Question 1

Accumulating debt poses a problem for the U.S.federal government because

Accepted Answer

A large debt-to-GDP ratio causes crowding out, which means that the government has to spend a larger amount of its budget on paying interest on the debt, leaving less money for important programs and investments in infrastructure, healthcare, education, and other areas. This can hinder economic growth and limit the government's fiscal flexibility. It is important for the government to address the issue of accumulating debt in a sustainable and responsible way to avoid these negative consequences.

Question 2

The federal budget exhibited a $128.7 billion surplus in 2001 but moved to a deficit of $157.8 billion in 2002.Some argued the deficit was opened up because of the Bush 2001 tax cuts,but others argued that the deficit grew because of the recession suffered in 2001.Evaluate the validity of the second argument.

Accepted Answer

The answer of The federal budget exhibited a $128.7 billion...

Question 3

If tax reduction and simplification are effective,then

Accepted Answer

The answer of If tax reduction and simplification are effective,then
...

Question 4

If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply,we would expect crowding out of investment and net exports brought about by the tax cut to be

Accepted Answer

Consideration of supply-side effects suggests that a tax cut could lead to an increase in labor supply, potentially limiting crowding out effects on investment and net exports. Therefore, the crowding out effect would likely be less than it would be without the supply-side effects.

Question 5

Double taxation refers to

Accepted Answer

Double taxation refers to corporations paying taxes on profits and individuals paying taxes on dividends. This is because corporations are considered separate entities from their shareholders, and therefore are taxed on their profits. When profits are distributed in the form of dividends to shareholders, those individuals also pay taxes on the dividends they receive, resulting in double taxation.

Question 6

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________.

Accepted Answer

The answer of Fiscal policy actions that are intended to...

Question 7

If the federal budget has an actual budget surplus of $75 billion,but a cyclically adjusted budget surplus of $50 billion,then the economy must be above potential real GDP.

Accepted Answer

A cyclically adjusted budget takes into account the effects of the business cycle on government revenues and expenditures. If the actual budget surplus is larger than the cyclically adjusted budget surplus, it suggests that the economy is performing better than expected and is likely operating above its potential real GDP.

Question 8

Critics of spending on infrastructure as a means to stimulate the economy,such as Alan Viard of the American Enterprise Institute,note that,dollar for dollar,tax cuts and direct government payments ________ infrastructure spending,________.

Accepted Answer

Critics of infrastructure spending argue that tax cuts and direct government payments may not stimulate the economy as much as infrastructure spending, but they take effect more quickly. This is because infrastructure projects take time to plan, obtain permits, and construct, while tax cuts and direct payments can be quickly distributed to individuals and businesses.

Question 9

A study by Edward Prescott found that the ________ marginal tax rates in the United States relative to Europe resulted in a ________ quantity of labor supplied in the United States.

Accepted Answer

Prescott's study concluded that lower marginal tax rates in the United States, compared to Europe, led to a larger quantity of labor supplied in the U.S. This is because lower taxes increase the incentive for work by allowing individuals to keep more of their earnings.

Question 10

A law requiring the government to balance its budget in each year would serve as an automatic destabilizer.

Accepted Answer

A law requiring the government to balance its budget in each year could lead to destabilization because in times of economic downturns or emergencies, the government may need to spend more money than it takes in through revenue. Enforcing a strict balanced budget could limit the government's ability to respond to crises and could worsen economic conditions.

Question 11

The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus.

Accepted Answer

When the federal government runs a deficit (spends more than it collects in revenue), it needs to borrow money to cover the gap, which puts the government into debt. Therefore, the federal government debt increases. Conversely, when the federal government runs a surplus (collects more in revenue than it spends), it has extra money to pay down its debt, which leads to a decrease in the federal government debt.

Question 12

The cyclically adjusted budget is calculated at potential GDP.

Accepted Answer

The cyclically adjusted budget is calculated at potential GDP, which is the level of output that the economy can produce at full employment. This takes into account the long-term trend of the economy and adjusts for cyclical fluctuations in output caused by economic booms and recessions.

Question 13

The federal government debt as a percentage of GDP did not rise

Accepted Answer

During the 1960s, the federal government debt as a percentage of GDP was relatively stable and did not see the significant increases that occurred during the Great Depression, World War II, or the 1980s.

Question 14

How could the existence of an unemployment insurance system or other transfer programs have reduced the severity of the Great Depression?

Accepted Answer

The answer of How could the existence of an unemployment...

Question 15

Reducing the marginal tax rate on income will

Accepted Answer

Reducing the marginal tax rate on income will have multiple effects. By reducing the tax wedge faced by workers, it will increase the after-tax income they receive, which will encourage them to increase their labor supplied. This is why choice A is correct. Reducing the tax rate on income will also increase the return to entrepreneurship, which will encourage the opening of new businesses, create more job opportunities, and increase economic growth. This is why choice B is correct. Finally, reducing the marginal tax rate on income will increase the after-tax return on saving, which will encourage saving and investment in the economy. This is why choice C is correct. All of the choices are correct, and that's why the answer is D.

Question 16

When does the Treasury Department borrow? Why would the Treasury have to borrow more than it estimated? When would the Treasury repay what it borrowed,and who is it repaying?

Accepted Answer

The answer of When does the Treasury Department borrow? Why...

Question 17

Consider a tax cut which affects not only consumer disposable income,but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving.In the long run we would expect this tax cut to

Accepted Answer

A tax cut that affects not only consumer disposable income but also after-tax earnings from labor and financial assets will increase incentives for work and saving, leading to an increase in the supply of labor and capital. This will shift the aggregate supply curve to the right, leading to an increase in real GDP. The increase in disposable income will also increase consumption expenditures, further increasing real GDP. Since there is no change in aggregate demand, the price level is expected to remain constant or increase slightly. Therefore, the best choice is C, which states that the tax cut will increase the level of real GDP.

Question 18

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.

Accepted Answer

Tax reduction and simplification can increase the incentives for individuals and businesses to work, save and invest, which can lead to an increase in the potential output of the economy (long-run aggregate supply). At the same time, a reduction in taxes can increase disposable income and consumer spending, which can boost aggregate demand. Therefore, tax reduction and simplification can increase both long-run aggregate supply and aggregate demand, supporting economic growth.

Question 19

As the tax wedge associated with a given economic activity gets smaller,we would expect

Accepted Answer

When the tax wedge associated with a given economic activity gets smaller, it becomes more profitable to engage in that activity. Hence, we can expect more of that particular activity to occur as it incentivizes businesses and individuals to undertake that activity.

Question 20

The federal budget was in deficit from 1931 to 1939,except in the year 1937.Given this fact,how do you explain E.Cary Brown's statement,"Fiscal policy,then,seems to have been an unsuccessful recovery device in the 'thirties-not because it did not work,but because it was not tried."

Accepted Answer

The answer of The federal budget was in deficit from...

Quiz 16: Fiscal Policy