Answer: An ideal response will:
1. Define fiscal policy, which is the government’s use of taxation and
spending policy to affect economic growth in the United States.
2. Explain how increasing or decreasing taxes speeds or slows economic
growth.
3. Explain how increasing or reducing government spending affects the
economy and the rate of unemployment.
Topic: Fiscal Policy
Learning Objective: LO 16.2: Outline the tools and impact of fiscal policy on
the economy.
Page Reference: 480
Skill Level: Understand the Concepts
Difficulty Level: Moderate
92. What is the difference between budget deficits and the national debt?
1. Define a budget deficit as the difference between yearly revenues and
expenditures, and define the national debt as the nation’s cumulative
deficits.
2. Outline the main difference between the two, which is that the national
debt is the long-term structural result of ongoing budget deficits.
3. Note that reducing the level of national debt is far more difficult than
reducing budget deficits.
Topic: Fiscal Policy
Learning Objective: LO 16.2: Outline the tools and impact of fiscal policy on
the economy.
Page Reference: 481
Skill Level: Analyze It
Difficulty Level: Difficult
93. In what areas have federal regulations been introduced to protect workers in the
United States?
1. Outline the four important areas of federal labor regulation: public
contracts, wages and hours, child labor, and industrial safety and
occupational health.
2. Explain that federal regulations also protect employees’ right to
organize unions.
3. Refer to the Taft-Harley Act of 1947, which outlawed the closed shop,
permitted the union shop, allowed courts to issue labor injunctions, and
structured collective bargaining.
Topic: Regulating the Economy
Learning Objective: LO 16.5: Categorize ways in which the federal government
seeks to regulate the economy.
Page Reference: 493
Skill Level: Understand the Concepts
Difficulty Level: Moderate
94. What are the proposed benefits of deregulation, and who in general supports this
position?
1. Define deregulation as the efforts to remove government regulations on
business and industries.
2. Identify key ways that deregulation would affect the economy. These
include reducing reporting burdens on industries and lowering the cost of
conducting business by reducing compliance costs.
3. Specify proponents of this position, which could include business
interests and political conservatives.
Topic: The Deregulation Movement
Learning Objective: LO 16.6: Evaluate the advantages and disadvantages of the
deregulation movement.
Page Reference: 496 – 498
Skill Level: Understand the Concepts
Difficulty Level: Moderate
95. What portion of the federal government is responsible for monetary policy, and
how does it affect the economy?
1. Identify the key bureaucratic component of the monetary system, which
is the Federal Reserve Board.
2. Explain the key measures the Federal Reserve Board can deploy to
affect the money supply, including raising or lowering interest rates.
3. Specify how raising or lowering interest rates affects the money supply
and how it encourages or discourages growth in the economy.
Topic: Monetary Policy
576
Learning Objective: LO 16.3: Outline the tools and impact of monetary policy
on the economy.
Page Reference: 484 – 485
Skill Level: Understand the Concepts
Difficulty Level: Moderate
96. Discuss some of the key areas of government regulation, and describe three major
regulations and/or agencies that have been put in place.
1. Discuss the notion of economic regulation in general, which involves
efforts to minimize abuses and promote competition.
2. Illustrate knowledge of some of the key regulatory sectors discussed in
the textbook, including labor, the stock market, and the environment.
3. Specify and explain three of the most important regulations, including
the Occupational Safety and Health Act, the Securities and Exchange Act,
and the Clean Air and Water Acts.
Topic: Regulating the Economy
Learning Objective: LO 16.5: Categorize ways in which the federal government
seeks to regulate the economy.
Page Reference: 491 – 495
Skill Level: Apply What You Know
Difficulty Level: Difficult
97. Discuss the two major economic worries faced by American politicians,
unemployment and inflation, and the options available to address them.
1. Discuss the two philosophies for addressing these problems, which are
monetary policy and fiscal policy.
2. Explain how managing the money supply affects the level of inflation in
the economy, and explain how increasing/decreasing taxes and
government spending levels affects unemployment.
Topic: Fiscal Policy; Monetary Policy
Learning Objective: LO 16.2: Outline the tools and impact of fiscal policy on
the economy; LO 16.3: Outline the tools and impact of monetary policy on the
economy.
Page Reference: 480, 484 – 485
Skill Level: Analyze It
Difficulty Level: Difficult
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98. Imagine the economy is slipping into a recession. What would a Keynesian
advocate and why? Compare this approach to using interest rates to affect the
money supply.
1. Identify that Keynesian economic policy is a type of fiscal policy that is
more concerned with high levels of unemployment than inflation.
2. Specify how increasing government spending and lowering tax rates
encourages employment and investment. Note that when taxes are
lowered, individuals and businesses will have more money to invest,
which in turn increases the potential for new job creation and employment.
3. Note how this is different from using interest rates to affect the money
supply because lowering interest rates reduces the cost of money and
makes it more likely that banks will offer loans to businesses seeking to
expand and thus increases the prospects for increased hiring and
employment.
Topic: Fiscal Policy; Monetary Policy
Learning Objective: LO 16.2: Outline the tools and impact of fiscal policy on
the economy; LO 16.3: Outline the tools and impact of monetary policy on the
economy.
Page Reference: 480, 484 – 486
Skill Level: Apply What You Know
Difficulty Level: Difficult
99. What are the four stages of the normal business cycle described in the textbook?
How does this cycle relate to the current state of the U.S. economy?
1. Identify the four stages of the normal business cycle as expansion,
contraction, recession, and recovery.
2. Explain that the recent economic turmoil has been called the Great
Recession because of its length and very high levels of unemployment,
and that it began in 2008 with the collapse of the U.S. housing market.
3. Note that although economic activity began to increase in 2011, the
U.S. economy was still struggling in 2012 because the economic cycle
was stuck in the recession phase.
Topic: An Introduction to Economic Policy
Learning Objective: LO 16.1: Describe the federal government’s role in making
economic policy and how the economy’s performance is measured.
Page Reference: 477 – 478
Skill Level: Apply What You Know
Difficulty Level: Difficult
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100. Describe the history of government regulation in the United States, noting key
aspects of its evolution.
1. Discuss the beginnings of the regulatory movement, noting its origins in
antitrust legislation.
2. Note the gradual addition of a range of regulations including workplace,
environmental, and consumer protections.
3. Discuss the deregulation movement, and note how the Great Recession
reduced its impact.
Topic: Regulating the Economy; The Deregulation Movement
Learning Objective: LO 16.5: Categorize ways in which the federal government
seeks to regulate the economy; LO 16.6: Evaluate the advantages and
disadvantages of the deregulation movement.
Page Reference: 492 – 495, 498 – 499
Skill Level: Understand the Concepts
Difficulty Level: Moderate
101. Why do most capitalist states engage in some regulation of the economy, and
where do we see regulation in the United States? Include discussion of specific
legislation.
1. Include a general discussion of regulation, including the need to
minimize abuses and promote healthy competition.
2. Discuss areas where business activities may create unfair advantages for
certain industries that try to gain control of their sector of the market.
3. Provide specific examples of regulation in the United States, including
but not limited to OSHA, the Clean Air Act, child labor laws, consumer
safety laws, and antitrust legislation.
Topic: Regulating the Economy
Learning Objective: LO 16.5: Categorize ways in which the federal government
seeks to regulate the economy.
Page Reference: 491 – 496
Skill Level: Analyze It
Difficulty Level: Difficult
102. Why do adjustments to interest rates by the Federal Reserve Board matter?
1. Explain the role of the Federal Reserve in controlling the money supply.
2. Describe how adjusting the interest rate up or down will affect the
money supply.
3. Illustrate how lowering the interest rate reduces the cost of money,
which makes borrowing easier, which increases spending, affects
economic growth.
Topic: Monetary Policy
Learning Objective: LO 16.3: Outline the tools and impact of monetary policy
on the economy.
Page Reference: 484 – 485
Skill Level: Analyze It
Difficulty Level: Difficult
103. Are the majority of taxes collected by the government progressive or regressive?
1. Identify the largest sources of federal revenue from taxes, which are
individual income taxes and payroll taxes for social insurance (Social
Security and Medicare).
2. Note that other tax revenue comes from corporate income taxes, excise
taxes, and smaller taxes such as estate taxes and tariffs.
3. Define progressive and regressive taxes.
4. Explain that the federal income tax is considered a progressive tax that
weighs more heavily on individuals with higher incomes, while the federal
payroll tax is considered a regressive tax that collects the same percentage
on all individuals and corporations regardless of income.
Topic: Fiscal Policy
Learning Objective: LO 16.2: Outline the tools and impact of fiscal policy on
the economy.
Page Reference: 481
Skill Level: Analyze It
Difficulty Level: Difficult
104. What is the World Trade Organization, and what is its purpose? What, if any, are
the disadvantages of the policies promoted by this entity?
1. Describe the World Trade Organization (WTO) and how its formation
ended the General Agreement on Trade and Tariffs (GATT).
2. Explain how the WTO provides an international forum for reaching
trade agreements and for resolving disputes among its members.
3. Note that labor unions, environmental groups, and human rights
organizations worry about the negative effects of free trade, including low-
wage jobs, child labor abuses, pollution, and worker abuse in foreign
countries.
4. Provide a clear and concise conclusion.
Topic: Promoting the Economy
Learning Objective: LO 16.4: Identify ways in which the federal government
seeks to promote economic growth.
Page Reference: 490
Skill Level: Analyze It
Difficulty Level: Difficult
Essay Questions
105. Discuss the historical trend of regulation in the United States. Why do we regulate
the economy and economic sectors, and are there any associated costs? Should the
United States continue the identified trend? Why or why not?
1. Assert that the historical trend has been one of increasing regulation
across an expanding spectrum of sectors.
2. Explain how free market systems can create unfair advantages for
certain industries that try to gain control of their sector of the market, and
therefore, regulations have a public benefit.
3. Discuss the nature of some of those benefits, including but not limited
to better working conditions, cleaner environments, safer consumer
products, and increased economic competition.
4. Describe how regulations often have a negative effect on business,
including increasing the costs for business in terms of labor, materials, and
compliance.
5. In the context of the first point, make a strong claim as to whether that
trajectory should continue, specifically connecting either the
aforementioned costs or benefits to this argument.
6. Provide a concise and effective conclusion.
Topic: Regulating the Economy; The Deregulation Movement
Learning Objective: LO 16.5: Categorize ways in which the federal government
seeks to regulate the economy; LO 16.6: Evaluate the advantages and
disadvantages of the deregulation movement.
Page Reference: 491 – 498
Skill Level: Analyze It
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Difficulty Level: Difficult
106. How does the federal government seek to promote economic growth? What
strategies are involved? How is economic growth measured?
1. Identify the two strategies for promoting economic growth: supporting
U.S. industries and encouraging national trade.
2. Specify how the government supports U.S. industry through
departments and agencies that promote the economy through loans, grants,
special payments, and advice on how to start new businesses.
3. Provide examples of this support, e.g., subsidies for certain crops and
4. Specify how the government promotes international trade through
protectionism, a policy of erecting trade barriers to protect domestic
industry that can take the form of special taxes, or tariffs, placed on
imported goods to make them more expensive.
5. Explain that some tariffs do more harm than good by leading other
countries to put tariffs and other restrictions on U.S. goods, resulting in a
persistent trade deficit.
6. Note the importance of the General Agreement on Tariffs and Trade
(GATT), the World Trade Organization (WTO), and the North American
Free Trade Agreement (NAFTA).
7. Provide a concise and effective conclusion.
Topic: Promoting the Economy
Learning Objective: LO 16.4: Identify ways in which the federal government
seeks to promote economic growth.
Page Reference: 487 – 488, 490
Skill Level: Understand the Concepts
Difficulty Level: Moderate
107. Discuss the differences in philosophy, key actors, and tools of fiscal and monetary
policy. Should the federal government give preference to one to the other? Why or
why not?
1. Discuss the difference between fiscal and monetary policy, noting that
monetary policy affects the money supply and is primarily used as a tool
to manage inflation, and fiscal policy is related to taxing and spending and
is primarily used to address issues of unemployment.
2. Connect those different tools to the ideological positions of the left and
the right.
3. Analyze the different origins of fiscal and monetary policy, noting that
Congress and the president have primary responsibility for the former,
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while the Federal Reserve Board has the primary responsibility for
monetary policy.
4. Compare the different tool sets of both policies, including monetary
policy efforts at managing interest rates to either expand or contract the
money supply to stimulate or slow down economic growth, and fiscal
policy efforts to use taxation and government spending rates to help
stimulate investment and employment.
5. Assert that under a specific set of circumstances, one policy menu is
preferable to the other, depending upon the government’s interests,
illustrating this through specific examples such as the recent stimulus
package to reduce unemployment or the decision by the Federal Reserve
to keep interest rates low to encourage borrowing.
6. Provide a concise and effective conclusion.
Topic: Fiscal Policy; Monetary Policy
Learning Objective: LO 16.2: Outline the tools and impact of fiscal policy on
the economy; LO 16.3: Outline the tools and impact of monetary policy on the
economy.
Page Reference: 480 – 487
Skill Level: Analyze It
Difficulty Level: Difficult
108. Discuss the recent economic crisis and recession. What happened and why?
Should the government take any steps to prevent this from happening again? If so,
what steps? If not, why not?
1. Outline the factors that contributed to the recent financial collapse,
including the housing bubble and the investment crisis.
2. Illustrate how these two factors created slowdowns in construction and
losses of jobs that sparked a domino effect that rippled throughout the U.S.
3. Connect how the efforts to deregulate certain sectors of the financial
industry, specifically investment banking, created conditions under which
banks took higher risks.
4. Lay out a specific course of action that would minimize these effects in
the future, including efforts to reregulate the financial and housing sectors,
or alternately argue why government should not guarantee against risk.
5. Provide a clear and concise conclusion.
Topic: An Introduction to Economic Policy; The Deregulation Movement
Learning Objective: LO 16.1: Describe the federal government’s role in making
economic policy and how the economy’s performance is measured; LO 16.6:
Evaluate the advantages and disadvantages of the deregulation movement.
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Page Reference: 478 – 479, 499
Skill Level: Analyze It
Difficulty Level: Difficult
109. What is the Federal Reserve System, and what is its role in managing the U.S.
economy? Why might the chairman of the Federal Reserve feel political pressure
even though he or she is independent?
1. State that the basic function of the Federal Reserve is to control
monetary policy by using interest rates in managing the money supply.
2. Discuss the membership and terms of service for the Federal Reserve
Board of Governors, and explain what it means to be an independent
regulatory commission.
3. Explain the federal funds rate, how it affects monetary policy, and its
relation to the prime interest rate.
4. Explain why it is that even though the chairman of the Federal Reserve
is not a well-known national figure, the chair can still come under constant
scrutiny.
5. Provide a clear and concise conclusion.
Topic: Monetary Policy
Learning Objective: LO 16.3: Outline the tools and impact of monetary policy
on the economy.
Page Reference: 484 – 485
Skill Level: Analyze It
Difficulty Level: Difficult
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