillion

Question 40

From the end of 1997 through 2000, federal government debt as a percentage of GDP:

A) became negative.
B) increased.
C) remained constant.
D) decreased.

Question 41

The U.S. tax system discourages savings because:

A) taxpayers pay a value- added tax on their savings.
B) taxpayers pay taxes on both their wages and on the earnings from their savings.
C) taxpayers pay taxes only on their wages.
D) taxpayers pay a federal tax on their consumption spending.

Question 42

If the Fed follows a policy of targeting the inflation rate:

A) the natural rate of unemployment will rise.
B) its credibility will be enhanced.
C) the financial market will be more confused.
D) it will likely face more political pressures.

Question 43

Part of the argument against budget deficits is that they _______ interest rates and _______ investment.

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

Question 44

The rule of thumb used to measure the cost of reducing inflation suggests that if the actual unemployment rate exceeds the natural rate of unemployment by 1 percentage point for one year, the inflation rate:

A) falls by 1 percentage point per year.
B) falls by 1.5 percentage points per year.
C) falls by 0.5 percentage point per year.
D) rises by 1 percentage point per year.

Question 45

Capital gains are heavily concentrated on:

A) the poor.
B) the middle class.
C) the very wealthy.
D) the homeless.

Question 46

In 2001, the federal budget turned _______ and, as a result of this, it is expected that the ratio of government debt to GDP is expected to _______.

A) from a deficit into a surplus ; decrease
B) from a surplus into a deficit ; decrease
C) from a surplus into a deficit ; increase
D) from a deficit into a surplus ; increase

Question 47

Which of the following statements is false concerning policies to reduce inflation?

A) They are likely to have a lower cost if people think that the central bank is credible.
B) They have permanent benefits.
C) They are likely to be more credible if the government also makes an attempt to reduce the budget deficit.
D) The costs are likely to exceed the benefits.

Question 48

One effect of removing capital gains tax is that:

A) it promotes social inequality.
B) it promotes social equality.
C) it makes the income tax system more progressive.
D) it promotes a flat tax system.

Question 49

Suppose that the government debt is $100 million at the beginning of the year. If government collects $55 million in taxes and incurs $50 million in expenditures this year, then the government is experiencing a _______ and the debt will be _______ at the end of the year.

A) deficit, $105 million
B) surplus, $95 million
C) surplus, $105 million
D) deficit, $95 million

Question 50

During a recession, automatic stabilizers cause the federal budget deficit to:

A) remain unchanged.
B) decrease.
C) either increase or decrease.
D) increase.

Question 51

Recall Application 1, "New Methods to Measure the Long-Term Fiscal Imbalances for the United States," to answer the
following questions:
According to the application, the term used for the "new measure" for the government's long term indebtedness is:

A) fiscal imbalance.
B) imbalanced budget.
C) Social Security imbalance.
D) future budget imbalance.

Question 52

Monetizing the deficit occurs when:

A) banks buy more treasury bills from the US Treasury.
B) banks lend more dollars to the central bank.
C) the central bank prints more money because the private sector's money demand has increased.
D) the central bank purchases newly issued government bonds.

Question 53

One way to prove the Ricardian equivalence is true is to show that when the government deficit increases, (the) _______ also increase(s).

A) country's imports
B) consumption expenditures
C) money supply
D) private sector saving

Question 54

If the Fed were to focus only on inflation:

A) its capacity to fight recessions would be diminished.
B) the private sector would become less responsive to the Fed's policies.
C) its independence from political pressures would decrease.
D) its credibility would be reduced.

Question 55

Which of the following is true regarding the U.S. procedure on inflation targeting?

A) The president sets a target that the Federal Reserve must follow.
B) The Federal Reserve has the authority to set its own inflation target and makes the target known to the public.
C) Congress sets a target that the Federal Reserve must follow.
D) The Federal Reserve does not have an explicit inflation target.

Question 56

The presence of automatic stabilizers means that the federal budget deficit is _______ than it otherwise would be in a recession and _______ than it otherwise would be in an expansion.

A) smaller; smaller
B) larger; smaller
C) smaller; larger
D) larger; larger

Question 57

The U.S. federal government had a budget _______ over the entire 1970 to 1997 period; by historical standards, it was particularly _______ in the 1980s.

A) deficit; large
B) surplus; small
C) deficit; small
D) surplus; large

Question 58

Some argue that deficits can cause a smaller government because:

A) deficits make it harder for politicians to print money.
B) deficits make it easier for politicians to print money.
C) deficits make it easier for politicians to increase spending.
D) deficits make it harder for politician to increase spending

Question 59

If the government is required to balance the budget and the economy is in a recession and experiencing an expanding budget deficit, the government must:

A) raise taxes.
B) decrease spending.
C) A and B are correct.
D) neither A nor B

Question 60

Suppose that the natural rate of unemployment is 5% and the current inflation rate is 1% per year. To bring the inflation rate down to zero, the actual unemployment rate in the economy would have to be:

A) 7%.
B) 6%.
C) 8%.
D) 4%.

Question 61

The reason why the budget deficit increases during recessions is:

A) higher tax revenues.
B) higher welfare payments.
C) lower tax rates.
D) Both A and C are correct.

Question 62

Recall Application 1, "New Methods to Measure the Long-Term Fiscal Imbalances for the United States," to answer the
following questions:
According to the application, why do the federal budget deficit projections not fully portray the long run problems of the United States?

A) The value of tax receipts to be made by the government in the future is expected to go way up as the population ages.
B) The value of payments to be made by the government in the future is expected to go way up as the population ages.
C) The value of payments to be made by the government in the future is expected to go way down as the population ages.
D) The value of tax receipts to be made by the government in the future is expected to stay constant as the population ages.

Question 63

Allowing the Fed to set its own inflation targets,

A) would require a constitutional amendment.
B) would make the Fed even more independent from Congress.
C) would diminish the Fed's authority and control over the economy.
D) would eliminate the need for the Treasury Department.

Question 64

When an individual in the US invests in a 401K, that person is taxed:

A) one year after making the investment.
B) only after the person dies.
C) immediately after making the investment.
D) only after cashing- in the investment.

Question 65

The existence of automatic stabilizers causes:

A) the size of any budget deficit to decrease as the economy enters a recession.
B) the effects of a given change in autonomous expenditures on output to be larger than they would be if there were no automatic stabilizers.
C) no change in the size of the budget deficit as the economy enters a recession.
D) the size of any budget deficit to increase as the economy enters a recession.

Question 66

If the flat tax is 27 percent, a person who makes $3000 a month will have an income net of taxes equal to _______ a month.

A) $810
B) $2190
C) $2730
D) $270

Question 67

The proposition that states that whether government finances its deficit by borrowing or by increasing taxes is irrelevant was named after:

A) John Maynard Keynes
B) Paul Samuelson
C) Adam Smith
D) David Ricardo

Question 68

If the Fed follows a policy of targeting the inflation rate:

A) its credibility will be lowered.
B) the automatic stabilizers will not work.
C) the natural rate of unemployment will rise.
D) it will likely face fewer political pressures.

Question 69

If the Fed enhances its credibility when it sets its own inflation targets,

A) long term interest rates will be more responsive to changes in the short term interest rates.
B) long term interest rates will be less responsive to changes in the short term interest rates.
C) short term interest rates will be less responsive to changes in the long term interest rates.
D) short term interest rates will be more responsive to changes in the long term interest rates.

Question 70

If the flat tax is 27 percent, a person who makes $3000 a month will pay _______ a month in income taxes.

A) $270
B) $8100
C) $810
D) $2190

Question 71

Recall Application 3, "Is a VAT in our Future?" to answer the following questions.
According to the application, what is the difficulty in imposing VAT in the U.S.?

A) Some conservatives oppose the tax because the VAT is regressive.
B) Some liberals oppose the tax because the VAT is too efficient.
C) The US already imposes retail level taxes collected by state governments.
D) The VAT is a lot more difficult to collect than sales taxes.

Question 72

In the United States in recent years, the national debt has been approximately _______ percent of GDP.

A) 25
B) 50
C) 100
D) 150

Question 73

Between 1996 and 1997, the budget deficit in Egypt fell dramatically. Other things being constant, this decline should have made interest rates _______ and investment _______ .

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

Question 74

Recall Application 1, "New Methods to Measure the Long-Term Fiscal Imbalances for the United States," to answer the
following questions:
According to the application, the largest source of the fiscal imbalance is:

A) education expenditures.
B) the spending on wars.
C) Medicare.
D) tax cuts.

Question 75

Which of the following ways does the federal government finance its expenditures?

A) issuing bonds
B) creating money
C) tax revenues
D) all of the above

Question 76

The sum of all past deficits is called:

A) the government deficit.
B) the government surplus.
C) the government expenditures.
D) the government debt.

Question 77

In 1998, the city of Canfield collected $500,000 in taxes and spent $450,000. In 1998, the city of Canfield had a:

A) budget surplus of $5,000.
B) budget surplus of $50,000.
C) budget deficit of $$50,000.
D) budget surplus of $450,000.

Question 78

Recall Application 2, "Would a Policy Rule Have Prevented the Housing Boom? ," to answer the following questions:
According to the application, which of the following European countries deviated the most from the "Taylor rule" and suffered the worst boom and bust in housing?

A) Germany
B) Spain
C) the United Kingdom
D) France

Question 79

A decrease in government spending and an increase in taxes will cause the:

A) government debt to increase.
B) budget deficit to increase.
C) budget deficit to remain unchanged.
D) budget deficit to decrease.

Question 80

If the government were to experience a budget surplus in the next three years, the government's total debt would:

A) stay the same over the next three years.
B) decrease over the next three years.
C) increase over the next three years.
D) would decrease only on the third year.