Microeconomics Special Topic 1—Government Spending and Taxation
MULTIPLE CHOICE
1. Between 1960 and 2010, the share of federal spending allocated to national defense
a.
declined sharply, while the share allocated to health care increased substantially.
b.
rose sharply, while the share allocated to health care declined substantially.
c.
was relatively constant, while the share allocated to health care declined modestly.
d.
declined modestly, while the share allocated to health care was relatively constant.
2. How much does it cost to tax a dollar of revenue away from the private sector and transfer it to the
government to finance a government program?
a.
one dollar
b.
less than one dollar because the administration of and compliance with the tax laws creates
jobs for people
c.
more than a dollar because collection of the taxes requires resources that would otherwise
be available for private sector production
d.
more than a dollar because of the excess burden resulting from the elimination of
productive exchanges by the taxes
e.
Both c and d are correct.
3. Real (adjusted for inflation) federal spending per person in the United States
a.
has increased by approximately 10 percent per decade during the last 225 years.
b.
increased more rapidly during the nineteenth century than during the twentieth century.
c.
in 2010 was approximately 80 times the level of 1916.
d.
increased rapidly during the first half of the twentieth century but has changed very little
since 1950.
4. Compared to the situation prior to 1980, the top marginal personal income tax rate imposed on the rich
is now substantially
a.
lower and so is the share of the revenue collected from them.
b.
higher and so is the share of the revenue collected from them.
c.
lower, but the share of the revenue collected from them is now higher.
d.
higher, but the share of the revenue collected from them is now lower.
5. Government expenditures as a share of the U.S. economy are
a.
the largest in the world.
b.
the smallest in the world.
c.
smaller than most Western European countries but larger than a number of high-growth
Asian economies.
d.
larger than Canada, France, and the United Kingdom but slightly smaller than Germany
and Italy.
6. Total government spending (federal, state, and local) sums to approximately
a.
10 percent of the U.S. economy.
b.
20 percent of the U.S. economy.
c.
40 percent of the U.S. economy.
d.
50 percent of the U.S. economy.
7. Measured as a share of the economy, government spending
a.
has been between 10 and 15 percent of the U.S. economy since 1930.
b.
has been between 20 and 25 percent of the U.S. economy since 1930.
c.
rose from less than 10 percent in 1929 to over 35 percent in 2010.
d.
declined from more than 50 percent in 1929 to approximately 25 percent in 2010.
8. Government expenditures for Social Security and unemployment benefits are examples of
a.
government consumption.
b.
government investment.
c.
government purchases.
d.
transfer payments.
9. What percentage of the total government expenditures of the United States is undertaken at the federal
level?
a.
approximately 20 percent
b.
approximately 40 percent
c.
approximately 60 percent
d.
approximately 80 percent
10. In 2010, federal expenditures on income transfers, health care, national defense, and interest on the
national debt accounted for
a.
less than 20 percent of federal spending.
b.
about 40 percent of federal spending.
c.
approximately 50 percent of federal spending.
d.
more than 85 percent of federal spending.
11. During the first 125 years of the United States,
a.
there were no constitutional constraints on the spending of the federal government.
b.
real spending per person by the federal government rose by a factor of 60.
c.
most of the government spending was undertaken at the state and local levels.
d.
most of the government spending was undertaken at the federal level.
12. Compared to the situation during the first 125 years of the United States (1790-1915), today total
government expenditures are ____ share of the economy, and a greater proportion of those
expenditures take place at the ____ level(s).
a.
a smaller; federal
b.
about the same; federal
c.
a larger; federal
d.
a larger; state and local
than in 1800.
b.
Prior to 1929, government expenditures at the state and local levels were substantially
smaller than federal expenditures.
c.
Real federal spending per person was approximately 80 times greater in 2010 than in
1916.
d.
All of the above are true.
14. Which of the following is true?
a.
Real federal spending per person was approximately 50 times higher in 1900 than 1800.
b.
Real federal spending per person was approximately 80 times higher in 2010 than 1916.
c.
Real federal spending per person grew slowly under the Reagan Administration during the
1980s, but it increased rapidly under the Clinton administration in the 1990s.
d.
In recent years, government expenditures at the state and local levels have been greater
than government spending at the federal level.
15. During the last four decades, the composition of federal spending has
a.
been virtually unchanged, but federal spending as a share of GDP has declined
substantially.
b.
been virtually unchanged, but federal spending as a share of GDP has increased sharply.
c.
shifted away from national defense and toward spending on income transfers and health
care.
d.
shifted away from health care and income transfers and toward spending on national
defense.
16. Measured as a share of the economy, government expenditures on ____ have declined during the last
four decades.
a.
health care
b.
national defense
c.
transfer payments
d.
Social Security benefits
17. During the last four decades, defense expenditures have
a.
accounted for approximately one-half of federal expenditures.
b.
accounted for less than 10 percent of federal expenditures.
c.
been increasing as a share of federal expenditures.
d.
been declining as a share of federal expenditures.
18. In 2010, spending on four items-income transfers (including Social Security), health care, national
defense, and interest on the national debt-accounted for
a.
approximately 25 percent of federal spending.
b.
approximately 40 percent of federal spending.
c.
slightly more than 50 percent of federal spending.
d.
approximately 88 percent of federal spending.
19. In 1960, spending on income transfers and health care accounted for 21.5 percent of the federal
budget. In 2010, these two items accounted for
a.
less than 15 percent of the federal budget.
b.
approximately 25 percent of the federal budget.
c.
approximately 32 percent of the federal budget.
d.
approximately 62 percent of the federal budget.
20. As the size of government increases as a share of the economy,
a.
the burden of deadweight losses of taxation generally diminishes.
b.
the rate of return derived from projects undertaken by the government will tend to
increase.
c.
the government generally becomes more heavily involved in unproductive and even
counterproductive activities.
d.
the activities of government are generally limited to protective functions such as public
safety , national defense, and provision of a limited set of public goods.
21. Increased spending on which of the following items is most likely to increase the size of government
during the years following 2010?
a.
education
b.
Social Security and Medicare
c.
agricultural subsidies
d.
transportation (roads and airports)
22. When the government borrows funds in order to pay for its current expenditures,
a.
the government will have to repay the borrowed funds within five years.
b.
the government can spend without having to increase taxes, either now or in the future.
c.
future taxes will have to be higher in order to pay the interest on the borrowed funds.
d.
the cost imposed on the private sector is virtually eliminated because taxes can remain
constant.
23. Which of the following most clearly distinguishes government from a private business?
a.
production of goods and services-private businesses produce things; governments do not
b.
the power to tax
c.
the hiring of law enforcement employees to protect property rights
d.
selfishness-the owners and managers of private businesses are selfish; government
officials are not
24. Which of the following is the largest source of revenue for the federal government?
a.
corporate income tax
b.
payroll tax
c.
personal income tax
d.
user charges
25. The administrative, enforcement, and compliance costs of collecting taxes in the United States sum to
a.
between 1 and 2 percent of the revenues collected.
b.
between 5 and 6 percent of the revenues collected.
c.
between 12 and 15 percent of the revenues collected.
d.
more than half of the revenues collected.
26. The private sector cost of tax revenues is equal to the
a.
tax revenue collected by government from individuals in the economy.
b.
income that could have been earned by government employees if they had worked in the
private sector.
c.
difference between government expenditures and tax revenues.
d.
tax revenue plus the cost of tax compliance and the excess burden of taxation.
27. From the viewpoint of the entire economy, the cost of government is
a.
equal to the amount of taxes collected.
b.
greater than the amount of taxes collected.
c.
less than the amount of taxes collected.
d.
equal to the level of government expenditures.
28. “I am in favor of increasing the corporate income tax. Businesses should shoulder a larger share of the
tax burden.” This statement is
a.
essentially correct.
b.
false; businesses already shoulder most of the tax burden in the United States.
c.
false; economic analysis indicates that the individual should pay more taxes and
businesses less.
d.
misleading; all taxes, including those levied on businesses, are paid by people.
29. What percentage of personal income tax revenue was collected from the top 1 percent of earners in
2008?
a.
less than 10 percent
b.
approximately 15 percent
c.
approximately 20 percent
d.
more than 35 percent
30. In 1980, the top 1 percent of earners paid 19.1 percent of the federal personal income tax. By 2008, the
share of this tax collected from the top 1 percent of earners
a.
had declined to less than 15 percent.
b.
was still slightly less than 20 percent.
c.
had risen to approximately 25 percent.
d.
had risen to over 35 percent.
31. During the last 15 years, what has happened to the marginal tax rates imposed on high-income
taxpayers and the personal income tax revenues collected from them?
a.
Both the rates imposed and the revenues collected from the rich have increased.
b.
Both the rates imposed and the revenues collected from the rich have declined.
c.
The tax rates imposed on the rich have declined, but the revenues collected from them
have increased.
d.
The tax rates imposed on the rich have increased, but the revenues collected from them
have declined.
32. The share of the personal income tax paid by the bottom half of earners
a.
rose to an all-time high in 2008.
b.
was substantially higher in 2008 than during the 1960s and 1970s.
c.
was substantially lower in 2008 than during the 1960s and 1970s.
d.
has been relatively constant during the last four decades.
33. How has the share of the personal income tax paid by the rich (the top 1 percent of earners) and the
not–so-well-off (the bottom half of earners) changed during the last four decades?
a.
The rich now pay a larger share and the not-so-well-off pay a smaller share of the personal
income tax.
b.
The rich now pay a smaller share and the not-so-well-off pay a larger share of the personal
income tax.
c.
The share of the personal income tax paid by the rich increased between 1960 and 1980,
but the share of the revenues collected from the rich has declined sharply since 1980.
d.
The relative shares paid by the rich and the not–so-well-off have been virtually unchanged
during the last four decades.
34. The Earned Income Tax Credit provides a tax credit or rebate to
a.
businesses that undertake investment expenditures.
b.
taxpayers with incomes greater than $100,000.
c.
persons with low incomes who are working.
d.
single parent families when the parent stays home to take care of the children.
35. The overall federal tax structure is
a.
regressive because the average tax rate of those with low incomes is higher than the rate
imposed on those with higher incomes.
b.
progressive because the average tax rate of those with high incomes is greater than the rate
imposed on those with lower incomes.
c.
flat because the average tax rate is approximately constant across all income brackets.
d.
progressive for income levels up to approximately $100,000 but regressive for income
levels above this figure.
36. When the tax structure of a nation is progressive, as real incomes increase, the tax revenues of the
government will
a.
decline.
b.
increase by the same proportion as the increase in real income.
c.
increase by a larger proportion than the increase in real income.
d.
remain unchanged unless legislative action is undertaken.
37. As government becomes larger and larger as a share of the economy, economic growth is likely to
decline because
a.
taxes are reduced to levels that are inconsistent with economic efficiency.
b.
governments are involved in many activities for which they are ill-suited.
c.
tax-transfer activities are reduced and sometimes virtually eliminated.
d.
governments do not spend enough on the provision of key public goods like education.
38. Economic analysis indicates that growth in the size of government as a share of the economy will
a.
always reduce economic growth and reduce the living standards of the citizenry.
b.
enhance economic growth and lead to higher income levels as it becomes larger and
larger.
c.
initially promote growth as the government focuses on core functions, but deter growth as
government becomes larger and larger.
d.
initially reduce economic growth, but eventually government will enhance growth as it
becomes larger and larger.
39. Expansion in the size of government relative to the market sector will eventually retard economic
growth because
a.
larger governments will be more involved in activities for which they are ill-suited.
b.
the higher taxes to finance a bigger government will lead to larger and larger deadweight
losses from taxation.
c.
the incentive to engage in innovative activities and respond to change is weaker in
government than in the market sector.
d.
all of the above are correct.
40. Economic theory indicates that, the size of government will be
a.
unrelated to economic growth.
b.
negatively related to economic growth at all possible sizes of government.
c.
positively related to economic growth at all possible sizes of government.
d.
positively related to economic growth at small levels of government but is negatively
related to economic growth as government becomes larger and larger.
41. Among the 23 long-standing members of the Organization for Economic Cooperation and
Development (OECD), the highest rates of economic growth during recent decades have been
achieved by
a.
Western European countries.
b.
the countries with the smallest government expenditures as a share of GDP.
c.
the countries with the largest government expenditures as a share of GDP.
d.
the countries with the most rapid growth of government expenditures as a share of GDP.
42. OECD data for 1960 through 1999 indicates that a 10 percent increase in government expenditures as
a percent of GDP
a.
increases economic growth by about 5 percent.
b.
increases economic growth by about 2 percent.
c.
has no effect on economic growth.
d.
reduces economic growth by about 1 percent.
43. During the quarter of a century prior to 2000, between 66 percent and 71 percent of Americans age 18
and older paid personal income taxes. What happened to the share of adult Americans with a personal
income tax liability between 2000 and 2009?
a.
It rose to nearly 90 percent.
b.
It rose to approximately 80 percent.
c.
It was virtually constant at approximately 70 percent.
d.
It fell to 51 percent.
44. What percentage of Americans age 18 and over paid personal income taxes in 2009?
a.
92 percent
b.
75 percent
c.
51 percent
d.
33 percent
45. The share of Americans who pay no personal income tax
a.
has been relatively constant at approximately 33 percent throughout 1975-2009.
b.
was relatively constant near 33 percent between 1975 and 2000, but it has increased during
the past decade, reaching nearly half of adult Americans in 2009.
c.
was relatively constant near 33 percent between 1975 and 2000, but it has fallen during the
past decade, receding to only 18 percent in 2009.
d.
rose steadily from 18 percent in 1975 to nearly 50 percent of adult Americans in 2000,
but it receded to less than 40 percent in 2009.
46. In recent years, what percentage of American families have derived income transfers from at least one
government transfer program?
a.
less than 20 percent
b.
approximately 53 percent
c.
approximately 62 percent
d.
nearly 75 percent
47. When the number of families with someone employed by the government is added to those receiving
income from transfer programs, the share of American families receiving income from the government
is
a.
less than 20 percent
b.
approximately 50 percent of the total
c.
approximately 62 percent of the total
d.
a little more than 75 percent of the total
48. What percentage of federal spending was financed by borrowing during 2009-2010?
a.
approximately 10 percent
b.
approximately 20 percent
c.
approximately 40 percent
d.
more than 50 percent
49. In a democratic setting, debt financing is attractive to elected political officials because
a.
it makes it possible for them to spend on current projects favored by their constituents
without having to levy current taxes.
b.
it drives up interest rates, which encourages saving.
c.
it leads to higher taxes in the future, which will tend to slow economic growth.
d.
it makes the cost of government more visible, which will help voters allocate government
spending more efficiently.
50. The 18th century Scottish philosopher Alexander Tytler argued that democracy
a.
would survive indefinitely into the future once it was established.
b.
was the only form of government that would be able to control excessive government
spending financed by debt.
c.
would tend to collapse from excessive debt once a majority of voters discovered they
could vote themselves benefits at the expense of others.
d.
would lead to persistent government surpluses because elected political officials would
find the surpluses attractive relative to budget deficits.
51. At the federal level, which of the following accounts for almost half of all revenue?
a.
corporate income taxes
b.
retail sales taxes
c.
personal income taxes
d.
cigarette taxes
52. (I) Sales taxes, income taxes, property taxes, and grants from higher levels of government are the
major sources of state and local revenue in the United States.
(II) Including both the excess burden and administration, enforcement, and compliance costs of taxes
in the United States, $1 in taxes to the government imposes a cost of somewhere between $1.20 and
$1.30 on the economy.
a.
Both I and II are true.
b.
I is true; II is false.
c.
I is false; II is true.
d.
Both I and II are false.
53. Under the progressive income tax system in the United States, as real incomes rise,
a.
a smaller share of income is taxed at higher rates.
b.
there is no change in the share of income taxed at higher rates.
c.
a larger share of income is taxed at higher rates.
d.
none of the above are true.
54. For the first time in almost a century,
a.
the rapid growth of federal spending stopped during the 1990s.
b.
the slow growth of federal spending began to increase during the 1990s.
c.
state and local governments spent more than the federal government during the 1990s.
d.
national defense became the largest category of federal spending in the 1990s.
55. Which of the following is true regarding U.S. federal government expenditures?
a.
National defense has fallen from 52.2 percent of the federal budget in 1960 to 21 percent
in 2008.
b.
Federal expenditures on income transfers and health care have risen from 21.5 percent of
the budget in 1960 to 57.7 percent in 2008.
c.
Corrected for inflation, the average person today pays more federal taxes in one week than
the average person in 1900 paid in an entire year.
d.
All of the above are true.
56. One dollar of tax revenue ends up costing citizens in the economy
a.
less than one dollar.
b.
exactly one dollar.
c.
more than one dollar.
d.
nothing.
57. In 2006, the income tax payments of the richest 1 percent of Americans accounted for approximately
what percent of all federal income tax revenue?
a.
1 percent
b.
17 percent
c.
40 percent
d.
57 percent
58. In 2006, the income tax payments of the poorest 50 percent of Americans accounted for approximately
what percent of all federal income tax revenue?
a.
3 percent
b.
25 percent
c.
50 percent
d.
76 percent
59. Estimates from the U.S. Treasury Department suggest that the typical family in the highest income
quintile pays approximately what percent of their total income in federal taxes?
a.
6 percent
b.
25 percent
c.
50 percent
d.
76 percent
60. Estimates from the U.S. Treasury Department suggest that the typical family in the lowest income
quintile pays approximately what percent of their total income in federal taxes?
a.
5 percent
b.
25 percent
c.
50 percent
d.
76 percent
61. Based on estimates from the U.S. Treasury Department, the federal tax structure is
a.
highly regressive.
b.
roughly proportional.
c.
highly progressive.
d.
regressive at lower incomes and progressive at higher incomes.
62. Because of which provision in the tax code did more than one-third of all taxpayers either have a zero
tax liability or actually receive money from the IRS in 2006?
a.
Earned Income Tax Credit
b.
Standard Deduction
c.
Marginal Tax Rate
d.
Families with Low Income Credit
63. Government expenditures as a percent of GDP in the United States
a.
are very high in comparison to the rest of the world.
b.
are smaller than for most other high-income industrial countries.
c.
are much smaller today than they were a century ago.
d.
are none of the above.
64. Which of the following most clearly distinguishes government from a private business?
a.
the power to tax
b.
the hiring of educated employees
c.
the production of goods and services
d.
the need to make managerial decisions
65. Which of the following correctly expresses the relationship between the size of government and
economic growth?
a.
Because it is the private sector in which growth occurs, the size of government is generally
unrelated to the rate of economic growth.
b.
When government is small, an increase in its size may increase economic growth, but
beyond some point, further increases in the size of government will reduce economic
growth.
c.
When government is small, an increase in its size may initially lower economic growth,
but when it becomes large enough, expansions in government generally increase the rate
of economic growth.
d.
The rate of economic growth appears to be increasing with the size of government for the
levels of government that we observe in most major industrialized countries.
66. Which of the following is an example of a transfer payment?
a.
wages and salaries paid to the employees of the Internal Revenue Service
b.
purchase of automobiles by a local police department
c.
agriculture subsidies paid to farmers
d.
salaries paid to the college professors of state-operated universities
67. Which of the following is true?
a.
Real federal spending per person was approximately 50 times higher in 1900 than 1800.
b.
Real federal spending per person grew more rapidly during the 19th century than during
the 20th century.
c.
Real federal spending per person was approximately 60 times greater in 1990 than in
1916.
d.
Real federal spending per person has decreased significantly since 1964.
68. Which of the following is true?
a.
In 2002, national defense accounted for more than half of federal spending.
b.
Federal spending on national defense has increase rapidly during the last several decades.
c.
Federal spending on health care programs such as Medicare and Medicaid has increased
rapidly during the last several decades.
d.
Federal spending in the aftermath of hurricane Katrina expanded over 50%.
69. Given the current structure of the Social Security and Medicare programs, the retirement of the baby
boom generation during the years following 2010 will be most likely to
a.
reduce government expenditures on health care and income transfers.
b.
increase government expenditures on health care and income transfers.
c.
result in large budget surpluses.
d.
result in lower tax rates.
70. Compared to 1980, the top marginal federal income tax rate today is
a.
substantially lower and the rate structure is less progressive than in 1980.
b.
substantially lower and the rate structure is more progressive than in 1980.
c.
substantially higher and the rate structure is less progressive than in 1980.
d.
substantially higher and the rate structure is more progressive than in 1980.
71. Which of the following countries had the highest level of government expenditures as a share of GDP
in 2007?
a.
Ireland
b.
United States
c.
Sweden
d.
Australia
72. In 1960, more than half (52 percent) of federal expenditures were for national defense. In 2003,
national defense accounted for approximately
a.
60 percent of the federal budget.
b.
44 percent of the federal budget.
c.
29 percent of the federal budget.
d.
21 percent of the federal budget.
73. A tax dollar collected from an individual or a business costs the private economy more than a dollar
because
a.
the administration and enforcement of the tax system is costly.
b.
record keeping and the other elements of compliance cost are sizable.
c.
the taxes will eliminate some productive exchanges (and cause people to undertake some
counterproductive activities).
d.
All of the above are correct.
74. Measured as a share of GDP, the total government expenditures of the United States are
a.
larger than any country in the world.
b.
smaller than any country in the world.
c.
smaller than the comparable figure for Japan and most Western European countries.
d.
larger than the comparable figure for Japan and most Western European countries.
75. Which of the following provides the bulk of revenue for the federal government?
a.
corporate income taxes and grants from state and local governments
b.
personal income and payroll taxes
c.
user charges and funds borrowed from the general public
d.
corporate income and sales taxes
ESSAY
76. How have the size and functions of government in the United States changed during the last century?
77. As real incomes grow, what happens to federal tax revenues as a share of the economy?
78. How has the structure of the personal income tax changed and the share of taxes paid by various
income groups changed in recent decades?
79. Discuss how size of government can negatively affect economic growth.
ANS:
