30) A federal budget ________ occurs when the federal government spends more than it collects
in taxes.
A) surplus
B) deficit
C) equilibrium
D) ceiling
31) A federal budget ________ occurs when the government spends less than it collects in taxes.
A) surplus
B) deficit
C) equilibrium
D) floor
32) Suppose the government runs a budget surplus in a given year. It can reduce its overall
federal debt by
A) not buying anything on credit.
B) buying back bond it sold to the public.
C) forcing a change in net exports.
D) increasing taxes on luxury items.
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).
33) 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
A) Adam Smith.
B) Arthur Laffer.
C) David Ricardo.
D) Ben Bernanke.
34) Recall the 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.
A) increase; increase
B) cut; increase
C) cut; decrease
D) increase; decrease
35) This Application addresses the idea that
A) cutting tax rates will decrease tax revenue.
B) cutting tax rates may actually increase tax revenues.
C) increasing tax rates is necessary to increase tax revenues.
D) there is ultimately no relationship between tax rates and tax revenues.
36) When the economy slows down and national income falls, the government will have
________ tax revenue to fund programs.
A) more
B) less
C) about the same
D) a rapid increase in
37) The government strives to operate at neither a deficit nor surplus budget in order to keep the
federal budget
A) balanced.
B) equal to inflation.
C) in line with the stock market.
D) equal to that of other countries.
38) During a recession, tax revenues ________ while government transfer payments ________,
thereby mitigating part of the adverse effects of a recession and stabilizing the economy.
A) fall; increase
B) fall; decrease
C) rise; increase
D) rise; decrease
39) Suppose initially the federal budget is balanced. The economy then enters a period of
expansion. What is likely to happen to the federal budget?
A) It will show a surplus.
B) It will show a deficit.
C) It will remain balanced.
D) It will automatically stabilize.
40) Automatic stabilizers
A) require explicit actions by policy makers to become active.
B) work without the need for decisions from Congress or the White House.
C) magnify fluctuations in the economy.
D) increase taxes during recessions.
41) Automatic stabilizers
A) minimize fluctuations in the economy.
B) must be authorized by the President.
C) decrease taxes during expansions.
D) increase welfare payments during expansions.
42) Which of the following is an example of an automatic stabilizer?
A) Congress authorizes spending increases during a recession.
B) Congress increases the tax rate during an expansion.
C) More unemployment benefits are paid during a recession.
D) Welfare payments decrease during a recession.
43) 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 ________.
A) fall; increase; deficit
B) increase; increase; surplus
C) fall; fall; deficit
D) increase; fall; surplus
44) 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 ________.
A) fall; increase; deficit
B) increase; increase; surplus
C) fall; fall; deficit
D) increase; fall; surplus
45) When the economy is producing its potential output, an increase in government spending
must necessarily reduce some component of private spending. This phenomenon is called
A) fiscal policy.
B) crowding out.
C) the multiplier effect.
D) entitlement spending.
46) Suppose the economy is operating below potential output. If policy makers try to avoid a
budget deficit by raising taxes or reducing government spending, these actions would
A) increase inflation.
B) help pull an economy out of a depression.
C) make a recession worse.
D) negate the multiplier effect.
47) Using expansionary policies to combat a recession would
A) increase a budget deficit.
B) increase a budget surplus.
C) decrease discretionary spending.
D) increase federal revenue.
48) Transfer payments are excluded from GDP.
49) Discretionary funds are typically used by the Executive Branch and Congress for activist
fiscal policies.
50) Net interest payments made by the government depend on the total federal debt held and on
the level of interest rates.
51) Taxes are the only mechanism by which the federal government earns money.
52) The federal income tax on wages is the largest source of revenue for the federal government.
53) Income taxes are taxes paid on wages and investment income.
54) Social insurance taxes are paid by corporations based on their profits.
55) Social insurance taxes are paid by wages and investment income.
56) Unlike social insurance taxes, income taxes are paid on wages only.
57) Estate and gift taxes account for a very small portion of total tax revenues collected by the
federal government because taxes are levied only on large estates.
58) Corporate profits are taxed by state and local governments, but not by the federal
government.
59) Because the government has so much money, and can print more, it does not need to borrow
and therefore rarely pays net interest on debt.
60) When federal government spending exceeds tax revenues, the federal government runs a
budget surplus.
61) When federal government spending amounts to less than tax revenues, the federal
government runs a budget deficit.
62) Taxes and transfer payments automatically reduce fluctuations in real GDP and thereby
stabilize the economy without any need for decisions from Congress or the White House.
63) Fiscal actions to eliminate a recession are likely to decrease the federal budget deficit.
64) What are the two components of federal spending?
65) The federal budget has three components. Name them.
66) Describe the three broad categories of the U.S. budget.
67) What is the federal government’s largest source of revenue?
68) Explain how a change in tax rates influences aggregate demand and aggregate supply.
69) Explain how an increased federal budget deficit resulting from a recession can actually help
stabilize an economy.
70) Describe the relationship illustrated by the Laffer curve.
71) Why do most economists believe that the Laffer argument does not apply to broad-based
taxes?
72) Explain the differences between a federal budget deficit, a federal budget surplus, and a
balanced federal budget.
73) Explain how automatic stabilizers work.
15.3 Fiscal Policy in U.S. History
1) In the United States during the 1930s, politicians
A) relied on government spending and taxation to pull the economy out of the depression.
B) did not believe in using government spending and taxation because they feared the
consequences of budget deficits.
C) knew that the depression would eventually subside because of automatic stabilizers.
D) deliberately relied on government spending and taxation even though they knew the
depression would continue.
2) In the United States during the 1930s
A) government spending and taxes both increased, resulting in zero net fiscal expansion.
B) government spending and taxes both decreased, resulting in a net fiscal contraction.
C) government spending increased and taxes decreased, resulting in a fiscal expansion.
D) government spending decreased and taxes increased, resulting in a fiscal contraction.
3) In the United States, the use of fiscal policy tools to stabilize the economy gained prominence
during
A) the depression era.
B) the Kennedy administration.
C) the Reagan administration.
D) the Clinton administration.
4) During the Kennedy administration, what did economist Walter Heller propose to bring the
economy back to full employment?
A) a large government works program
B) insourcing
C) tax cuts
D) tariffs on imported goods
5) In the United States during the Vietnam War era, as military spending increased
A) unemployment dropped to very low levels.
B) both frictional and cyclical unemployment increased.
C) frictional unemployment dropped, but cyclical unemployment increased.
D) overall unemployment rates did not change.
6) Huge increases in government spending and record low levels of unemployment during the
Vietnam War era in the late 1960s led policy makers to fear that
A) the economy was growing too fast, which would increase unemployment.
B) the economy was growing too fast, which would increase inflation.
C) the economy was slipping into a recession, which would increase unemployment.
D) the economy was slipping into a recession, which would increase inflation.
7) In the United States, the temporary tax surcharge of 1968
A) had no impact on consumer spending.
B) decreased consumer spending by less than was originally estimated.
C) decreased consumer spending by more than was originally estimated.
D) actually increased consumer spending.
8) Fearing that the economy was overheating, policymakers instituted a temporary tax surcharge
in 1968. This temporary surtax
A) successfully reduced consumption sufficiently to cool down the economy.
B) reduced savings but had little effect on consumption.
C) drastically reduced both savings and consumption.
D) increased savings and reduced consumption.
9) The supply-side motivated tax cuts of 1981 during the Reagan administration were aimed at
A) increasing aggregate demand.
B) increasing aggregate supply.
C) decreasing aggregate supply.
D) balancing the federal budget.
10) Taxes can have an important effect on
A) the labor supply.
B) saving.
C) economic growth.
D) all of the above
11) The Clinton administration inherited a budget deficit from its predecessor. President Clinton
instituted major tax increases that
A) increased the budget deficit during his entire term.
B) brought the budget into balance and eventually into a surplus.
C) reduced the budget deficit but increased the federal debt.
D) reduced the size of the deficit but could not eliminate it.
12) President George W. Bush used part of the budget surplus inherited from the Clinton
administration to
A) fund tax cuts.
B) stimulate the economy that was slowing down following the end of the high-tech investment
boom.
C) increase government entitlement spending.
D) both A and B
13) In 2003, the Bush administration revised the tax bill to include provisions to
A) delay tax increases from the 2001 bill.
B) decrease the child tax credit.
C) lower taxes on dividends.
D) increase taxes on capital gains.
14) The prospect of future deficits
A) encourages government to conduct expansionary fiscal policy.
B) would prompt government to vastly expand discretionary spending.
C) requires a government to eliminate all entitlement spending.
D) limits the ability of government to conduct fiscal policy in the near future.
15) The federal deficit ________ in 2006 and 2007, and ________ in 2008.
A) increased; decreased
B) increased, increased further
C) decreased; increased
D) decreased; decreased further
Recall the Application about the success of the 2009 stimulus package to answer the
following question(s).
16) Recall the application. Economist John B. Taylor found that the temporary tax cuts which
were a part of the 2009 stimulus package
A) were very successful in stimulating consumption spending.
B) did very little to stimulate consumption spending.
C) were split very evenly between consumption spending and household saving.
D) were primarily used to pay off home mortgage balances.
17) Recall the application. Economist John B. Taylor found that the aid to state and local
governments which were a part of the 2009 stimulus package were used primarily to
A) increase spending on goods and services.
B) increase spending on transfer programs, but spending on goods and services declined.
C) increase spending on transfer programs, goods, and services.
D) increase spending on infrastructure, but spending on transfer programs declined.
18) The Obama stimulus package was implemented to assist the economy in its recovery from
recession. This package was designed to shift
A) aggregate demand to the right.
B) aggregate demand to the left.
C) aggregate supply to the left.
D) aggregate demand and aggregate supply to the left.
19) The Obama stimulus package included fiscal policy actions designed to assist the economy
in its recovery from recession. These fiscal policy actions would include ________ government
spending and ________ taxes.
A) increasing; decreasing
B) decreasing; increasing
C) increasing; Increasing
D) decreasing; decreasing
20) At the beginning of the Vietnam War, increased military spending in the United States
decreased unemployment.
21) An estimate of a household’s long-run average income is called permanent income.
22) Consumers often base their spending on their estimated permanent income.
23) Temporary tax cuts tend to stimulate consumer spending at the same rate as permanent tax
cuts.
24) The tax cuts of 2008 were valued at approximately one% of GDP.