Survey of Economics, 6e (O’Sullivan/Sheffrin/Perez)
Chapter 15 Fiscal Policy
15.1 The Role of Fiscal Policy
1) What are the two tools of fiscal policy that governments can use to stabilize an economy?
A) government spending and technology improvements
B) government spending and taxation
C) taxation and controlling imports
D) taxation and controlling exports
2) Contractionary policies are policies designed to
A) increase the level of real GDP.
B) reduce the level of real GDP.
C) increase government spending.
D) increase the federal deficit.
3) Expansionary policies are policies designed to
A) increase the level of real GDP.
B) reduce the level of real GDP.
C) decrease government spending.
D) reduce the federal deficit.
4) What are the two tools of fiscal policy that governments can use to affect the level of
aggregate demand?
A) government spending and taxation
B) government spending and technology improvements
C) taxation and controlling imports
D) taxation and controlling exports
5) In order to ________, a government must increase spending and decrease taxation.
A) increase aggregate demand
B) decrease aggregate demand
C) increase aggregate supply
D) decrease aggregate supply
6) In order to ________, a government must decrease spending and increase taxation.
A) increase aggregate demand
B) decrease aggregate demand
C) increase aggregate supply
D) decrease aggregate supply
7) As a result of an increase in the personal income tax rate, consumers are likely to
A) spend less.
B) spend more.
C) save more.
D) earn more money.
8) A decrease in the personal income tax rate ________ disposable income which ________
consumption.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
9) Tax cuts aimed at businesses can stimulate
A) social spending.
B) private consumption.
C) investment spending.
D) net exports.
10) Expansionary policies are government policies that
A) increase aggregate supply.
B) decrease aggregate supply.
C) decrease aggregate demand.
D) increase aggregate demand.
11) Contractionary policies are government policies that
A) increase aggregate supply.
B) decrease aggregate supply.
C) decrease aggregate demand.
D) increase aggregate demand.
12) When the government develops policies to stabilize the economy
A) these policies are unaffected by the multiplier effect.
B) only expansionary fiscal policy is impacted by the multiplier effect.
C) it needs to consider the multiplier effect for all fiscal policies.
D) only contractionary fiscal policy is impacted by the multiplier effect.
13) Due to the ________ effect, the final shift in aggregate demand is larger than the initial shift
in aggregate demand.
A) income
B) multiplier
C) substitution
D) crowding-out
14) The idea that a $1 increase in infrastructure spending will generate more than $1 in economic
growth is a representation of
A) the multiplier effect.
B) an outside lag.
C) an inside lag.
D) an automatic stabilizer.
15) Policies taken to move the economy closer to potential output
A) must necessarily be expansionary policies.
B) must necessarily be contractionary policies.
C) are called stabilization policies.
D) are lagging policies or automatic policies.
16) Stabilization policies are policies designed to
A) keep output constant.
B) keep prices constant.
C) move the economy closer to potential output.
D) increase trade.
17) What is the reason that stabilization policies do not have an immediate effect on an
economy?
A) Consumers are slow to catch up on spending.
B) There is a time lag for policies to take effect.
C) Imports come into the country too fast.
D) Exports often are not shipped fast enough.
18) The time it takes to formulate a policy is known as
A) fiscal policy.
B) crowding out.
C) inside lags.
D) outside lags.
19) The time it takes for a policy to actually work is known as
A) fiscal policy.
B) crowding out.
C) inside lags.
D) outside lags.
20) The fact that it takes time for government to identify and recognize a problem is one reason
for the occurrence of
A) inside lags.
B) outside lags.
C) implementation lags.
D) structural lags.
21) The fact that it takes time for government to take action, even after a problem has been
diagnosed, is one reason for the occurrence of
A) inside lags.
B) outside lags.
C) crowding out.
D) the multiplier effect.
22) President Obama needs to get Congressional approval to enact measures to boost the
economy. The time involved to formulate and get approval for these policies are called
A) inside lags.
B) outside lags.
C) automatic stabilization.
D) crowding in.
23) Even when the Obama administration succeeds with its effort to gain Congressional approval
for its stimulus proposals, it will still take time for these policies to actually work. The time it
takes for these policies to work is known as
A) inside lags.
B) outside lags.
C) automatic stabilization.
D) crowding out.
24) Taxation and government spending are examples of fiscal policy tools used to stabilize an
economy.
25) Economic advisers who fear that the economy is growing too rapidly would recommend that
the government decrease spending and/or increase taxes.
26) Changes in government purchases affect aggregate demand only indirectly through
consumption spending.
27) Stabilization policies are actions taken to bring the economy closer to full employment.
28) An outside lag is the time period it takes economists to formulate a stabilization policy.
29) An inside lag is the time period it takes for the stabilization policies to take effect after they
have been implemented.
30) Briefly explain how a change in the personal income tax rate affects aggregate demand.
31) Name two actions that a government could take if it wants to implement an expansionary
fiscal policy.
32) Name two actions a government could take if it wants to implement a contractionary fiscal
policy.
33) What is meant by the term “inside lags”?
34) What is meant by the term “outside lags”?
35) What are the two basic reasons inside lags occur?
36) Why is it difficult to implement fiscal policies?
15.2 The Federal Budget
1) Which component of federal spending is included in GDP?
A) net exports
B) transfer payments
C) government purchases
D) capital supply
2) Why are transfer payments not included in GDP?
A) The amount is too low to have any effect.
B) Unemployment varies and can’t be tracked.
C) They do not represent payments to those who contributed resources to currently produced
goods or services.
D) Money companies receive from the government isn’t reported.
3) Spending on programs that Congress authorizes ________ is known as discretionary
spending.
A) by prior law
B) on an annual basis
C) on an off-budget emergency basis
D) after approval from the Federal Reserve
4) When the government conducts activist fiscal policy, what type of spending does it usually
use?
A) entitlement and mandatory spending
B) net interest spending
C) discretionary spending
D) strategic spending
5) Which of the following is an example of government discretionary spending?
A) Social Security retirement payments
B) Medicare benefits for the elderly
C) defense spending
D) net interest paid on government debt held by the public
6) Spending on programs that ________, such as Social Security and Medicare, is classified as
entitlement and mandatory spending.
A) is authorized by Congress on an annual basis
B) has been authorized by prior law
C) is authorized only in times of budget surpluses
D) is authorized only in times of budget deficits
7) Does the term “mandatory spending” mean that spending must go on forever?
A) Yes, once appropriated, spending is indefinite.
B) No, once appropriated, spending is for the life of the program only or until it changes.
C) Yes, the laws which authorized this spending cannot be changed.
D) Yes, Congress has no right to change these spending programs.
8) Who sets the rules for entitlements when spending is authorized under this category?
A) the President
B) the agency involved
C) the Congress when it appropriates the spending
D) each individual state
9) What is the largest component of the federal budget?
A) discretionary spending
B) entitlements and mandatory spending
C) net interest
D) defense spending
10) Entitlements and net interest are the ________ the U.S. federal budget.
A) only two declining components of
B) two fastest-growing components of
C) two slowest-growing components of
D) only two components with negative values in
11) A White House proposal to increase infrastructure spending on roads, rail lines and runways
is an example of
A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) automatic stabilization.
D) insourcing policies.
Recall the Application about how society will cope with increased demands for entitlement
programs to answer the following question(s). This Application addresses the impact of
increasing life expectancy and aging populations on the costs of government entitlement
programs such as Social Security, Medicare and Medicaid, and examines several possible
solutions to the potential problem.
12) Recall the application. Current spending on federal retirement and health programs accounts
for 10% of GDP. Experts estimate that this spending component’s share of GDP ________ by the
year 2075.
A) is likely to shrink
B) will more than double
C) will remain constant
D) will grow moderately initially then taper off
13) Recall the application. In the year 2075, the portion of GDP devoted to spending on Social
Security, Medicare and Medicaid is expected to be
A) significantly less than the share of GDP devoted to these programs today.
B) roughly equal to the total amount of GDP today.
C) larger than total federal spending’s share of GDP today.
D) greater than the consumption spending component’s share of GDP in 2075.
14) Recall the application. How will an increase in government spending on entitlement
programs affect the macroeconomy?
A) It will increase aggregate demand.
B) It will decrease aggregate demand.
C) It will increase aggregate supply.
D) It will decrease aggregate supply.
15) Recall the application. One solution proposed to deal with the rising expenses of government
entitlement programs is to raise taxes. An increase in taxes to help cover the rising expenses of
entitlement programs would
A) increase aggregate demand, shifting the AD curve to the right.
B) increase aggregate demand, shifting the AD curve to the left.
C) decrease aggregate demand, shifting the AD curve to the right.
D) decrease aggregate demand, shifting the AD curve to the left.
16) Recall the application. One strategy proposed to deal with the rising expenses of government
entitlement programs is for the government to save and invest now so as to reduce the burden on
future generations. This strategy would
A) increase GDP, and entitlement programs would increase along with GDP.
B) increase GDP and entitlement programs would decrease.
C) increase GDP and eliminate entitlement programs.
D) not change GDP, but shrink entitlement programs.
17) Recall the application. Which of the following is NOT a strategy that the government can
pursue to address the rising cost of federal retirement and health care programs?
A) reform the health care system to encourage more competition to reduce health care
expenditures
B) increase the age at which retirement benefits begin to be paid
C) borrow from the public to finance the programs
D) promote government saving and investment to increase real GDP over time
18) A White House proposal to lower business taxes by increasing tax deductions is an example
of
A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) automatic stabilization.
D) progressive taxation.
19) Which of the following sources of revenue is used to fund government spending?
A) interest
B) taxation
C) corporate contributions
D) political party contributions
20) Individual income tax is the ________ single component of federal revenue.
A) largest
B) second largest
C) smallest
D) least important
21) The share of corporate tax in total federal revenues
A) is larger than the other components of federal revenue.
B) is the smallest of all the components of federal tax revenue.
C) has declined over the past few decades to a relatively low level.
D) has grown significantly in each of the past 10 years.
22) Special taxes levied on earnings for Social Security and Medicare are called
A) withholding tax on wages.
B) social insurance tax.
C) unfair tax on low-income families.
D) an exception tax for corporations.
23) Proponents of the estate and gift tax argue that the tax is necessary because
A) it generates a large portion of total federal revenue.
B) it prevents “unfair” accumulation of wealth across generations.
C) it is only applied to items that have not previously been taxed.
D) it is the primary source of funding for Medicare and Medicaid.
24) One school of thought that emphasizes the role that taxes play in an economy’s supply of
output is known as
A) demand-pull economics.
B) classical economics.
C) tax-and-spend economics.
D) supply-side economics.
25) According to supply-side economics, a(n) ________ in the tax rate tends to increase the labor
supply and ________ aggregate output.
A) decrease; increase
B) increase; decrease
C) decrease; decrease
D) increase; increase
26) The relationship between tax rates and tax revenues is shown on the
A) IRS curve.
B) Laffer curve.
C) production possibilities frontier.
D) Discretionary Spending curve.
27) The Laffer curve illustrates that
A) high tax rates could lead to lower tax revenues if economic activity is severely discouraged.
B) lowering tax rates will always increase tax revenues.
C) high tax rates would increase tax revenue and increase the labor supply as people work harder
to maintain their standard of living.
D) lowering tax rates will always decrease tax revenues.
28) 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.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
29) 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 ________.
A) higher; more tax revenue for the government
B) higher; larger profits for businesses
C) lower; fewer spending cuts for businesses
D) lower; increases in the price level