Chapter 15. Economic Policy (InQuizitive)
Imagine that the nation has just entered an unexpected recession. Place the following items in the order in which we would expect them to occur according to a textbook approach to monetary policy.
- The Federal Reserve lowers the target for the federal funds rate. - Consumer interest rates decrease. - The number of businesses and individuals taking out loans increases. - Economic growth recovers. - The Federal Reserve raises the target for the federal funds rate.
Put these steps in the "textbook" version of the budget process in order, from the one that's supposed to happen earliest to the one that's supposed to happen latest in the process.
- The president submits a budget request to Congress. - CBO issues its outlook for the coming fiscal year. - The House votes on its budget resolution. - A conference committee reconciles any differences between the chambers.
Put these steps in the "textbook" version of the budget process in order, from the one that's supposed to happen earliest to the one that's supposed to happen latest in the process.
- The president submits a budget request to Congress. - The CBO issues its outlook for the coming fiscal year. - The House votes on its budget resolution. - The Senate votes on its budget resolution. - A conference committee reconciles any differences between the chambers.
Put the following budget categories in order from the one that takes up the largest percentage of the federal budget to the one that takes up the smallest percentage of the federal budget.
- mandatory spending such as Social Security and Medicare - nondefense discretionary spending - interest on the national debt
When the economy is at full employment, the unemployment rate is around what level?
4-4.5 percent
What do we call the process by which Congress determines how government money will be spent and revenue will be raised?
Budget making
What budget process has become the default method by which Congress has adopted most of its budgets since 1980?
Budget reconciliation
Match each agency with its function.
Congressional Budget Office - provides independent expertise on budgeting to the legislative branch National Economic Council - coordinates economic policy for the president Council of Economic Advisers - provides objective data on the state of the economy to the president Office of Management and Budget - provides independent expertise on budgeting to the executive branch
Which parts of the federal government played a major role in stabilizing the economy after the 2008 economic crisis?
Correct Answer(s) Congress the president the Federal Reserve the Treasury Department Incorrect Answer(s) the Supreme Court
Which of the following statements about balanced budgets are correct?
Correct Answer(s) Expenditures are equal to revenue. The federal government has rarely achieved a balanced budget in the twenty-first century. Incorrect Answer(s) A balanced budget should have a 2-5 percent budget deficit. Balanced budgets first became a central economic goal in the 1800s, in the wake of the Civil War.
Why is fiscal policy often limited in effectiveness?
Correct Answer(s) Increasing taxes or cutting spending during economic boom times is politically difficult. It often cannot be implemented quickly enough to affect the business cycle. Incorrect Answer(s) The Federal Reserve is often unwilling to take the necessary steps to keep fiscal policy going. The amount of currency in circulation cannot be changed quickly enough.
What advantages does the budgetary reconciliation process offer Congress?
Correct Answer(s) It is easier to pass a single huge bill than lots of small bills. Reconciliation bills in the Senate cannot be filibustered. Reconciliation bills can reduce the deficit. Incorrect Answer(s) Congress only has to worry about budget reconciliation every four or five years.
Identify the correct and incorrect statements about gross domestic product (GDP).
Correct Answer(s) It measures the value of a country's economic output. It is a traditional measure of a country's economic growth. Incorrect Answer(s) It usually goes up in recessions and down during good economic times. It measures the strength of a country's education system and life expectancy.
Which of the following statements can we conclude from the chart?
Correct Answer(s) OECD countries vary substantially in their tax rates as a percentage of GDP. North American countries, in general, seem to charge lower tax rates as a percentage of GDP than do European countries. The United States has a lower tax rate as a percentage of GDP than most other OECD countries. Incorrect Answer(s) The United states has an above average tax rate as a percentage of GDP as compared to the rest of the OECD.
Which of the following are examples of negative externalities?
Correct Answer(s) Someone smoking a cigarette creates second-hand smoke. A coal-fired plant produces air pollution. Incorrect Answer(s) National parks allow anyone to use them. Research and development produce new breakthroughs.
Which of the following statements would a Keynesian agree with?
Correct Answer(s) Tax cuts and increased spending during recessions are good ideas. The government can soften the effects of a recession. Governments should run deficits during recessions. Incorrect Answer(s) Tax increases are usually better than increasing spending. Governments should give back to the people through tax cuts when the economy is booming.
Which of the following are sources of political independence for the Federal Reserve Board?
Correct Answer(s) The Fed is an independent agency. Fed members serve 14-year terms. The Fed does not depend on the federal government for its operating budget. Incorrect Answer(s) The Fed governors are chosen by member banks rather than by politicians. The Fed's power comes from the Constitution.
Which of the following can we conclude from the figure?
Correct Answer(s) The United States has a trade surplus in services. The United States has a trade deficit in goods. America's trade deficit has grown substantially since 1990. Incorrect Answer(s) America has a bigger trade surplus from services than it does a trade deficit from goods.
In which of the following ways does the federal government promote the free market and economic growth?
Correct Answer(s) The patent process creates incentives for inventors. The Security and Exchange Commission provides a transparent capital market. The courts ensure property rights and the rule of law. Incorrect Answer(s) Congress encourages economic equality through a high minimum wage. The Treasury Department controls how much citizens are allowed to invest outside the country.
Which of the following are tools that the Federal Reserve can use to carry out monetary policy?
Correct Answer(s) engaging in open-market operations changing the reserve requirement changing the discount rate Incorrect Answer(s) cutting discretionary spending creating a new progressive tax
Which of the following events led to very large yearly increases in the U.S. federal deficit, either in dollar terms or in percentage of GDP terms?
Correct Answer(s) financial crisis outbreak of war Incorrect Answer(s) natural disaster terrorist attacks
Which of the following taxes are regressive taxes?
Correct Answer(s) payroll tax sales tax Incorrect Answer(s) income tax
Which of the following are the responsibilities of the Treasury Department?
Correct Answer(s) print currency sell government bonds collect taxes Incorrect Answer(s) change the federal funds rate target set the reserve requirement
Watch the animation, and then determine which of the following players have a role in the budget-making process.
Correct Answer(s) the House of Representatives the Senate the president Incorrect Answer(s) the Supreme Court
Which of the following factors lead to an increasing trade deficit?
Correct Answer(s) the growing value of the dollar American consumers preferring foreign goods the low cost of foreign labor Incorrect Answer(s) strong foreign economies
The Federal Reserve has a dual mandate (or responsibility) that requires it to focus first and foremost on which two things?
Correct Answer(s) unemployment inflation Incorrect Answer(s) balanced budgets inequality exchange rates
Which of the following examples represent a trade-off between economic goals?
Correct Answer(s) wanting to promote responsible budgets versus wanting to win reelection in the fall wanting to prevent inflation versus wanting to promote full employment wanting to protect American jobs versus wanting to promote free markets Incorrect Answer(s) wanting to balance the budget versus wanting to reduce foreign debt
A trade deficit means a country is exporting more than it is importing.
False
America currently runs a trade surplus.
False
Congress writes its tax bills and spending bills at the same time.
False
Despite party conflict, Congress is regularly able to pass a yearly budget.
False
In 1971, the United States went on the gold standard, pegging the value of the dollar to the value of gold on the world market.
False
In the "textbook" version of the budget process, the appropriations process happens before the budgeting process.
False
The current account represents the difference between the government's expenditures and its revenue in a given year.
False
Complete the following statement. The _____________ is the main part of the government responsible for ensuring that _______________ stays at a reasonable rate, usually around 2 to 3 percent per year.
Federal Reserve, inflation
What's the term for government spending on budget items such as interest payments on the national debt, Social Security, and Medicare?
Mandatory
Complete the following statement. The __________________ deals more with the political side of economic policy, whereas the ________________ deals more with providing technical assistance to the president.
National Economic Council, Council of Economic Advisors
Which group sets the president's proposed budget for the year?
Office of Management and Budget
Select a point on the Laffer curve where a supply-side economist would argue we could cut taxes and still raise overall revenues.
Right side of the curve
Complete the following statement. _______________ economic theory believes that ______________ tax rates will stimulate the economy, even during good economic times, by encouraging people to save, invest, and produce more goods and services.
Supply-side, lower
Based on the figure, the Fed's balance sheet grew substantially after what event?
The Great Recession
Complete the following statement. The normal expansion and contraction of the economy is known as __________________.
The business cycle
Which statement would Keynesian economists agree with?
The government can stimulate and stabilize the economy through taxing and spending.
If the value of the U.S. dollar declines from 1 dollar buying 0.9 euro to 1 dollar buying 0.7 euro, what happens to the trade deficit (all else being equal)?
The trade deficit shrinks.
According to the charts, what statement best describes the changes in federal taxes in the past fifty years?
They have become more regressive.
What is the most important cabinet-level department for implementing economic policy?
Treasury
In general, Democrats are more likely to favor protectionist policies than are Republicans.
True
The purpose of the United States Trade Representative is to negotiate treaties with foreign governments and with global trade-policy organizations.
True
Complete the following statement. Inflation generally rewards ___________ and generally punishes ____________.
debtors, savers
Review the figure, and then complete the following statement. Relative to its level in 1970, federal discretionary spending today has _______________ while its spending on interest has ________.
decreased, stayed the same
What was the economic downturn in the late 1920s and 1930s an example of?
depression
Complete the following statement. The worst condition that the economy can experience is known as a(n) ______________.
economic depression
Complete the following statement. Taxing and spending are related to __________ policy, whereas _______________ policy is related to regulating the economy through manipulating credit and interest rates.
fiscal, monetary
Use the chart to complete the following statement. In the late 1970s and 1980s, the misery index was particularly high because of _________________. In the late 2000s, the misery index spiked because of ________________.
high inflation, high unemployment
Use the chart to complete the following statement. the late 1970s and 1980s, the misery index was particularly high because of _________________. In the late 2000s, the misery index spiked because of ________________.
high inflation, high unemployment
Complete the following statement. Donald Trump's tax cut disproportionally benefitted ____________________ -income people, making the income tax __________________ progressive.
high, less
The general name for a course of action pursued by government to address a specific problem is __________ policy. One subset of that is ____________ policy, which includes both fiscal and monetary varieties.
public, economic
Complete the following statement.In modern times, Congress _________ passes all 12 appropriations bills using the regular process. In 2020, Congress used _________ in the budget process.
rarely, an omnibus bill and continuing resolutions
According to monetarist theory, what is the most important determinant of economic activity?
the amount of money in circulation
Complete the following statement. Because _____________________ increases as a person's income goes up, income tax is ___________________________.
the marginal tax rate, progressive
One of the _____________ things that can happen to an economy is a prolonged period of decreasing prices of general goods and services. This is known as _______________.
worst, deflation
