Deck 15: 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

Tax cuts aimed at businesses can stimulate

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

Answer 2

investment spending.

Question 3

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.

Answer 3

are called stabilization policies.

Question 4

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 5

Stabilization policies are policies aimed at

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

Question 6

Expansionary policies are government policies that

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

Question 7

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 8

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 9

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 10

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 11

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 12

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 13

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 14

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 15

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.

Question 16

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 17

Contractionary policies are government policies that

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

Question 18

The time it takes to formulate a policy is known as

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

Question 19

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 20

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 21

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

Question 22

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 23

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

Question 24

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 25

Does the term ʺmandatory spendingʺ 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 26

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

Question 27

What is meant by the term ʺinside lagsʺ?

Question 28

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

Question 29

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

Question 30

Which component of federal spending is included in GDP?

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

Question 31

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

Question 32

What are the two basic reasons inside lags occur?

Question 33

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

Question 34

What is meant by the term ʺoutside lagsʺ?

Question 35

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

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

Question 36

Why is it difficult to implement fiscal policies?

Question 37

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 38

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

Question 39

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

Question 40

Why are transfer payments not included in GDP?

A)The amount is too low to have any effect.
B)Unemployment varies and canʹt 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 isnʹt reported.

Question 41

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

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

Question 42

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 43

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 2010, spending on federal retirement and health programs accounted for 10 percent of GDP. Experts estimate that this spending componentʹs 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 44

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 45

The idea that a $1 increase in infrastructure spending will generate $1.57 in economic growth is a representation of

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

Question 46

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 ʺunfairʺ 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 47

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 in 2010.
B)roughly equal to the total amount of GDP in 2010.
C)larger than total federal spendingʹs share of GDP in 2010.
D)greater than the consumption spending componentʹs share of GDP in 2075.

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

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 50

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 51

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 52

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

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

Question 53

Summary of the article:
Obamaʹs economic recovery plan not a hit with economists
By Paul Wiseman and Richard Wolf
USA Today
September 8, 2010
In an attempt to boost the struggling economy, President Obama proposed a new $180 billion package of tax
breaks and transportation projects. Obamaʹs proposal includes the following:
-Allowing businesses to deduct from their taxes 100 percent of investments in new equipment through 2011,
giving businesses an additional $200 billion right away and costing the Treasury only $30 billion over the
next ten years due to depreciation write-offs.
-Expanding the business tax credit for research and development and making this credit permanent, at an
estimated cost of $100 billion over ten years.
-Construction spending of $50 billion to build or repair roads, rail lines and airport runways.
Some economists are not convinced that these proposals will create any dramatic improvements in the
economy, claiming that they will not result in the creation of many new jobs and that tax breaks on payroll
taxes may be more effective than credits for research and development. Economists Mark Zandi and Alan
Blinder did say, however, that construction spending on infrastructure eventually generates $1.57 in growth
for every dollar spent, but the benefit to the economy will not be immediate.
President Obama will need to get Congressional approval to enact his proposed 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 54

What is the largest component of the federal budget?

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

Question 55

Summary of the article:
Obamaʹs economic recovery plan not a hit with economists
By Paul Wiseman and Richard Wolf
USA Today
September 8, 2010
In an attempt to boost the struggling economy, President Obama proposed a new $180 billion package of tax
breaks and transportation projects. Obamaʹs proposal includes the following:
-Allowing businesses to deduct from their taxes 100 percent of investments in new equipment through 2011,
giving businesses an additional $200 billion right away and costing the Treasury only $30 billion over the
next ten years due to depreciation write-offs.
-Expanding the business tax credit for research and development and making this credit permanent, at an
estimated cost of $100 billion over ten years.
-Construction spending of $50 billion to build or repair roads, rail lines and airport runways.
Some economists are not convinced that these proposals will create any dramatic improvements in the
economy, claiming that they will not result in the creation of many new jobs and that tax breaks on payroll
taxes may be more effective than credits for research and development. Economists Mark Zandi and Alan
Blinder did say, however, that construction spending on infrastructure eventually generates $1.57 in growth
for every dollar spent, but the benefit to the economy will not be immediate.
The Obama 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 56

Summary of the article:
Obamaʹs economic recovery plan not a hit with economists
By Paul Wiseman and Richard Wolf
USA Today
September 8, 2010
In an attempt to boost the struggling economy, President Obama proposed a new $180 billion package of tax
breaks and transportation projects. Obamaʹs proposal includes the following:
-Allowing businesses to deduct from their taxes 100 percent of investments in new equipment through 2011,
giving businesses an additional $200 billion right away and costing the Treasury only $30 billion over the
next ten years due to depreciation write-offs.
-Expanding the business tax credit for research and development and making this credit permanent, at an
estimated cost of $100 billion over ten years.
-Construction spending of $50 billion to build or repair roads, rail lines and airport runways.
Some economists are not convinced that these proposals will create any dramatic improvements in the
economy, claiming that they will not result in the creation of many new jobs and that tax breaks on payroll
taxes may be more effective than credits for research and development. Economists Mark Zandi and Alan
Blinder did say, however, that construction spending on infrastructure eventually generates $1.57 in growth
for every dollar spent, but the benefit to the economy will not be immediate.
Even if the Obama administration succeeds with its effort to gain Congressional approval for its proposals, it will still take time for these policy 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 57

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 58

Summary of the article:
Obamaʹs economic recovery plan not a hit with economists
By Paul Wiseman and Richard Wolf
USA Today
September 8, 2010
In an attempt to boost the struggling economy, President Obama proposed a new $180 billion package of tax
breaks and transportation projects. Obamaʹs proposal includes the following:
-Allowing businesses to deduct from their taxes 100 percent of investments in new equipment through 2011,
giving businesses an additional $200 billion right away and costing the Treasury only $30 billion over the
next ten years due to depreciation write-offs.
-Expanding the business tax credit for research and development and making this credit permanent, at an
estimated cost of $100 billion over ten years.
-Construction spending of $50 billion to build or repair roads, rail lines and airport runways.
Some economists are not convinced that these proposals will create any dramatic improvements in the
economy, claiming that they will not result in the creation of many new jobs and that tax breaks on payroll
taxes may be more effective than credits for research and development. Economists Mark Zandi and Alan
Blinder did say, however, that construction spending on infrastructure eventually generates $1.57 in growth
for every dollar spent, but the benefit to the economy will not be immediate.
The Obama 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 59

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 60

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 61

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 62

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 63

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 64

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 65

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 66

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

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

Question 67

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 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

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 70

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 bond it sold to the public.
C)forcing a change in net exports.
D)increasing taxes on luxury items.

Question 71

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 72

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 73

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

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

Question 74

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 75

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 76

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 77

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 78

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 79

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

Question 80

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