Question 1

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

Accepted Answer

The Laffer curve illustrates the relationship between tax rates and tax revenues. As tax rates increase, at some point, people become disincentivized to work and the economy slows down, resulting in lower tax revenues. On the other hand, lower tax rates can encourage economic growth and lead to higher tax revenues. The curve is named after economist Arthur Laffer, who popularized the idea in the 1970s.

Question 2

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 employment, leading to higher tax revenues. At the same time, expenditures on transfer payments such as unemployment insurance and welfare will decrease as more people are employed. This will lead to an increase in tax revenues and a decrease in expenditures on transfer payments, resulting in a surplus in the budget. Therefore, option D is correct.

Question 3

Automatic stabilizers

Accepted Answer

Automatic stabilizers are fiscal policies that work automatically to stabilize the economy. They include unemployment benefits, progressive income taxes, and transfer payments. These stabilizers help to minimize fluctuations in the economy by reducing the impact of economic booms and busts. They do not need to be authorized by the President and do not necessarily decrease taxes or increase welfare payments during expansions.

Question 4

Automatic stabilizers

Accepted Answer

Automatic stabilizers are built-in features of the economy that help to mitigate the effects of economic fluctuations without explicit actions from policy makers. Examples include unemployment insurance, which automatically provides support to those who lose their jobs during a recession, and progressive income taxes, which automatically increase during periods of economic growth and decrease during recessions. These stabilizers work to help stabilize the economy without the need for decisions from Congress or the White House.

Question 5

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 commonly known as the Laffer Curve, which suggests that at a certain point, increasing tax rates will actually decrease tax revenues because it can discourage work and investment. This is the same idea proposed by economist Arthur Laffer.

Question 6

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 fall due to decreased economic activity and lower profits. However, government transfer payments increase as more people become eligible for unemployment benefits and other forms of social welfare. This helps to mitigate the adverse effects of the recession and stabilize the economy.

Question 7

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 and businesses earn less income, leading to a decrease in tax revenue collected by the government. Therefore, the government will have less tax revenue to fund programs.

Question 8

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

Accepted Answer

A federal budget deficit occurs when the government spends more money than it receives in taxes. This results in a shortfall of funds that must be borrowed, leading to an increase in the national debt.

Question 9

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 proposed cutting the tax rate during times of famine to increase the standard of living. This approach was based on the idea that lower taxes would alleviate some of the financial burdens on the people, thereby improving their standard of living during difficult times.

Question 10

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 government spending equals the amount of revenue it collects. This helps to avoid a deficit (spending more than revenue collected) or surplus (collecting more revenue than necessary). A balanced budget is considered a fiscally responsible approach to government spending and helps maintain stability in the economy.

Question 11

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

Accepted Answer

In order to reduce federal debt, the government needs to decrease the amount it borrows from the public. Buying back bonds that it sold to the public is one way to do this. Option A is not a viable solution as the government will still be borrowing money. Option C relates to the trade balance and not the federal debt. Option D may generate revenue for the government but does not directly address the issue of federal debt.

Question 12

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 in turn increase the income of households receiving these payments. This process is part of automatic fiscal stabilizers that help to mitigate the economic downturn.

Question 13

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, economic activity slows down, leading to lower tax revenues as individuals and businesses earn less. At the same time, government expenditures on transfer payments (such as unemployment benefits) typically increase as more people become eligible for these benefits. These two factors combined—a decrease in tax revenues and an increase in transfer payments—would result in a budget deficit.

Question 14

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 reduction in taxes can help businesses by requiring fewer spending cuts, thus providing a form of economic stabilization.

Question 15

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 an economic expansion, tax revenues typically increase due to higher incomes and corporate profits, while government spending on social programs like unemployment benefits may decrease. This can lead to a budget surplus.

Question 16

The Laffer curve illustrates that

Accepted Answer

The Laffer curve shows that as tax rates increase, tax revenue initially increases but eventually reaches a point where further tax increases lead to a decrease in revenue because people are discouraged from working and investing. Therefore, high tax rates could lead to lower tax revenues if economic activity is severely discouraged, as illustrated by the Laffer curve. Lowering tax rates may increase tax revenues, but this is not always the case and depends on the specific circumstances.

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).
-This Application addresses the idea that

Accepted Answer

Yu Juo's Application proposes that cutting tax rates may actually increase tax revenues, which goes against the traditional belief that higher tax rates always lead to increased tax revenues.

Question 18

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

Accepted Answer

Unemployment benefits are an example of an automatic stabilizer because they automatically increase during a recession when more people lose their jobs and need support. This helps to stimulate consumer spending and stabilize the economy. Options A and B involve Congress making deliberate policy changes, which are not automatic stabilizers. Option D is incorrect because welfare payments would typically increase during a recession, not decrease.

Question 19

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 has spent less than it has collected in taxes. This means that the government is able to pay off debt or save the excess funds for future use.

Question 20

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 incentivizes individuals to work more, thereby increasing the labor supply and ultimately increasing aggregate output.

Quiz 15: Fiscal Policy

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

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 .

Automatic stabilizers

Automatic stabilizers

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.

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

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

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

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.

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 .

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 .

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 Laffer curve illustrates that

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

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

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

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