Deck 11: Fiscal Policy and the Federal Budget

Question 1

A permanent marginal tax rate cut would be expected to shift both the short-run and the long-run aggregate supply curves to the right.

Answer 1

True

Question 2

A value-added tax (VAT)is a less visible form of a sales tax.

Answer 2

True

Question 3

According to Keynesian theory,a recessionary gap can be closed using expansionary fiscal policy.

Answer 3

True

Question 4

To finance a budget deficit the federal government borrows funds.

Question 5

A "flat tax" is another term for a regressive tax.

Question 6

The transmission lag is the period that elapses between the time fiscal policy is enacted and the time it is put into effect.

Question 7

To identify whether fiscal policy is expansionary or contractionary,one should focus on the cyclical deficit.

Question 8

When the government decides to increase income taxes,this is an example of contractionary fiscal policy.

Question 9

Crowding out results when an increase in government spending leads to declines in consumption,investment,and/or net exports.

Question 10

A tax rate increase necessarily leads to an increase in tax revenue for the government.

Question 11

The United States currently has a progressive income tax structure.

Question 12

The AD curve shifts to the right with an increase in taxes or a decrease in government purchases.

Question 13

With a progressive income tax,as taxable income rises (up to a certain point),one's tax rate rises.

Question 14

The distinctive feature of a progressive tax is that the dollar value of taxes paid rises as income rises.

Question 15

The marginal tax rate is found by dividing a person's tax payment by the person's taxable income.

Question 16

According to the textbook,in 2011 the top 1 percent of income earners in the U.S.earned more than $388,905.

Question 17

A structural deficit refers to that part of the deficit that exists as a result of a downturn in economic activity.

Question 18

A federal budget surplus occurs when government expenditures exceed tax revenues.

Question 19

The Laffer curve shows the exclusively direct relationship that exists between tax rates and tax revenues.

Question 20

Complete crowding out occurs when an increase in government spending is completely offset by an equal increase in tax revenues.

Question 21

Suppose Congress decreases income taxes.This is an example of

A)expansionary fiscal policy.
B)expansionary monetary policy.
C)contractionary fiscal policy.
D)contractionary monetary policy.

Question 22

When the economy is in a recessionary gap,Keynesian economists will often advocate expansionary policy measures.Why?

A)Keynesians believe the economy sometimes gets stuck in a recessionary gap and can't get itself out without government intervention.
B)Keynesians believe the economy itself sometimes takes too long to eliminate the recessionary gap and return to full-employment output.
C)Keynesians are generally in favor of increasing taxes.
D)a and b
E)a and c

Question 23

A subsidy is the same thing as a tax deduction

Question 24

A balanced budget occurs when

A)the national debt is reduced to zero dollars.
B)a budget deficit during one year is matched by a budget surplus in the next year.
C)transfer payments equal tax revenues.
D)government expenditures equal tax revenues.
E)the deficit-GDP ratio equals one.

Question 25

Suppose the economy is at a position below its institutional production possibilities frontier.To improve this situation,Keynesian economists might propose that government __________ taxes,which will cause the aggregate demand curve to shift to the __________ and Real GDP will __________.

A)increase;right;increase
B)increase;left;decrease
C)decrease;left;decrease
D)decrease;right;decrease
E)decrease;right;increase

Question 26

Suppose aggregate demand is too low to bring about the Natural Real GDP level.A Keynesian policy prescription would call for a(n)_____________________ to close this recessionary gap.

A)increase in government spending
B)decrease in government spending
C)increase in taxes
D)decrease in taxes
E)a or d

Question 27

Buchanan and Wagner assert that there is a political bias toward contractionary fiscal policy and not expansionary fiscal policy.

Question 28

Suppose the economy is at a point below its institutional production possibilities frontier.To improve this situation,Keynesian economists might propose that the government should __________ expenditures,which will cause the aggregate demand curve to shift to the __________ in an attempt to close this __________ gap.

A)decrease;left;inflationary
B)increase;right;inflationary
C)decrease;right;inflationary
D)increase;right;recessionary
E)decrease;left;recessionary

Question 29

Suppose the economy is at a point below its physical production possibilities frontier but above its institutional production possibilities frontier.In response to this situation,Keynesian economists may propose that government enact __________ fiscal policy to correct this __________ gap by __________ government expenditures.

A)expansionary;inflationary;increasing
B)contractionary;inflationary;decreasing
C)expansionary;recessionary;increasing
D)contractionary;recessionary;decreasing
E)contractionary;inflationary;increasing

Question 30

Expansionary fiscal policy actions include __________ government spending and/or __________ taxes,while contractionary fiscal policy actions include __________ government spending and/or __________ taxes.

A)increasing;increasing;decreasing;decreasing
B)decreasing;decreasing;increasing;increasing
C)increasing;decreasing;increasing;decreasing
D)decreasing;increasing;increasing;decreasing
E)increasing;decreasing;decreasing;increasing

Question 31

Suppose Congress increases income taxes.This is an example of

A)expansionary fiscal policy.
B)expansionary monetary policy.
C)contractionary fiscal policy.
D)contractionary monetary policy.

Question 32

An expansionary fiscal policy will

A)always result in a budget deficit.
B)always result in a budget surplus.
C)sometimes result in a budget deficit.
D)never result in a budget surplus.
E)More information is necessary to answer this question.

Question 33

Fiscal policy refers to

A)efforts to balance a government's budget.
B)changes in the money supply to achieve particular economic goals.
C)changes in government expenditures and taxation to achieve particular economic goals.
D)the change in private expenditures that occurs as a consequence of changes in government spending.

Question 34

According to the textbook,if the government had taxed everyone who earned more than $1 million an income tax rate of 100 percent in 2012,the budget deficit for that year would have been completely eliminated.

Question 35

An example of automatic fiscal policy is

A)the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession.
B)when interest rates automatically fall in a recession.
C)Congress passes a law during a recession that automatically extends unemployment benefits for those whose benefits will soon expire.
D)a and b
E)a,b and c

Question 36

Crowding out results in a decrease in

A)transfer payments.
B)defense spending.
C)private spending.
D)government spending.

Question 37

Reductions in private spending as a result of increased government spending or the need to finance a budget deficit is called

A)pushing in.
B)rushing forth.
C)crowding in.
D)crowding out.

Question 38

A budget deficit

A)occurs when government expenditures exceed tax revenues.
B)occurs when tax revenues exceed government expenditures.
C)occurs when transfer payments exceed tax revenues.
D)will always result when Congress and the president cannot agree on expenditures.
E)occurs when monetary policy works in the opposite direction of fiscal policy.

Question 39

A budget surplus

A)occurs when government expenditures exceed tax revenues.
B)occurs when tax revenues exceed government expenditures.
C)occurs when tax revenues exceed transfer payments.
D)occurs when monetary policy works in the opposite direction of fiscal policy.
E)is an impossibility.

Question 40

__________ flows from government to households.

A)A transfer payment
B)A tax payment
C)The Laffer Curve
D)Crowding out

Question 41

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million.This is an example of

A)incomplete crowding out.
B)complete crowding out.
C)zero crowding out.
D)a and c
E)none of the above

Question 42

Some economists argue that a rise in the interest rate,brought about by a rise in government borrowing in the loanable funds market to finance a budget deficit,brings in foreign funds in search of the higher interest rate return.This,in turn,dampens the rise in the interest rate.If this is true as far as it goes,there will be __________ crowding out than there would be if foreign funds did not flow into the country.

A)more
B)less
C)the same amount of
D)none of the above

Question 43

Fiscal policy may not work as policymakers intend it to work because of

A)crowding out.
B)lags.
C)the position of the physical production possibilities frontier.
D)a and b
E)a,b,and c

Question 44

The AD curve shifts to the right with a __________ in government purchases (G)or a __________ in taxes.

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

Question 45

Exhibit 11-1
Refer to Exhibit 11-1.The economy is currently at point 1.Suppose the federal government increases purchases and there is complete crowding out.As a result,the aggregate demand (AD)curve in the exhibit

A)will maintain its present position at AD_1.
B)will shift rightward,ideally so that it goes through point 2.
C)will shift rightward,ideally so that it goes beyond point 2.
D)will shift leftward.
E)​does not shift,but the SRAS curve will shift rightward so that it goes through point 3.

Question 46

Exhibit 11-1
Refer to Exhibit 11-1.The economy is currently at point 1.In this situation,supply-side economists would most likely propose _______________ to make the price level ______________ and Real GDP ___________.

A)cutting marginal tax rates;fall;rise
B)raising marginal tax rates;fall;rise
C)raising government spending;fall;rise
D)cutting government spending;rise;fall
E)cutting marginal tax rates;rise;fall

Question 47

The AD curve shifts to the left with a __________ in government purchases (G)or a __________ in taxes.

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

Question 48

With complete crowding out,an increase in government spending

A)is completely offset by a reduction in private spending.
B)is matched by an increase in private spending.
C)results in an increase in aggregate supply.
D)results in an increase in aggregate demand.

Question 49

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.

A)data
B)wait-and-see
C)legislative
D)transmission

Question 50

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income,then that individual must have a(n)__________ tax rate of 30 percent.

A)average
B)fixed
C)total
D)marginal

Question 51

Which of the following is an example of crowding out?

A)A decrease in the rate of growth of the money supply which causes a decrease in Real GDP.
B)A budget deficit causes an increase in interest rates,which causes a decrease in investment spending.
C)An increase in tariffs which causes a decrease in imports.
D)A decrease in government housing subsidies which causes an increase in private spending on housing.

Question 52

If there is complete crowding out as a result of an increase in government spending there will be

A)a decrease in aggregate demand.
B)no change in aggregate demand.
C)an increase in aggregate demand.
D)a downward movement along the aggregate demand curve.

Question 53

Exhibit 11-1
Refer to Exhibit 11-1.The economy is currently at point 1.Suppose the federal government increases purchases and there is no crowding out.As a result,the aggregate demand (AD)curve in the exhibit

A)maintains its present position at AD_1.
B)shifts rightward,ideally so that it goes through point 2.
C)shifts rightward,ideally so that it goes beyond point 2.
D)shifts leftward.
E)​does not shift,but the SRAS curve will shift rightward so that it goes through point 3.

Question 54

Suppose the government attempts to stimulate the economy by increasing spending without increasing taxes.Which of the following statements is most likely to be accepted by someone who believes in crowding out?

A)The government's actions will have their intended effect.
B)The government's actions will cause businesses to become more optimistic about the economy,and they will increase their output even more than the government had intended.
C)The government's actions will raise interest rates,causing decreased investment and consumption,and the economy will not expand as much as the government had intended.
D)This is a trick question,because the federal government is required by law to increase taxes by the same amount as it increases expenditures.

Question 55

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $500 million.This is an example of

A)incomplete crowding out.
B)complete crowding out.
C)zero crowding out.
D)a and c
E)none of the above

Question 56

Exhibit 11-1
Refer to Exhibit 11-1.The economy is currently at point 1.In this situation,Keynesian economists would most likely propose

A)an increase in government purchases.
B)a decrease in government purchases.
C)an increase in taxes.
D)a and c
E)b and c

Question 57

Which of the following illustrates the effectiveness lag?

A)Policymakers believe an economic downturn has occurred,but they decide not to take action until they are sure.
B)Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.
C)Policymakers first learn of the recession when it is five months old.
D)Policymakers implement policy X,but it will be a few months before it starts working.
E)Policymakers agree to policy X,but it will be at least two months before the policy is implemented.

Question 58

Which of the following illustrates the wait-and-see lag?

A)Policymakers believe an economic downturn has occurred,but they decide not to take action until they are sure.
B)Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.
C)Policymakers first learn of the recession when it is five months old.
D)Policymakers implement policy X,but it will be a few months before it starts working.
E)Policymakers agree to policy X,but it will be at least two months before the policy is implemented.

Question 59

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.

A)effectiveness
B)transmission
C)legislative
D)data

Question 60

Which of the following illustrates the data lag?

A)The economy turns down on January 8,2006,but policymakers do not figure this out until April 19,2006.
B)Policymakers wait and see what is really going on with the economy.
C)
C)Policymakers implement policy X on September 12,2006,but the effects are not felt until six months later.
D)The data lag is illustrated equally well by a,b,and

Question 61

An example of contractionary fiscal policy is

A)an increase in government expenditures,or an increase in taxes,or both.
B)a decrease in government expenditures,or a decrease in taxes,or both.
C)an increase in government expenditures,or a decrease in taxes,or both.
D)a decrease in government expenditures,or an increase in taxes,or both.
E)increasing government expenditures while holding taxes constant.

Question 62

Crowding out suggests that

A)high taxes reduce both consumption and saving.
B)increases in consumption are always at the expense of saving.
C)increases in government spending may raise the interest rate,thereby reducing investment.
D)increases in government spending will close a recessionary gap.

Question 63

An example of expansionary fiscal policy is

A)an increase in government spending,or an increase in taxes,or both.
B)a decrease in government spending,or a decrease in taxes,or both.
C)an increase in government spending,or a decrease in taxes,or both.
D)a decrease in government spending,or an increase in taxes,or both.
E)holding government spending constant while increasing taxes.

Question 64

Exhibit 11-2
Refer to Exhibit 11-2.Compare points A and
B)Which of the following is true?

A)At A and B,the tax rates are the same,but tax revenues are different.
B)At A tax rates are higher than at B,but tax revenues are the same at both points.
C)At B tax rates are higher than at A,but tax revenues are the same at both points.
D)none of the above

Question 65

​Exhibit 11-6
Elaine's taxable income increases by $1 and her tax payment increases by $0.28.Her marginal tax rate is

A)72 percent.
B)28 percent.
C)56 percent.
D)There is not enough information to answer the question.

Question 66

Suppose the economy's current AD and SRAS curves intersect to the right of Natural Real GDP.Keynesians might advise a policy of tax __________ to shift __________.

A)increases;SRAS to the left
B)increases;AD to the left
C)cuts;SRAS to the right
D)cuts;AD to the right

Question 67

Exhibit 11-2
Refer to Exhibit 11-2.At point B,if we cut tax rates slightly,tax revenues will

A)increase.
B)decrease.
C)will not change.
D)immediately drop to zero.

Question 68

Fiscal policy is implemented primarily by

A)local governments alone.
B)the defense department.
C)state governments alone.
D)the federal government.
E)state and local governments.

Question 69

​Exhibit 11-6
Refer to Exhibit 11-6.The economy is currently in short-run equilibrium producing Q₁.In this situation,Keynesian economists would most likely propose

A)an increase in government purchases.
B)a decrease in government purchases.
C)an increase in taxes.
D)a or c
E)b or c

Question 70

Between the data lag and the legislative lag falls the __________ lag.

A)effectiveness
B)wait-and-see
C)expansionary
D)legislative

Question 71

​Exhibit 11-6
A curve showing the relationship between tax rates and tax revenues is called a __________ curve.

A)Phillips
B)Keynesian
C)Gaussian
D)Laffer

Question 72

When we speak of expansionary fiscal policy,we are talking about policymakers __________ government spending,or __________ taxes,or both.

A)decreasing;decreasing
B)increasing;increasing
C)increasing;decreasing
D)decreasing;increasing

Question 73

All other things held constant,lower marginal (income)tax rates

A)necessarily increase tax revenues.
B)necessarily decrease tax revenues.
C)decrease the attractiveness of productive activities relative to leisure and tax- avoidance activities,and shift the SRAS curve rightward.
D)do not affect the attractiveness of productive activities relative to leisure and tax- avoidance activities and therefore the SRAS does not shift rightward or leftward.
E)increase the attractiveness of productive activities relative to leisure and tax- avoidance activities and shift the SRAS curve rightward.

Question 74

An example of expansionary fiscal policy is

A)increasing government expenditures.
B)increasing taxes.
C)decreasing government expenditures.
D)decreasing taxes.
E)a and d

Question 75

Exhibit 11-2
Refer to Exhibit 11-2.At point A,if we cut tax rates slightly,tax revenues will

A)increase.
B)decrease.
C)will not change.
D)drop to zero.

Question 76

Supply-side economists believe reductions in tax rates can

A)shift the aggregate demand curve to the left.
B)shift the short run aggregate supply curve to the left.
C)increase output and lower prices.
D)decrease output and lower prices.

Question 77

Fiscal policy refers to

A)changes in the amount of government expenditures and taxes to achieve particular economic objectives.
B)changes in the composition of a given amount of government expenditures to achieve particular economic objectives.
C)changes in interest rates initiated by government action.
D)any change in government spending or taxes that has the intended effect of destabilizing the economy.

Question 78

Fiscal policy is

A)the money supply policy that the Fed pursues to achieve particular economic goals.
B)the spending and tax policy that the government pursues to achieve particular macroeconomic goals.
C)the investment policy that businesses pursue to achieve particular macroeconomic goals.
D)the spending and saving policy that consumers pursue to achieve particular macroeconomic goals.
E)none of the above

Question 79

Increased government spending and tax cuts characterize

A)contractionary fiscal policy.
B)expansionary fiscal policy.
C)expansionary monetary policy.
D)deflationary policy.
E)none of the above

Question 80

Some of the crowding out of private expenditures may come in the form of

A)an increase in consumption.
B)an increase in net exports.
C)a decrease in taxes.
D)a decrease in net exports.