Econ- Chapter 11

Crowding out results in a decrease in a. transfer payments. b. defense spending. c. private spending. d. government spending.

c. private spending.

Refer to Exhibit 11-4. If a person's taxable income is $50,000, how much does he pay in taxes? a. $9,250 b. $8,500 c. $24,150 d. $12,500

a. $9,250

Which of the following statements is true? a. A budget deficit occurs when government expenditures exceed tax receipts during any single year. b. The public debt is the total amount the federal government owes its creditors. c. The public debt is greater than the net public debt. d. b and c e. a, b, and c

a. A budget deficit occurs when government expenditures exceed tax receipts during any single year.,b. The public debt is the total amount the federal government owes its creditors.,c. The public debt is greater than the net public debt.

Which of the following illustrates the wait-and-see lag? a. Policymakers believe an economic downturn has occurred, but they decide not to take action until they are sure. b. Policymakers are in the process of proposing policy measures to deal with the current economic slowdown. c. Policymakers first learn of the recession when it is five months old. d. Policymakers implement policy X, but it will be a few months before it starts working. e. Policymakers agree to policy X, but it will be at least two months before the policy is implemented.

a. Policymakers believe an economic downturn has occurred, but they decide not to take action until they are sure.

Which of the following illustrates the data lag? a. The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006. b. Policymakers wait and see what is really going on with the economy. c. Policymakers implement policy X on September 12, 2006, but the effects are not felt until six months later. d. The data lag is illustrated equally well by a, b, and c.

a. The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006.

__________ flows from government to households. a. A transfer payment b. A tax payment c. The Laffer Curve d. Crowding out

a. A transfer payment

Fiscal policy may not work as policymakers intend it to work because of a. crowding out. b. lags. c. the position of the physical production possibilities frontier. d. a and b e. a, b, and c

a. crowding out.,b. lags.

A "flat tax" is another term for __________ tax. a. a progressive b. a proportional c. a regressive d. the inflation

b. a proportional

An expansionary fiscal policy will a. always result in a budget deficit. b. always result in a budget surplus. c. sometimes result in a budget deficit. d. never result in a budget surplus. e. More information is necessary to answer this question.

c. sometimes result in a budget deficit.

Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose a. an increase in government purchases. b. a decrease in government purchases. c. an increase in taxes. d. a and c e. b and c

a. an increase in government purchases.

Fiscal policy refers to a. changes in the amount of government expenditures and taxes to achieve particular economic objectives. b. changes in the composition of a given amount of government expenditures to achieve particular economic objectives. c. changes in interest rates initiated by government action. d. any change in government spending or taxes that has the intended effect of destabilizing the economy.

a. changes in the amount of government expenditures and taxes to achieve particular economic objectives.

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag. a. effectiveness b. transmission c. legislative d. data

a. effectiveness

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $500 million. This is an example of a. incomplete crowding out. b. complete crowding out. c. zero crowding out. d. a and c e. none of the above

a. incomplete crowding out.

To eliminate an inflationary gap, Keynesian theory indicates that government should a. increase taxes. b. decrease taxes. c. increase government purchases. d. decrease government purchases. e. either a or d

a. increase taxes.,d. decrease government purchases.

Refer to Exhibit 11-2. At point B, if we cut tax rates slightly, tax revenues a. increase. b. decrease. c. will not change. d. drop to zero.

a. increase.

With complete crowding out, an increase in government spending a. is completely offset by a reduction in private spending. b. is matched by an increase in private spending. c. results in an increase in aggregate supply. d. results in an increase in aggregate demand.

a. is completely offset by a reduction in private spending.

Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is complete crowding out. As a result, the aggregate demand (AD) curve in the exhibit a. maintains its present position at AD1. b. shifts rightward, but does not shift rightward by enough to go through point 2. c. shifts rightward by enough to go through point 2. d. shifts leftward.

a. maintains its present position at AD1.

A federal budget deficit a. occurs when government expenditures exceed tax revenues. b. occurs when tax revenues exceed government expenditures. c. occurs when transfer payments exceed tax revenues. d. will always result when Congress and the president cannot agree on expenditures. e. occurs when monetary policy works in the opposite direction of fiscal policy.

a. occurs when government expenditures exceed tax revenues.

The U.S. income tax is currently a __________ tax. a. progressive b. proportional c. regressive d. proactive

a. progressive

An example of automatic fiscal policy is a. the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession. b. when interest rates automatically fall in a recession. c. Congress passes a law during a recession that automatically extends unemployment benefits for those whose benefits will soon expire. d. a and b e. a, b and c

a. the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession.

Which of the following is an example of crowding out? a. A decrease in the rate of growth of the money supply which causes a decrease in Real GDP. b. A deficit causes an increase in interest rates, which causes a decrease in investment spending. c. An increase in tariffs which causes a decrease in imports. d. A decrease in government housing subsidies which causes an increase in private spending on housing.

b. A deficit causes an increase in interest rates, which causes a decrease in investment spending.

The unique feature of a progressive income tax is that the higher one's income (up to some point), the __________ one pays. a. more taxes b. higher the tax rate c. less taxes d. lower the tax rate e. none of the above

b. higher the tax rate

If there is complete crowding out as a result of an increase in government spending there will be a. a decrease in aggregate demand. b. no change in aggregate demand. c. an increase in aggregate demand. d. a downward movement along the aggregate demand curve

b. no change in aggregate demand.

A federal budget surplus a. occurs when government expenditures exceed tax revenues. b. occurs when tax revenues exceed government expenditures. c. occurs when tax revenues exceed transfer payments d. occurs when monetary policy works in the opposite direction of fiscal policy. e. is an impossibility

b. occurs when tax revenues exceed government expenditures.

The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

b. rise; fall

Keynesians believe a. in laissez-faire. b. that equilibrium may exist at less than full employment. c. in the use of fiscal policy to stabilize the economy. d. b and c e. all of the above

b. that equilibrium may exist at less than full employment.,c. in the use of fiscal policy to stabilize the economy.

Between the data lag and the legislative lag falls the __________ lag. a. effectiveness b. wait-and-see c. expansionary d. legislative

b. wait-and-see

Suppose the government attempts to stimulate the economy by increasing spending without increasing taxes. Which of the following statements is most likely to be accepted by someone who believes in crowding out? a. The government's actions will have their intended effect. b. The government's actions will cause businesses to become more optimistic about the economy, and they will increase their output even more than the government had intended. c. The government's actions will raise interest rates, causing decreased investment and consumption, and the economy will not expand as much as the government had intended. d. This is a trick question, because the federal government is required by law to increase taxes by the same amount as it increases expenditures.

c. The government's actions will raise interest rates, causing decreased investment and consumption, and the economy will not expand as much as the government had intended.

Fiscal policy refers to a. efforts to balance a government's budget. b. changes in the money supply to achieve particular economic goals. c. changes in government expenditures and taxation to achieve particular economic goals. d. the change in private expenditures that occurs as a consequence of changes in government spending.

c. changes in government expenditures and taxation to achieve particular economic goals.

Suppose Congress increases income taxes. This is an example of a. expansionary fiscal policy. b. expansionary monetary policy. c. contractionary fiscal policy. d. contractionary monetary policy.

c. contractionary fiscal policy.

That part of the deficit that results from a downturn in economic activity is called the __________ deficit. a. net b. gross c. cyclical d. structural

c. cyclical

Supply-side economists believe reductions in tax rates can a. shift the aggregate demand curve to the left. b. shift the short run aggregate supply curve to the left. c. increase output and lower prices. d. decrease output and lower prices.

c. increase output and lower prices.

If the structural deficit is $750 billion and the cyclical deficit is $150 billion, it follows that the __________ is __________ billion. a. public debt; $900 b. total budget deficit; $600 c. total budget deficit; $900 d. net public debt; $600 e. none of the above

c. total budget deficit; $900

A curve showing the relationship between tax rates and tax revenues is called a __________ curve. a. Phillips b. Keynesian c. Gaussian d. Laffer

d. Laffer

When the economy is in a recessionary gap, Keynesian economists will often advocate expansionary policy measures. Why? a. Keynesians believe the economy sometimes gets stuck in a recessionary gap and can't get itself out without government intervention. b. Keynesians believe the economy itself sometimes takes too long to eliminate the recessionary gap and return to full-employment output. c. Keynesians are generally in favor of increasing taxes. d. a and b e. a and c

d. a and b a. Keynesians believe the economy sometimes gets stuck in a recessionary gap and can't get itself out without government intervention., b. Keynesians believe the economy itself sometimes takes too long to eliminate the recessionary gap and return to full-employment output.

Reductions in private spending as a result of increased government spending or borrowing is called a. pushing in. b. rushing forth. c. crowding in. d. crowding out.

d. crowding out.

A balanced budget occurs when a. the national debt is reduced to zero dollars. b. a budget deficit during one year is matched by a budget surplus in the next year. c. transfer payments equal tax revenues. d. government expenditures equal tax revenues. e. the deficit-GDP ratio equals one

d. government expenditures equals tax revenues.

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, then that individual must have a(n) __________ tax rate of 30 percent. a. average b. fixed c. total d. marginal

d. marginal

The deficit that exists when the economy operates at full employment is called the __________ deficit. a. net b. gross c. cyclical d. structural

d. structural

Fiscal policy is implemented primarily by a. local governments alone. b. the defense department. c. state governments alone. d. the federal government. e. state and local governments.

d. the federal government.

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag. a. data b. wait-and-see c. legislative d. transmission

d. transmission

Some economists believe that higher marginal income tax rates __________ the incentive to work and thus shift the __________. a. increase; AD curve to the right b. increase; SRAS curve to the right c. increase; SRAS curve to the left d. decrease; AD curve to the left e. decrease; SRAS curve to the left

e. decrease; SRAS curve to the left

Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while contractionary fiscal policy actions include __________ government spending and/or __________ taxes. a. increasing; increasing; decreasing; decreasing b. decreasing; decreasing; increasing; increasing c. increasing; decreasing; increasing; decreasing d. decreasing; increasing; increasing; decreasing e. increasing; decreasing; decreasing; increasing

e. increasing; decreasing; decreasing; increasing