Deck 13: Spending, Taxes, and the Budget Deficit

Question 1

Real transfer payments by the U.S. government, in general,

A) displayed a strong positive correlation with the unemployment rate over the past three decades.
B) displayed no systematic correlation with the unemployment rate over the past three decades.
C) displayed a strong negative correlation with the unemployment rate over the past three decades.
D) expanded slower than real GDP over the past three decades.
E) declined over the past three decades despite a gradual deepening of the natural rate of unemployment.

Answer 1

displayed a strong positive correlation with the unemployment rate over the past three decades.

Question 2

Revenue collected by sales and property taxes in 2003 amounts to

A) less than 10 percent of the revenue collected to run state and local governments.
B) approximately 25 percent of the revenue collected to run state and local governments.
C) approximately 33 percent of the revenue collected to run state and local governments.
D) approximately 40 percent of the revenue collected to run state and local governments.
E) well over 40 percent of the revenue collected to run state and local governments.

Answer 2

well over 40 percent of the revenue collected to run state and local governments.

Question 3

Which of the following is not a transfer program that works automatically to stabilize the state of the economy?

A) unemployment insurance programs that pay benefits to workers who lose their jobs during recession
B) e m p l oye r-funded unemployment programs for wh i ch mandated contri- butions climb as the number of unemployment claims climbs in re c e s s i o n
C) Medicaid that assists poor families with medical expenses
D) Social Security programs for which participation rates swell when jobs get tight in recession and older Americans find it difficult to find work
E) food stamp programs that pay benefits to families with incomes below a given threshold

Answer 3

e m p l oye r-funded unemployment programs for wh i ch mandated contri- butions climb as the number of unemployment claims climbs in re c e s s i o n

Question 4

Federal purchases of goods and services in 1993

A) amounted to less than 10 percent of total budget outlays.
B) amounted to approximately 25 percent of total budget outlays.
C) amounted to about 33 percent of total budget outlays.
D) amounted to slightly more than 50 percent of total budget outlays.
E) amounted to more than 75 percent of total budget outlays.

Question 5

Federal government policies during the 1980s and 1990s have been to

A) shifted budgetary responsibility away from the federal government on both the taxation and the expenditure sides of the ledger.
B) shifted responsibility for expenditure decisions away from the federal government but maintained a national tax base for equity and efficiency reasons.
C) shifted taxation responsibility away from the federal government but maintained control over expenditures to shrink the size of government.
D) shifted responsibility toward the federal government on both the taxation and expenditure sides of the ledger to achieve greater budgetary control.
E) maintained the existing budgetary balance.

Question 6

Transfer payments made by governments over the business cycle in the United States

A) move procyclically with GDP because they are constructed to increase or decrease automatically as tax receipts climb or fall with GDP.
B) move countercyclically with GDP because they are constructed to increase or decrease automatically as changes in GDP cause corresponding changes in the number of people eligible for payment.
C) are not well correlated with changes in GDP in part because the discretionary power to enact changes in fiscal policy is diluted across too many congressional committees.
D) vary directly with tax revenues and therefore play no role in stabilization policy.
E) none of the above.

Question 7

The federal deficit of the United States, over the past three decades, has been

A) strongly procyclical in part because tax revenues rise during recession and fall during boom.
B) strongly anticyclical in part because tax revenues fall during recession and rise during boom.
C) strongly procyclical in part because transfers rise during recession and fall during boom.
D) strongly procyclical in part because tax revenues are stable over the business cycle even as transfers rise during recession and fall during boom.
E) none of the above.

Question 8

Which of the following reasons might explain, at least in part, why changes in federal tax revenues tend to mitigate changes in aggregate demand?

A) The federal income tax rate is computed as a proportion of disposable income.
B) Federal income tax rates are progressive and thus increase with disposable income.
C) All kinds of taxes discourage work and thus reduce GDP, but the income tax creates the smallest of these work disincentives.
D) The federal income tax is constructed so that the middle-class taxpayer pays the largest share.
E) None of the above.

Question 9

Purchases of goods and services by the U.S. government, in general,

A) displayed a strong positive correlation with the unemployment rate over the past two decades.
B) displayed no systematic correlation with the unemployment rate over the past two decades.
C) displayed a strong negative correlation with the unemployment rate over the past two decades.
D) have been declining over the past two decades despite a gradual deepening in the natural rate of unemployment.
E) have been increasing over the past two decades because of a gradual deepening of the natural rate of unemployment.

Question 10

Indexing federal income tax rates to inflation would cause the elasticity of tax revenue with respect to GDP

A) to increase because it would allow elasticity to more accurately reflect the accelerating effect of inflation.
B) to do nothing because tax brackets would simply be enlarged with inflation and not associated with lower tax rates.
C) to do nothing because the bulk of tax revenue collected by the federal government is generated by a combination of taxes, the net effect of which is roughly proportional to GDP.
D) to diminish the elasticity of tax revenue with respect to GDP because tax revenue would no longer increase faster than nominal GDP owing to inflation.
E) none of the above.

Question 11

The tax elasticity for the federal government of the United States over the past 20 years was roughly equal to

A) 1.8; that is, a 1 percent increase in GDP generated a 1.8 percent increase in tax revenue.
B) -1.8; that is, a 1 percent reduction in GDP causes tax revenues to climb by 1.8 percent.
C) 1.8; that is, a 1.8 percent increase in GDP could be expected to generate a 1 percent decrease in tax revenue.
D) .55; that is, a 0.55 percent increase in tax revenue could be expected if GDP increased by 1 percent.
E) none of the above.

Question 12

Purchases made by governments over the business cycle

A) move procyclically with GDP as governments that collect more or less in taxes over the cycle spend more or less on goods and services.
B) move countercyclically with GDP as governments try to smooth out the cycle by spending more on goods and services in recession and less during booms.
C) are not very well correlated with changes in GDP because discretionary adjustments in purchasing arrangements take a long time to consummate and are almost never canceled.
D) are one of the major causes of business cycles as we now understand them.
E) none of the above.

Question 13

Which of the following statements is an accurate description of the relative sizes of the major components of the federal budget for the United States in 2003?

A) Defense expenditures exceeded the revenue generated by the corporate income tax.
B) Transfer payments exceeded the revenue generated by social security taxes.
C) Transfer payments exceeded the revenue generated by the individual income tax.
D) Income and social security taxes made up well over 80 percent of federal receipts.
E) All of the above.

Question 14

Which of the following statements about the combined 2003 budgets of state and local governments is false?

A) Purchases of goods and services by state and local governments exceed the purchases of goods and services made by the federal government by more than 2 to 1.
B) Expenditure by the federal government on defense exceeded total outlays of state and local governments.
C) State and local governments pay more interest than they earn each year, but the federal government earns more than it pays.
D) Both b and c.
E) None of the above.

Question 15

The budget of the U.S. federal government has run a surplus

A) no year since 1969.
B) every year since 1997.
C) every year before 1969.
D) during the years 1998-2001.
E) no year before 1998.

Question 16

The budget of the U.S. federal government has run a deficit

A) every year since 1969.
B) every year since 1997.
C) every year since 1969 except 1998-2001.
D) every year since 1959 except 1998-2001.
E) every year since 1959.

Question 17

Outlays by the federal government in 2003

A) exceeded outlays by state and local governments by approximately 10 percent.
B) fell short of outlays by state and local governments by nearly 50 percent.
C) exceeded outlays by state and local governments by almost 65 percent.
D) exceeded outlays by state and local governments by nearly 90 percent.
E) none of the above.

Question 18

The tax revenue elasticity with respect to GDP

A) exceeds 1 in part because things that are not taxed, like depreciation, do not vary with GDP.
B) exceeds 1 in part because things that are taxed are taxed progressively and vary with GDP.
C) exceeds 1 in part because exports are included in the computation of GDP and move countercyclically with GDP.
D) all of the above.
E) a and b only.

Question 19

A tax is progressive with respect to income if

A) the average exemption allowed for each dependent in a taxpayer's family increases with income.
B) the average tax rate paid by individuals climbs with GDP for all levels of GDP.
C) the marginal tax rate paid by individuals falls with GDP even while the average tax rate moves in the opposite direction.
D) the average level of disposable income climbs with personal income.
E) none of the above.

Question 20

Tax collections by the federal government of the United States, in general,

A) declined faster than real GDP during the recessionary periods that punctuated the past three decades.
B) increased faster than real GDP during the boom periods that marked some years of the past three decades.
C) served as one of many automatic stabilizers that worked to keep aggregate demand more stable than it otherwise would have been over the past three decades.
D) all of the above.
E) none of the above.

Question 21

Deficits are correlated inversely with

A) the rate of growth of GDP because tax revenues climb and transfer payments contract as GDP swells.
B) inflation because tax revenues climb and expenditures automatically fall during periods of inflation.
C) the rate of unemployment because people who are out of work pay no tax and swell the roles of those eligible for transfer payments.
D) interest rates because higher rates mean higher earnings on government bonds and thus more income from nontax sources.
E) none of the above.

Question 22

For the fiscal year starting in October 2003, the U.S. government reported a budget deficit of

A) $3.83 trillion or about 38 percent of GDP.
B) $383 billion or about 3.8 percent of GDP.
C) $4.5 trillion or about 45 percent of GDP.
D) $450 billion or about 4.5 percent of GDP.
E) none of the above.

Question 23

Any deficit that a government might run must be financed somehow. Which of the following is a vehicle by which a government might finance spending beyond its means?

A) Floating new bonds
B) Purchasing existing bonds
C) Calling in foreign debt
D) Turning over existing debt with advantageously lower interest rates
E) Printing less new money

Question 24

Which of the following policy measures is not discretionary?

A) Investment tax credits designed to stimulate new investment
B) Public works programs designed to speed up highway construction
C) Income tax surcharges designed to reduce budget deficits
D) Interest payments for servicing the national debt
E) Income tax deductions for college tuition

Question 25

Changes in GDP translate into changes in disposable income that are

A) nearly twice as large.
B) nearly the same size in most circumstances.
C) only 60 percent as large.
D) less than half as large.
E) possibly any of the above depending on circumstance.

Question 26

Which of the following word equations accurately records the relationship between actual, structural, and cyclical deficits?

A) The structural deficit equals the sum of the actual deficit and the cyclical deficit.
B) The structural deficit equals the difference between the actual deficit and its cyclical component.
C) The cyclical deficit matches the actual deficit in the United States because the structural deficit is negligible.
D) The actual deficit represents the sum of the structural and cyclical deficits if the current account of the trade balance is included in the structural component.
E) None of the above.

Question 27

It is not completely accurate to assume that government spending is exogenous because

A) some government spending is controlled by automatic policy rules that depend on current economic conditions.
B) some government spending is adjusted at the discretion of policy makers, who observe conditions across the economy and react.
C) it is, to a significant degree, controlled by politicians who want to continue to be elected and therefore respond to the will of the people.
D) all of the above.
E) none of the above.

Question 28

Which of the following are transfer programs that work to automatically stabilize the level of economic activity around its "potential"?

A) unemployment insurance for workers who have lost their jobs
B) Social Security for the elderly
C) Medicare, health care assistance for the elderly
D) Medicaid, health care assistance for the poor
E) food stamps for families below certain income thresholds

Question 29

One variant of rational expectations theory that supports the long-run neutrality of fiscal policy asserts that

A) any tax reduction enacted now ultimately is covered by a future tax increase because all federal borrowing must eventually be paid off.
B) any government spending financed by either higher taxes or increased borrowing must somehow be covered by taxpayers' liabilities.
C) people that anticipate future tax increases immediately begin to save to cover their future liability and thus reduce aggregate demand by an amount equal to the anticipated stimulus.
D) all of the above fit together to predict fiscal neutrality.
E) none of the above can be used to predict fiscal neutrality.

Question 30

As a percentage of GDP, the total debt of the federal government of the United States

A) fell quite consistently from 1945 through 1974, held steady from 1974 until 1981, but then began to increase during the 1980s.
B) fell slowly from 1945 through 1970 but then rose steadily until the Reagan revolution in government took hold in 1983.
C) grew during the 1980s, fell during the 1990s, but now is growing again.
D) was quite stable from 1945 until 1980 and then grew at an unprecedented rate once the Reagan administration took control of the budget.
E) both a and c.

Question 31

Suppose that a simple tax system were to assess no tax up through $10,000, a 10 percent rate for income between $10,000 and $20,000, and a 20 percent rate on every dollar earned above $20,000. If inflation were to run at 10 percent for a year, then indexing would cause the 10 percent bracket to

A) run from $10,000 to $22,000 if the tax schedule were indexed.
B) hold fixed from $10,000 to $20,000 despite the indexing because the tax would remain proportional within the 10 percent bracket.
C) run from $11,000 to $22,000 if the tax schedule were indexed.
D) be narrowed, but its precise boundary points cannot be determined from the information provided.
E) none of the above.

Question 32

Government in any economy can influence aggregate demand by

A) changing the quantity or pattern of goods it purchases from the private sector.
B) changing the quantity or pattern of services it purchases from the private sector.
C) changing the mechanisms by which it transfers income from one individual with one pattern of consumption) to another with a different pattern of consumption).
D) changing either the level or type of taxation by which it collects its revenue.
E) all of the above.

Question 33

Suppose inflation were proceeding at a rate of 10 percent per year. If the real deficit were in balance, then the nominal budget would be

A) in surplus by 10 percent.
B) in surplus by something less than 10 percent.
C) in surplus by something more than 10 percent.
D) in deficit by a percentage that depends on the size of the outstanding debt.
E) none of the above.

Question 34

The structural deficit

A) is the same thing as the full-employment deficit.
B) reflects the accuracy of the notion that an economy can eliminate its deficit by growing toward full employment.
C) removes from its definition the cyclical components of the actual deficit that swell with recession and contract with boom.
D) is a measure of deficit spending that is not sensitive to the automatic stabilizers of fiscal policy.
E) all of the above.

Question 35

One interpretation of the correlation between changes in the real interest rate and the federal deficit is that the

A) observed negative correlation means that high deficits can cause interest rates to fall.
B) observed negative correlation has to be explained by linking any current recession to the simultaneous decline of interest rates and aggregate demand with mounting deficits.
C) observed positive correlation definitively proves that high deficits cause high interest rates.
D) observed positive correlation is an accident of the competitive structure of the U.S. economy.
E) none of the above.

Question 36

Over short-run periods during the past three to four decades, real interest rates appear to have fallen in the face of higher deficits rather than risen. How might this seeming contradiction best be explained?

A) Deficits occur when the economy is in a slump and interest rates are low anyway.
B) Deficits do not appear to cause high real interest rates.
C) When deficits occurred during an expansion, as during the 1980s, real interest rates were higher than normal.
D) Both a and b.
E) Both a and c.

Question 37

If changes in GDP are not totally reflected in changes in disposable income, then they must, to a significant degree, be absorbed by changes in

A) tax collections, both automatic and discretionary.
B) transfer payments.
C) dividend payments.
D) all of the above.
E) none of the above.

Question 38

Which of the following statements is not an accurate description of the 1970s?

A) Interest payments are a major spending component of the federal budget.
B) The federal debt is a more important element in the political budgeting process.
C) Congressional representatives have little trouble saying no to constituents' spending demands.
D) Economists are divided on the economic significance of the national debt.
E) Deficit and debt issues are forcing reductions in the growth of government spending.

Question 39

Suppose that an economy with a progressive income tax that began to assign tax liability at $10,000 were to go into a recession. If only those people at the lower end of the income distribution were laid off and filed for untaxed unemployment compensation, then the average tax rate computed across the remaining taxpayers would

A) necessarily fall because unemployment compensation transfers would maintain aggregate demand.
B) rise or fall depending on circumstance.
C) necessarily rise because people who previously faced relatively low tax rates would no longer be included in the average.
D) not be changed because the tax schedule was not altered.
E) none of the above.

Question 40

One way of financing a budget deficit is for that nation's central bank to monetize the debt. In the United States,

A) the Federal Reserve Bank has monetized only a small portion of the national debt.
B) the Federal Reserve Bank has monetized a very large portion of the national debt.
C) the Federal Reserve is prohibited form monetizing the national debt because of its independent agency status.
D) the Federal Reserve Bank has monetized approximately half of the national debt.
E) the Federal Reserve Bank does not participate in government treasury obligations.

Question 41

Suppose that the correlation between government spending and the differ- ence between actual and potential GDP were to become more strongly cor- related; that is, suppose that an increase or decrease in the GDP gap causes an enlarged increase or decrease, respectively, in government spending.

A) The aggregate demand curve should become steeper because monetary policy is less effective.
B) The aggregate demand curve should become steeper because monetary policy is more effective.
C) The aggregate demand curve should become flatter because monetary policy is more effective.
D) The aggregate demand curve should become flatter because monetary policy is less effective.
E) There should be no change in the slope of the aggregate demand curve.

Question 42

Automatic stabilizers built into our system of fiscal policy

A) make the marginal propensity to consume smaller than it otherwise would be.
B) make the investment multiplier larger than it otherwise would be.
C) make the IS curve steeper than it otherwise would be.
D) make monetary policy less effective in moving GDP around in the short run than it otherwise would be.
E) all of the above.

Question 43

Suppose that a progressive individual income tax were suddenly indexed to the rate of inflation. You would expect, in that case, to see

A) the investment multiplier decline with the marginal propensity to consume.
B) monetary policy become less effective in manipulating the level of GDP in the short run.
C) the interest rate become more volatile over the short run in response to weekly uncertainties in the precise specification of the money supply.
D) the IS curve be drawn steeper than before.
E) none of the above.

Question 44

The Ricardian equivalence argues that deficits caused by tax cuts should not cause interest rates to climb because

A) consumption does not respond in anticipation of a counterbalancing increase in taxes sometime in the future.
B) investment declines in anticipation of a counterbalancing increase in corporate taxes sometime in the future.
C) investment does not respond because of an impression that the tax cut is permanent.
D) any increase in consumption is matched and cancelled by a corresponding increase in net exports.
E) any increase in the interest rate is negated by an adjustment in the foreign exchange rate.

Question 45

If a forecaster predicts a rate of economic growth that is smaller than the average of the predictions of other forecasters, you should expect to see that forecaster also issue forecasts

A) for the deficit and interest rates that are higher than the average.
B) for the deficit that are higher than the average and forecasts for interest rates that are higher or lower than the average, depending on the reason slow growth is expected.
C) for the deficit and interest rates that are lower than the average.
D) for the deficit that are lower than the average and forecasts for interest rates that are higher than the average.
E) of the deficit and interest rates that are nonetheless close to the average.

Question 46

Which of the following is an accurate implication of adopting a government spending rule that produces a negative correlation between changes in gov- e rnment spending and the diffe rence between actual GDP and potential GDP?

A) Changes in taxes should be more effective in stimulating GDP.
B) Changes in taxes should be less effective in stimulating GDP.
C) Changes in the money supply should be more effective in stimulating GDP.
D) C h a n ges in the money supply should be less effe c t ive in stimu l ating GDP.
E) Both changes in taxes and changes in the money supply should be more effective in stimulating GDP.

Question 47

When the budget is balanced in nominal terms and inflation is positive,

A) monetary policy must have been expansionary.
B) the budget in real terms is also in balance.
C) the budget in real terms is in surplus.
D) the budget in real terms is in deficit.
E) a and b.

Question 48

The experience of the U.S. economy in response to the tax cuts of the early 1980s

A) validates the Ricardian equivalence theory that the resulting deficits should not cause interest rates to climb.
B) invalidates the Ricardian equivalence theory because the resulting deficits caused interest rates to climb dramatically.
C) provides mixed evidence on the validity of the Ricardian equivalence theory because interest rates climbed only moderately even as consumption swelled.
D) provides mixed evidence on the validity of the Ricardian equivalence theory because consumption swelled even as interest rates rose dramatically.
E) p rovides no evidence on the validity of the Ricardian equivalence theory.

Question 49

Which of the following explains, at least in part, why it is difficult to predict how far an IS curve will shift in response to a change in tax policy? A change in tax policy

A) works by changing disposable income and thus indirectly personal consumption; the link between income and consumption is uncertain.
B) generates a response that depends on the uncertain perception of the permanence of the change.
C) implies a change in the government's intertemporal budget constraint and its future need for revenue; people with different perceptions of that need react differently to a tax change.
D) creates an uncertain shift in an IS curve for all these reasons.
E) none of the above.