CHAPTER 18
Economic Policy
1. The amount the government spends in excess of what it takes in each year is called the __________.
a.
debt
b.
unbalanced fund
c.
appropriation
d.
deficit
e.
redline
2. In 2012, the national debt rose to over $__________ trillion.
a.
3
b.
5
c.
16
d.
45
e.
112
3. In 2011, Standard & Poor’s, a credit ratings agency, issued
a.
a warning about the U.S. housing market.
b.
an opinion in support of the U.S. Congress and its efforts to lower the federal debt.
c.
a first-ever warning about America’s national debt.
d.
a call to focus on a measure other than GDP growth.
e.
a call for the U.S. federal government to spend more.
4. The total value of all a nation’s goods and services produced each year is called
a.
adjusted production value.
b.
consumer price index.
c.
gross domestic product.
d.
goods measure.
e.
international trade product.
5. The huge new demands for Social Security benefits and medical payments under Medicare is largely
due to
a.
the population getting older.
b.
increases in benefits in those programs.
c.
the increasing numbers of young workers in the American economy.
d.
recent changes to make the programs less generous.
e.
None of the above is true.
6. The health of the American economy creates __________ politics.
a.
majoritarian
b.
interest group
c.
client
d.
entrepreneurial
e.
egalitarian
7. The pocketbook issue tends to preoccupy politicians most
a.
early in a presidential term.
b.
toward the end of a session of Congress.
c.
when presidential popularity is at its peak.
d.
when the economy is doing poorly.
e.
just before elections.
8. As a group, low-income people tend to vote
a.
Republican.
b.
for Democrats and Republicans at about equal levels.
c.
for independent candidates.
d.
Democratic.
e.
for third party candidates.
9. In 1980, about two-thirds of those who said they had become worse off economically voted for Ronald
Reagan, the challenger, while over half of those who felt they had become better off voted for
__________.
a.
Gerald Ford
b.
Walter Mondale
c.
Jimmy Carter
d.
George W. H. Bush
e.
Bill Clinton
10. A twentieth-century example of government use of money to influence elections was
a.
increasing the size of the military in election years.
b.
increasing foreign aid in election years.
c.
increasing Social Security benefits in election years.
d.
reducing subsidies for mortgage insurance in election years.
e.
mobilizing troops in election years.
11. In 2010, Barack Obama became the first president since __________ to be reelected despite an
unemployment rate on election day that was higher than the unemployment rate on the day of his
first inaugural.
a.
Herbert Hoover
b.
Harry Truman
c.
Jimmy Carter
d.
Ronald Reagan
e.
Franklin Roosevelt
12. __________’s campaign aides often reminded each other, “It’s the economy, stupid!”
a.
Gerald Ford
b.
Walter Mondale
c.
Jimmy Carter
d.
George W. H. Bush
e.
Bill Clinton
13. As a group, low-income people tend to be most concerned with __________.
a.
inflation
b.
education
c.
economic drift
d.
health
e.
employment
14. When voting behavior and economic conditions correlate at the national but not at the individual level,
it can be said that the voters are
a.
heliocentric, or earth conscious.
b.
sociopathic, or self-absorbed.
c.
homeopathic, or group related.
d.
socialistic, or ideology driven.
e.
sociotropic, or other-regarding.
15. Elected officials are strongly tempted to take
a.
a long-run view of the economy.
b.
a short-run view of the economy.
c.
a position in support of policies that will best satisfy the self-regarding voter.
d.
positions with no regard to unemployment.
e.
Both B and C are true.
16. Milton Friedman believed that inflation occurs
a.
when the government does not stimulate the economy.
b.
when the private sector spends too little.
c.
when too much money chases too few goods.
d.
when spending is higher than revenue from taxes.
e.
when Republicans control the White House.
17. When there is an economic downturn, this economic theory argues that the proper thing for
government to do is to have a steady, predictable increase in the money supply at a rate about equal to
growth in the economy’s productivity.
a.
Keynesian economics.
b.
Monetarist economics.
c.
Economic planning.
d.
Supply-side economics.
e.
Credit-based economics.
18. According to the monetarist theory, inflation occurs when
a.
government holds down interest rates.
b.
there is too little money, and interest rates are low.
c.
demand exceeds supply.
d.
the budget deficit exceeds the gross national product (GNP).
e.
the government prints too much money.
19. When there is an economic downturn, this economic theory argues that the proper thing for
government to do is increase demand through pumping more money into the economy by spending
more than it takes in in taxes and by creating public-works programs.
a.
Keynesian economics
b.
Monetarist economics
c.
Economic planning
d.
Supply-side economics
e.
Credit-based economics
20. Keynes would insist that there is no need for the government to
a.
create public works programs.
b.
cut federal expenditures.
c.
increase taxes.
d.
pump money into the economy.
e.
balance the budget on a year-to–year basis.
21. When the Troubled Asset Relief Program (TARP) program began investing in __________, some
Americans argued that there was potential wisdom in the planning approach.
a.
the airline industry
b.
banks
c.
coal
d.
steel
e.
rubber
22. An economist proposes that the government should spend more on public-works programs to help
increase demand for goods and services in order to improve the overall economy. Which approach
would fit best with this economic theory?
a.
Keynesian economics
b.
Monetarist economics
c.
Economic planning
d.
Supply-side economics
e.
Credit-based economics
23. According to this economic theory, cutting taxes will increase people’s incentive to work, save,
and invest.
a.
Keynesian economics
b.
Monetarist economics
c.
Economic planning
d.
Supply-side economics
e.
Credit-based economics
24. In this important decision, the Supreme Court ruled that the president does not have the authority to
seize private steel mills even during wartime.
a.
Lochner v. New York
b.
Muller v. Oregon
c.
West Coast Hotel Co. v. Parrish
d.
Youngstown Sheet & Tube Co. v. Sawyer
e.
Gibbons v. Ogden
25. During his presidency, Kennedy mostly picked __________ to fill key economic positions.
a.
supply-siders
b.
monetarists
c.
keynesians
d.
central planners
e.
libertarians
26. The executive agency in charge of economic forecasting and preparing the president’s annual
economic report to Congress is the
a.
Council of Economic Advisers.
b.
Treasury Department.
c.
Office of Management and Budget.
d.
Federal Reserve Board (Fed).
e.
National Security Agency.
27. Typically, the economic adviser with the closest link to the financial community is the
a.
chairperson of the CEA.
b.
secretary of the Treasury.
c.
director of the OMB.
d.
chairperson of the Fed.
e.
deputy director of the OMB.
28. The president’s adviser who provides estimates of government revenues and who recommends tax
changes is the
a.
chairperson of the CEA.
b.
secretary of the Treasury.
c.
director of the OMB.
d.
chairperson of the Fed.
e.
deputy director of the OMB.
29. One study found __________ separate government bureaus were engaged in making economic policy.
a.
fewer than five
b.
fewer than ten
c.
approximately thirty
d.
close to seventy-five
e.
more than one hundred
30. In theory, the Fed is
a.
the only national entity responsible for economic policy.
b.
central planning body for the economy.
c.
independent of both the president and Congress.
d.
the main fiscal policy body in the federal government.
e.
None of the above is true.
31. This federal organization is primarily responsible for monetary policy.
a.
Council of Economic Advisers.
b.
Treasury Department.
c.
Office of Management and Budget.
d.
Federal Reserve Board (Fed).
e.
National Security Agency.
32. Republicans tend to support free trade, but George W. Bush imposed sharp increases in the taxes that
must be paid on imported steel because
a.
Congress pressured him to do so.
b.
the CEA recommended that he do so.
c.
other nations had done the same thing.
d.
he wanted political support in states such as Ohio and Pennsylvania.
e.
of a bargain with Democratic senators.
33. If only the economic health of the nation mattered, then __________ politics would dominate.
a.
majoritarian
b.
interest group
c.
client
d.
entrepreneurial
e.
organizational
34. According to opinion polls, the public wants all of the following EXCEPT
a.
a balanced federal budget.
b.
lowered government spending.
c.
more spending on education and other programs.
d.
tight trade restrictions.
e.
a limited government, with no deficit.
35. The fiscal year goes from
a.
June 3 to November 15.
b.
March 16 to September 29.
c.
October 1 to September 30.
d.
January 1 to November 30.
e.
January 15 to November 15.
36. The first unified presidential budget did not appear until the __________.
a.
1820s
b.
1860s
c.
1880s
d.
1920s
e.
1930s
37. Since 1974, the purpose of congressional budget resolutions passed annually in May has been to
a.
add up all the agreed-on expenditures.
b.
set a ceiling on total spending.
c.
get final authorization for all expenditures.
d.
compromise over the spending measures of the two houses.
e.
settle issues related to discrepancies in math.
38. Voters want a balanced budget and less governmental spending, but they also believe government
should spend more on education and crime control. The authors say voters are
a.
baffled by polling questions.
b.
hopelessly uninformed.
c.
easily manipulated.
d.
clearly confused.
e.
not irrational.
39. Reagan’s strategy in the budget battle of 1981 was to
a.
focus on specific controversial programs and leave remaining programs at current
spending levels.
b.
pass a May budget resolution that called for further cuts in most programs.
c.
form a consensus of liberals and conservatives.
d.
get Congress to vote for a total package of cuts before it voted for particular cuts.
e.
reduce party leaders to a subordinate role in the process by insisting on particular cuts on
the front end of the process.
40. The Gramm-Rudman Act was passed by Congress to
a.
fine-tune the existing budget procedures.
b.
give more authority to the OMB.
c.
eliminate deficit spending.
d.
eliminate the balance-of-trade deficit.
e.
eliminate tax cuts.
41. The term sequester refers to
a.
those budget items, such as Social Security, that are largely uncontrollable.
b.
the process of protecting certain items from budgetary review.
c.
freezing budget items at previous levels.
d.
a limit set on the percentage of uncontrollable expenses that the budget can contain.
e.
automatic, across-the-board percentage cuts in the budget.
42. The Budget Enforcement Act of 1990 focused on limiting
a.
travel expenses.
b.
payment on the national debt.
c.
existing contracts.
d.
entitlements.
e.
discretionary spending.
43. The Budget Enforcement Act of 1990 required that all increases in nonentitlement spending be
followed by
a.
abolition of frivolous agencies.
b.
matching funds from the states.
c.
spending cuts in discretionary programs.
d.
tax increases.
e.
decrease in spending on other discretionary programs or increase in taxes.
44. Keeping both the tax burden and tax evasion low would be an example of __________ politics.
a.
client
b.
entrepreneurial
c.
interest group
d.
majoritarian
e.
reciprocal
45. Which statement best describes the tax burden in the United States?
a.
It is lower than it is in most other democratic nations.
b.
It is about the same as it is in most other democratic nations.
c.
It is slightly higher than it is in most other democratic nations.
d.
It is much higher than it is in most other democratic nations.
e.
It has fluctuated considerably, but just about always remained higher than in most other
democratic nations.
46. Loophole politics is an example of __________ politics.
a.
majoritarian
b.
interest group
c.
entrepreneurial
d.
client
e.
reciprocal
47. Before the creation of the federal income tax, most of the money that the government needed
came from __________.
a.
loans
b.
state contributions
c.
private wealth
d.
tariffs
e.
public charity
48. The average citizen paid very little in income taxes until
a.
the Great Depression.
b.
the New Deal.
c.
the election of Herbert Hoover.
d.
the Korean War.
e.
World War II.
49. When Congress first created a peacetime income tax (in 1895),
a.
it distributed the money evenly among the states.
b.
the president vetoed the legislation.
c.
several states threatened to secede from the Union.
d.
the deficit disappeared instantly.
e.
the Supreme Court declared it unconstitutional.
50. From the inauguration of income tax up to the 1950s, tax rates tended to rise and fall with
a.
the cycles of public opinion.
b.
good and bad economic times.
c.
war and peace.
d.
Democratic and Republican administrations.
e.
critical or realigning elections.
51. If a tax is progressive,
a.
the wealthiest individuals pay the lowest rate.
b.
the wealthiest individuals pay the highest rate.
c.
every taxpayer pays the same rate.
d.
rates are lower at the lowest and highest income brackets.
e.
rates are the highest for the middle class.
52. High marginal tax rates have been offset by __________.
a.
deductions
b.
exemptions
c.
exclusions
d.
shelters
e.
All of the above are true.
53. The political compromise reached on taxation in the first half of the twentieth century included
a.
high marginal tax rates and numerous loopholes.
b.
low marginal tax rates and numerous loopholes.
c.
high marginal tax rates and few loopholes.
d.
low marginal tax rates and few loopholes.
e.
None of the above is true.
54. Democrats agreed to support loopholes that favored the rich in return for high marginal rates, because
they feared that a combination of no loopholes and high marginal rates would
a.
hurt the middle class more than it would hurt the wealthy by denying them
Schedule C deductions.
b.
discourage foreign investment and raise the cost of raw materials.
c.
encourage foreign investment in U.S. industry, thereby hurting the economy indirectly.
d.
seriously affect productivity by raising the cost of raw materials and labor.
e.
hurt the economy by discouraging people and businesses from saving and investing.
55. All of the following gave significant tax benefits to most taxpayers EXCEPT
a.
mortgage interest deductions.
b.
Schedule C deductions.
c.
state tax payments.
d.
interest on consumer loans.
e.
local tax payments.
56. Among the interest groups that have organized around loopholes are
a.
home builders.
b.
universities.
c.
insurance companies.
d.
automakers.
e.
All of the above are true.
57. Contributing to the success of loophole politics prior to passage of the 1986 tax bill was the
a.
strong support of policy entrepreneurs such as Ralph Nader.
b.
existence of low marginal rates to offset revenues lost through deductions.
c.
decentralized structure of Congress.
d.
existence of tariff revenues to offset revenues lost through deductions.
e.
strong support of the conservative coalition and Ralph Nader.
58. The big losers with respect to the Tax Reform Act of 1986 were __________.
a.
businesses
b.
individuals
c.
farmers
d.
the poor
e.
Both C and D are true.
59. President ________ was notable for saying, “Read my lips. No new taxes.”
a.
Bill Clinton
b.
Gerald Ford
c.
Ronald Reagan
d.
George H. W. Bush
e.
John F. Kennedy
60. In 1993, President Clinton raised the top income tax rate to over
a.
15 percent.
b.
20 percent.
c.
31 percent.
d.
39 percent.
e.
53 percent.
298 Chapter 18: Economic Policy
TRUE/FALSE
1. The amount the government spends in excess of what it takes in each year is called the debt.
2. By 2015, the federal debt is projected to reach nearly $22 trillion.
3. When a recession and an older population occur together, our national debt tends to
increase significantly.
4. Liberals generally believe the debt should be addressed by lowering taxes.
5. Lower income earners tend to vote Democratic.
6. People who tell pollsters that their families’ finances have gotten worse are more likely than other
people to vote against the incumbent president.
7. Younger voters often worry more about inflation than unemployment.
8. Sociotropic voting would involve decision making based on personal experiences rather than on
perceptions of the economic health of the nation as a whole.
9. Voters frequently endorse three inconsistent policies⎯lower taxes, less debt, and new programs.
10. A monetarist believes that inflation is caused by too little money chasing too many goods.
11. Keynes was skeptical of the notion that the market would automatically operate at a full-employment,
low-inflation level.
12. Wage-price controls are most likely to be advocated by supply-side economists.
13. The economic approach known as planning has never been popular in America.
14. Keynesianism argues that lower taxes will provide incentives for people to work, save, and invest.
15. The president’s troika of economic advisers includes the Federal Reserve Board, the Council of
Economic Advisers, and the secretary of the Treasury.
16. The executive office in charge of forecasting economic trends is the Council of Economic Advisers.
17. The most important part of the economic policymaking machinery is Congress.
18. The federal government traditionally makes out its budget without regard for the amount of money it
has to spend.
19. A progressive tax is one that requires those who are better off to pay more as a percentage of
their income.
20. The Tax Reform Act of 1986 called for lower tax rates but smaller and fewer deductions.
ESSAY
1. Discuss the difference between deficit and debt.
2. Discuss how economics affects the way people vote.
3. Identify and summarize the central tenants of the four main theories about how to improve
the economy.
4. Discuss some of the major initiatives by the federal government to stimulate the economy.
5. Identify the machinery of economic policymaking—sometimes called the “troika.” Explain their roles.
6. Describe the membership, tenure, and structure of the Fed.
7. What tools does the Fed use to implement its monetary policy?
8. Discuss the tools that Congress has to influence the economy.
9. What are the arguments in favor of and against globalization?
10. Discuss the procedures for Congress in the Congressional Budget Act of 1974.