Question 1

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 _______.

Accepted Answer

A favorable supply shock will increase output and income, leading to higher tax revenues. At the same time, expenditures on transfer payments will decrease as fewer people will be in need of government assistance. This will result in an increase in tax revenue and a decrease in government expenditure, leading to a surplus in the budget. Therefore, the best choice is D.

Question 2

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Automatic stabilizers refer to government policies (e.g. tax and spending programs) that automatically adjust themselves to counteract economic fluctuations. More unemployment benefits paid during a recession is an example of an automatic stabilizer since this will help to increase consumer spending and aggregate demand during a downturn, which can help to mitigate the severity of the recession.

Question 3

Automatic stabilizers

Accepted Answer

Automatic stabilizers are government programs that kick in during economic downturns without any need for legislative action. They automatically provide stimulus to the economy by increasing government spending and reducing taxes during recessions. Therefore, option B is correct. The other options are incorrect because automatic stabilizers do not need any explicit actions by policy makers, do not magnify fluctuations in the economy, and do not increase taxes during recessions.

Question 4

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.

Accepted Answer

An increased federal budget deficit during a recession often leads to higher transfer payments, such as unemployment benefits, which directly increase the income of households receiving them. This process is part of automatic fiscal stabilizers that help to mitigate the economic downturn.

Question 5

The Laffer curve illustrates that

Accepted Answer

The Laffer curve suggests that at low tax rates, increasing tax rates leads to increasing tax revenues. However, at a certain point, further increases in tax rates will lead to a decline in taxable income, as taxpayers may reduce their work effort or choose to evade taxes. This point where tax revenues start to decline is known as the “Laffer peak”. Therefore, option B and C are not correct, and option D is too extreme as it suggests that tax reductions would never lead to increased tax revenues, which is not always true.

Question 6

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

Accepted Answer

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

Question 7

During a recession, tax revenues _______ while government transfer payments _______, thereby mitigating part of the adverse effects of a recession and stabilizing the economy.

Accepted Answer

During a recession, tax revenues typically fall as people have less income and businesses have lower profits. However, government transfer payments (such as unemployment benefits) increase as more people become unemployed and need assistance. This combination of falling tax revenues and increasing transfer payments has a stabilizing effect on the economy by providing income support for those most affected by the recession.

Question 8

When the economy slows down and national income falls, the government will have _______ tax revenue to fund programs.

Accepted Answer

When the economy slows down and national income falls, people's income and spending on goods and services decrease, leading to a decrease in the government's tax revenue. Therefore, the government will have less tax revenue to fund programs.

Question 9

Automatic stabilizers

Accepted Answer

Automatic stabilizers help to minimize fluctuations in the economy by providing automatic stimulus during recessions and automatic restraint during expansions. These stabilizers do not require authorization from the President and they do not necessarily involve decreasing taxes or increasing welfare payments during expansions.

Question 10

Suppose the government runs a budget surplus in a given year. It can reduce its overall federal debt by

Accepted Answer

When the government runs a budget surplus, it has extra funds that can be used to buy back bonds it previously sold to the public, thereby reducing the overall federal debt.

Question 11

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 _______.

Accepted Answer

In a recession, tax revenues typically fall due to lower income and corporate earnings, while expenditures on transfer payments (like unemployment benefits) increase as more people qualify for these benefits. This combination leads to a budget deficit.

Question 12

The relationship between tax rates and tax revenues is shown on the

Accepted Answer

The Laffer curve shows the relationship between tax rates and tax revenues, indicating that as tax rates increase beyond a certain point, tax revenues actually decrease due to disincentivizing work and economic activity.

Question 13

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

Accepted Answer

A federal budget surplus occurs when the government has extra money left over after it pays for all of its expenses. This happens when the government spends less than it collects in taxes.

Question 14

Suppose initially the federal budget is balanced. The economy then enters a period of expansion. What is likely to happen to the federal budget?

Accepted Answer

During a period of economic expansion, tax revenues increase due to higher incomes and profits, while automatic stabilizers such as unemployment benefits and food stamps decrease as more people become employed. Therefore, the federal budget is likely to show a surplus.

Question 15

The government strives to operate at neither a deficit nor surplus budget in order to keep the federal budget

Accepted Answer

A balanced budget means that the government spends no more than it takes in, which helps to prevent excessive debt and inflation. It is not necessary for the federal budget to be equal to inflation or the stock market, and comparing it to other countries' budgets is not a determining factor in maintaining a balanced budget.

Question 16

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

Accepted Answer

The proposed application suggests that cutting tax rates may actually increase tax revenues, which contradicts option A and C. Option D is also not supported as there is a relationship between tax rates and tax revenues, as discussed in the application.

Question 17

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

Accepted Answer

Yu Juo's idea is often referred to as the "Laffer curve" in modern economics, named after Arthur Laffer who popularized the concept in the 1970s. The idea is that at a certain point, as tax rates increase, people will begin to have less incentive to work and invest, thus reducing overall taxable income and ultimately leading to lower tax revenues. Therefore, there is an optimal tax rate that will maximize tax revenues. This is the same concept that Laffer proposed.

Question 18

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.

Accepted Answer

Yu Juo suggested that cutting the tax rate during a famine would increase the standard of living by allowing people to retain more of their income, thereby stimulating economic activity and potentially increasing overall tax revenue.

Question 19

According to supply-side economics, a(n) _______ in the tax rate tends to increase the labor supply and _______ aggregate output.

Accepted Answer

Supply-side economics posits that a decrease in the tax rate will incentivize individuals to work more, thereby increasing the labor supply and ultimately increasing aggregate output.

Question 20

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 _______.

Accepted Answer

During a recession, corporate profits tend to fall, leading to lower corporate taxes. This, in turn, can result in fewer spending cuts for businesses as they have less tax liability, allowing them to potentially stabilize their operations during economic downturns.

Quiz 15: Fiscal Policy

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 _____.

Which of the following is an example of an automatic stabilizer?

Automatic stabilizers

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.

The Laffer curve illustrates that

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

During a recession, tax revenues _ while government transfer payments _, thereby mitigating part of the adverse effects of a recession and stabilizing the economy.

When the economy slows down and national income falls, the government will have _______ tax revenue to fund programs.

Automatic stabilizers

Suppose the government runs a budget surplus in a given year. It can reduce its overall federal debt by

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 _____.

The relationship between tax rates and tax revenues is shown on the

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

Suppose initially the federal budget is balanced. The economy then enters a period of expansion. What is likely to happen to the federal budget?

The government strives to operate at neither a deficit nor surplus budget in order to keep the federal budget

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

According to supply-side economics, a(n) _ in the tax rate tends to increase the labor supply and _ aggregate output.

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 _.