Ch 23 Macro Practice Questions

If a government is using spending and tax policy to attempt to stabilize the economy, it is using:

fiscal policy

How are payroll taxes collected?

on all income, regardless of its source

During the economic downturn of the 1970s, lenders to Latin American countries raised interest rates. This caused Latin American debt to balloon, and these countries could not pay their debts. This is an example of:

a debt crisis

President Johnson's use of a temporary 10% surcharge on income taxes is an example of _____ policy.

contractionary fiscal

(Figure: Short- and Long-Run Equilibrium II) Use Figure: Short- and Long-Run Equilibrium II. If the economy is in short-run macroeconomic equilibrium atE1, the government might use _____ fiscal policy to shift the aggregate demand curve to the _____.

contractionary; left

In response to an overheating economy, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.

contractionary; lowers; raises

Discretionary fiscal policy refers to temporary changes in:

government spending or taxes to close a recessionary or inflationary gap.

What is social insurance?

government-provided insurance against bad outcomes such as unemployment, illness, disability, or outliving your savings

If the economy is at full employment, expansionary fiscal policy is MOST likely to lead to:

higher inflation

_____ income taxes and payroll taxes _____ after-tax incomes, which _____ consumption and therefore lower aggregate expenditure.

higher; lower; decrease

If the economy is at potential output, and consumer spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is a(n):

increase in government spending

Taxes _____ as GDP rises. This is an example of a(n) _____ stabilizer.

increase; automatic

(Figure: Fiscal Policy Options) Use Figure: Fiscal Policy Options. If the aggregate demand curve isAD', the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

increase; decrease

Suppose the government decreases taxes. As a result, disposable income will ___________ and total consumer spending will ___________.

increase; increase

Please complete the statements regarding a government budget deficit. Suppose the government reduced tax rates while also increasing government spending, raising the budget deficit to 9% of GDP, while nominal GDP is rising at 6% per year. If this policy continues, the budget deficit will ________. If this policy continues, future tax rates will likely________. If this policy continues, future government spending will likely________.

increase; increase; decrease

The multiplier effect of a(n) _____ in transfer payments is _____ that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

increase; smaller than

Time lags associated with fiscal policy implementation suggest that:

increases in spending to fight a recessionary gap may occur too late.

An expansionary fiscal policy either _____ government spending or _____ taxes.

increases; decreases

If overall spending declines, causing the economy to contract, the government could counter this by:

increasing government spending

In Canada, all the provinces provide health care to all citizens and permanent residents. This is an example of:

social insurance

What takes up the largest portion of federal spending?

social insurance programs %61

What does the federal government spend most of it's money on?

social insurance programs and the military

Unfunded liabilities refers to promises made by the government, such as:

social security and Medicare payments

In the United States, the largest components of federal government spending are:

social security, unemployment, and labor

Tax expenditures are:

special deductions, credits, or exemptions that lower your tax obligations.

Unfunded liabilities of a government are:

spending commitments, like Social Security benefits, made without a plan to pay for them

The marginal tax rate is the:

tax rate you pay if you earn another dollar

Fiscal policy is the use of _____ to shift the aggregate demand curve.

taxes, government transfers, or government purchases

The New Deal was created to counter the effects of:

the Great Depression

What did the New Deal create?

the Securities and Exchange Commission (public works programs), social security and unemployment insurance

Do the federal or state governments spend more?

the federal government spends more money than state and local governments combined

What is income?

the flow of money that you receive in a year, from all sources

In December 2019, U.S. debt held by the public was approximately $17 trillion, intragovernmental debt was approximately $6 trillion, and the total public debt was approximately $23 trillion. What was the net government debt?

$17 trillion

The standard deduction is $12,200 for a single person. Suppose you file as a single person, and your current income is $35,000. Your taxable income is:

$22,800

Payroll taxes are 6.2% of income, and Medicare taxes are 2.9% of income. Your employer owes you $665. How much will your work cost your employer?

$725.52

The standard deduction for a single person is $12,200. Based on this table, if your total income is $131,000, what is the amount of tax you will pay on your taxable income?

(10%(9700) + 12%(39,475 - 9700) + 22%(84200 - 39475) + 24%(118,780 - 84200)) = $22,681

The standard deduction for a single person is $12,200. Based on this table, if your total income is $47,000, what is the amount of tax you will pay on your taxable income?

(10%(9700) + 12%(total income- standard deduction)- 9,700)) = 3982

faces an inflationary gap

(Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. AtE3, the economy:

Y2-Y1

(Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. Which equation measures a recessionary gap?

Y1-YP

(Figure: Short-Run Equilibrium) Use Figure: Short-Run Equilibrium. The diagram indicates a short-run inflationary gap. The size of the inflationary gap is:

What are income taxes assessed on?

all income

The national debt:

grows when the government runs a deficit

Fiscal policy works best when it is:

timely, targeted, and temporary

Earned income refers to:

wages from an employer or net earnings from self-employment

(Figure: Fiscal Policy I) Use Figure: Fiscal Policy I. Suppose that this economy is in equilibrium atE1. If there is an increase in government purchases,_____will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD1;right; increase; increase

_____ is an automatic stabilizer.

Medicaid

You're watching an interview where the speaker favors greatly increasing government spending. "The Social Security plan is a looming disaster. The program established to help our elderly and most vulnerable will leave millions desolate in their retirement." Which statement about the speaker's viewpoint is TRUE? A) There's no truth to their concern. The Social Security fund is tracked to grow with real GDP. B) The Social Security program represents a broken promise, as the program will cease paying benefits by the time young people reach retirement. C) Social Security may not pay as much as it did for previous generations, but it will still provide a partial income for retirees. D) A strong economy will further undermine the Social Security program over the decades.

Social Security may not pay as much as it did for previous generations, but it will still provide a partial income for retirees.

Your friend is concerned about the rise in government spending from the Great Recession and the COVID-19 pandemic, resulting in a larger amount of publicly held debt. "We don't earn enough to pay it off. If the median household income is only around $70,000, then each family owes $5,000 more than we even make." Which of the following would ease their concern?

The federal government has resources that households don't.

(Figure: Fiscal Policy Options) Use Figure: Fiscal Policy Options. If the aggregate demand curve isAD':

an expansionary fiscal policy may be warranted.

Which of these exemplifies an expansionary fiscal policy?

an increase in unemployment benefits

Fiscal policies that require no government action but are expansionary when the economy contracts and contractionary when the economy expands are known as:

automatic stabilizers

Which services are provided by the local government?

bus services, water and sewer, local parks/ playgrounds, firefighters/police (emergency services), public elementary and secondary schools (highest amount of spending)

Changes in the budget balance may result from _____.

changes in economic policy or fluctuations in the economy

Which of these is NOT a tool of fiscal policy?

changes in the money supply

Congress increases personal income tax rates to balance the budget. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; contractionary; decrease

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

decrease; expansionary; increase

Payroll taxes are taxes assessed on:

earned income

Which services are provided by the state government?

employment/ income support (1/2 of spending), Medicaid, unemployment insurance, pensions

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically _____ when the economy _____ and automatically _____ when the economy _____.

expansionary; contracts; contractionary; expands

Suppose that the government increases spending more than is necessary to close a recessionary gap. What is the MOST likely result?

inflation will increase

The larger the amount of outstanding public debt, the:

larger the fraction of the federal budget deficit the government must devote to interest payments

In 1913, the sixteenth amendment gave Congress the power to:

levy an income tax

Which fiscal policy would make a budget surplus larger or a budget deficit smaller?

lower government transfers

To close a recessionary gap with fiscal policy, the government could:

lower the corporate income tax rate

Food stamps are an example of:

mandatory spending

A $100 million increase in government spending increases equilibrium GDP by:

more than $100 million

Programs like Social Security and Medicare are funded through:

payroll taxes

Where does the majority of the federal government's revenue come from?

payroll taxes or income taxes (rest come from cooperate taxes)

What are the primary taxes at the U.S. federal level?

personal income taxes, corporate profit taxes, and payroll taxes

Suppose the city of Strelsau has a 10% property tax on rental properties. Rudolph makes $100,000 a year and pays $19,000 per year in rent. Fritz makes $40,000 per year and spends $7800 in rent. Both Rudolph and Fritz rent from Michael. a. How is Strelsau's property tax best described? b. Who most likely actually pays the tax on rental property?

regressive; the renters

What is fiscal policy?

the government's use of spending and tax policies to attempt to stabilize the economy; and adjusting its taxes and spending to reduce output fluctuations (trying to keep GDP close to potential output)

An example of an automatic stabilizer is:

the increase in tax receipts when GDP rises

The effectiveness of fiscal policy increases through:

the multiplier effect