ECON 2315 CH 15

The revenue that the government raises by printing money is called A. seignorage. B. an indirect tax. C. fiscal policy. D. a direct tax. Another name for seignorage is A. the surcharge. B. the marginal tax. C. the inflation tax. D. the fiscal tax.

A. seignorage. C. the inflation tax.

Which of the following is NOT an example of government​ capital? A. ten-year Treasury bonds B. public hospitals C. schools D. roads Which type of government capital does the U.S. government mostly invest​ in? equipment Which type of government capital do state and local governments mostly invest​ in? structures

A. ten-year Treasury bonds

Discuss four reasons why the Ricardian equivalence proposition​ isn?t likely to hold exactly. A. Ricardian equivalence might not hold if people face borrowing​ constraints, if they are​ shortsighted, if they fail to leave​ bequests, or if taxes​ aren't lump sum. B. Ricardian equivalence might not hold if people do not face borrowing​ constraints, if they are​ shortsighted, if they fail to leave​ bequests, or if taxes are lump sum. C. Ricardian equivalence might not hold if people face borrowing​ constraints, if they are​ shortsighted, if they fail to leave​ bequests, or if taxes are lump sum. D. Ricardian equivalence might not hold if people do not face borrowing​ constraints, if they are​ shortsighted, if they fail to leave​ bequests, or if taxes​ aren't lump sum.

A. Ricardian equivalence might not hold if people face borrowing​ constraints, if they are​ shortsighted, if they fail to leave​ bequests, or if taxes​ aren't lump sum.

Both transfer programs and taxes affect incentives. Consider a program designed to help the poor that promises each aid recipient a minimum income of​ $10,000. That​ is, if the recipient earns less than​ $10,000, the program supplements his income by enough to bring him up to​ $10,000. Explain why this program would adversely affect incentives for​ low-wage recipients. A. The program has very bad incentive​ effects, because the marginal tax rate for any income earned below​ $10,000 is​ 100%. B. The program has very good incentive​ effects, because the marginal tax rate for any income earned below​ $10,000 is​ 0%. C. The program has very bad incentive​ effects, because the marginal tax rate for any income earned below​ $10,000 is​ 50%. D. The program has very good incentive​ effects, because the marginal tax rate for any income earned below​ $10,000 is minus−​50%. Consider a program with a better incentive effect would be to provide a subsidy to labor income. The program subsidizes labor income at a​ 25% rate. If a person worked 2000 hours per year at a wage of​ $4 per​ hour, to get labor income of​ $8000, the subsidy would increase the​ person's wage by​ 25% to​ $5 per​ hour, so he or she would earn​ $10,000 per year. What are the advantages and disadvantages of this​ program? A. Advantage: there is a substitution effect toward lower work​ effort; disadvantage: there is an income effect toward lower work effort. B. Advantage: there is a substitution effect toward greater work​ effort; disadvantage: there is an income effect toward greater work effort. C. Advantage: there is a substitution effect toward lower work​ effort; disadvantage: there is an income effect toward greater work effort. D. Advantage: there is a substitution effect toward greater work​ effort; disadvantage: there is an income effect toward lower work effort.

A. The program has very bad incentive​ effects, because the marginal tax rate for any income earned below​ $10,000 is​ 100%. D. Advantage: there is a substitution effect toward greater work​ effort; disadvantage: there is an income effect toward lower work effort.

An automatic stabilizer is a provision in the budget that causes A. government spending to rise or taxes to fall automatically when GDP falls. B. an increase in the money supply automatically when GDP falls. C. government spending to fall or taxes to rise automatically when GDP falls. D. a decrease in the money supply automatically when GDP falls. For proponents of antirecessionary fiscal​ policies, what advantage do automatic stabilizers have over other types of taxing and spending​ policies? The advantage of automatic stabilizers over legislated changes in spending and taxes is that they​ _____, while legislation​ _____. A. cause the real interest rate to​ decline; causes the real interest rate to rise B. can be coordinated with monetary​ policy; cannot be coordinated with monetary policy C. occur​ quickly; takes a long time to put in place D. take a long time to put in​ place; occurs quickly

A. government spending to rise or taxes to fall automatically when GDP falls. C. occur​ quickly; takes a long time to put in place

1.) The U.S.​ government's 2009 stimulus package was heavily weighted toward government expenditures​, and its projected impact sparked much debate between Keynesian and classical economists. ​ 2.) In the context of the standard ​IS-LM​ model, Keynesians disagreed with classical economists and projected that the stimulus package would yield a relatively​ __________ increase in output due to the​ __________ of prices in the short run. A. large​; inflexibility B. large​; flexibility C. small​; flexibility D. small​; inflexibility ​ 3.) Because the classical version of the ​IS-LM model envisioned a wealth effect​, it ended up concurring with the Keynesian version that temporary increases in government spending would lead to higher output. ​ 4.) The latest research regarding the size of the government spending multiplier suggests the multiplier is greatest when the economy is A. in recession and the zero lower bound constrains monetary policy. B. expanding and the zero lower bound constrains monetary policy. C. in recession and the zero lower bound is not constraining monetary policy. D. expanding and the zero lower bound is not constraining monetary policy.

A. large​; inflexibility A. in recession and the zero lower bound constrains monetary policy.

In what ways is the government debt a potential burden on future​ generations? A. distortions from lower future tax rates and lower future capital B. distortions from higher future tax rates and lower future capital C. distortions from lower future tax rates and higher future capital D. distortions from higher future tax rates and higher future capital What is the relationship between Ricardian equivalence and the idea that government debt is a​ burden? A. If the Ricardian equivalence proposition is​ valid, a tax cut does not cause consumption to​ rise, so there is a decrease in national saving. B. If the Ricardian equivalence proposition is​ valid, a tax cut does not cause consumption to​ rise, so there is no change in national saving. C. If the Ricardian equivalence proposition is​ valid, a tax cut does not cause consumption to​ rise, so there is an increase in national saving. D. If the Ricardian equivalence proposition is​ valid, a tax cut causes consumption to​ rise, so there is no change in national saving.

B. distortions from higher future tax rates and lower future capital B. If the Ricardian equivalence proposition is​ valid, a tax cut does not cause consumption to​ rise, so there is no change in national saving.

For the past 35​ years, which category of U.S.​ federal, state, and local government tax receipts has been the​ largest? A. taxes on production and imports B. personal taxes C. corporate profit taxes D. contributions from social insurance For the past 35​ years, which category of U.S.​ federal, state, and local government tax receipts has been the​ smallest? A. contributions from social insurance B. corporate profit taxes C. taxes on production and imports D. personal taxes

B. personal taxes B. corporate profit taxes

Define inflation tax​ (also called​ seignorage). A. The inflation tax arises when the government declines to sell​ inflation-indexed bonds. B. The inflation tax arises when the government taxes nominal interest income instead of real interest income. C. The inflation tax arises when the government raises revenue by printing money. D. The inflation tax arises when the government increases statuatory marginal tax rates when inflation increases. How does the government collect the inflation​ tax, and who pays​ it? A. The government collects the inflation tax by printing money to purchase goods and​ services; the tax is paid by anyone who holds money. B. The government collects the inflation tax by increasing excise taxes on goods and​ services; the tax is paid by anyone who buys goods and services. C. The government collects the inflation tax by increasing excise taxes on goods and​ services; the tax is paid by anyone who holds money. D. The government collects the inflation tax by printing money to purchase goods and​ services; the tax is paid by anyone who buys goods and services. Can the government always increase its real revenues from the inflation tax by increasing money growth and​ inflation? A. Yes, because even though the inflation rate is​ high, it generates a rapid economic​ expansion, increasing real money demand enough that seignorage revenue increases. B. No, because a high enough inflation rate causes a severe​ recession, so seignorage revenue decreases. C. No, because a high enough inflation rate causes the real money supply to fall enough that seignorage revenue begins to fall when inflation increases. D. Yes, no matter how high the inflation rate​ is, seignorage revenue rises when inflation​ increases, though at a decreasing rate.

C. The inflation tax arises when the government raises revenue by printing money. A. The government collects the inflation tax by printing money to purchase goods and​ services; the tax is paid by anyone who holds money. C. No, because a high enough inflation rate causes the real money supply to fall enough that seignorage revenue begins to fall when inflation increases.

Why do economists suggest that tax rates be kept roughly constant over​ time, rather than alternating between high and low​ levels? A. Varying between a high and low tax rate leads to higher inflation than keeping the tax rate constant at a medium level. B. Varying between a high and low tax rate leads to more unemployment than keeping the tax rate constant at a medium level. C. Varying between a high and low tax rate leads to a greater average distortion than keeping the tax rate constant at a medium level. D. Varying between a high and low tax rate leads to a lower average distortion than keeping the tax rate constant at a medium level.

C. Varying between a high and low tax rate leads to a greater average distortion than keeping the tax rate constant at a medium level.

Compared with most other OECD​ countries, how high is the ratio of U.S. government spending to​ GDP? A. about average B. higher than most other OECD countries C. lower than most other OECD countries D. the highest of all OECD countries

C. lower than most other OECD countries

Which concept of the government budget deficit indicates what the government budget deficit would be​ (given the tax and spending policies currently in​ force) if the economy were operating at its​ full-employment level? A. the real deficit B. the​ general-equilibrium deficit C. the​ full-employment deficit D. the potential deficit In a​ recession, which deficit concept tends to rise relative to the other​ one, the​ full-employment deficit or the actual​ deficit? actual deficit

C. the​ full-employment deficit

How is government debt related to the government​ deficit? A. The government deficit is not related to the change in the government debt. B. The government debt is the change in the government deficit. C. The government deficit is the change in the government debt times the real interest rate. D. The government deficit is the change in the government debt. What of the following factors would contribute to a large increase in the​ debt-GDP ratio? A. a low deficit relative to the real interest rate times nominal GDP B. a high inflation rate C. a high deficit relative to GDP D. a fast growth rate of nominal GDP

D. The government deficit is the change in the government debt. C. a high deficit relative to GDP

1.) Which of the following is true about​ supply-side economics? A. It maintains that economic behavior may react to changes in​ taxes, but only to a very small degree. B. Its supporters lobbied against ERTA and other similar tax changes in the 1980s. C. It predicted that the supply of labor would decrease significantly as a result of legal changes like ERTA. D. Supply-side economics maintains that economic behavior will react strongly to changes in taxes. ​ 2.) As a result of​ ERTA, A. average tax rates rose and marginal tax rates fell. B. average tax rates fell and marginal tax rates rose. C. both average and marginal tax rates fell. D. both average and marginal tax rates rose. As a result of the 1986 Tax Reform​ Act, A. average tax rates fell and marginal tax rates rose. B. both average and marginal tax rates fell. C. average tax rates rose and marginal tax rates fell. D. both average and marginal tax rates rose. ​3.) The tax revisions in the 1980s led to A. increases in the supply of​ labor, but larger increases than those predicted by​ supply-side economics. B. decreases in the supply of​ labor, but smaller decreases than those predicted by​ supply-side economics. C. decreases in the supply of​ labor, but larger decreases than those predicted by​ supply-side economics. D. increases in the supply of​ labor, but smaller increases than those predicted by​ supply-side economics.

D. Supply-side economics maintains that economic behavior will react strongly to changes in taxes. C. both average and marginal tax rates fell. C. average tax rates rose and marginal tax rates fell. D. increases in the supply of​ labor, but smaller increases than those predicted by​ supply-side economics.

Why is some state and local spending paid for by grants in aid from the Federal government instead of entirely through taxes levied by states and localities on​ residents? A. The benefits to​ education, transportation, and welfare programs accrue to states and​ localities, but these programs are not efficiently administered at the state and local level. B. The benefits to​ education, transportation, and welfare programs accrue to states and​ localities, but these programs are most efficiently administered at the national level. C. The benefits to​ education, transportation, and welfare programs accrue to the entire​ nation, but these programs are not efficiently administered at the state and local level. D. The benefits to​ education, transportation, and welfare programs accrue to the entire​ nation, but these programs are most efficiently administered at the state and local level. What are the advantages and disadvantages of a system of grants in​ aid? A. Advantage: the national government has a broader mandate than state and local​ governments; disadvantage: when state and local governments​ don't have to raise taxes to pay for their​ spending, they tend to spend too much. B. Advantage: the administration of the programs may become​ politicized; disadvantage: the national government can identify the features that make these programs have nationwide benefits. C. Advantage: the national government is more efficient than state and local​ governments; disadvantage: the national government may use the system to control the state and local governments. D. Advantage: the national government can identify the features that make these programs have nationwide​ benefits; disadvantage: the administration of the programs may become politicized.

D. The benefits to​ education, transportation, and welfare programs accrue to the entire​ nation, but these programs are most efficiently administered at the state and local level. D. Advantage: the national government can identify the features that make these programs have nationwide​ benefits; disadvantage: the administration of the programs may become politicized.

Explain the difference between the overall government budget deficit and the primary deficit. A. The overall budget deficit equals the primary budget deficit minus net interest payments. B. The overall budget deficit equals the primary budget deficit minus government investment spending. C. The overall budget deficit equals the primary budget deficit plus government investment spending. D. The overall budget deficit equals the primary budget deficit plus net interest payments. Explain the difference between the primary deficit and the primary current deficit. A. The primary current budget deficit equals the primary budget deficit minus government investment. B. The primary current budget deficit equals the primary budget deficit plus government investment. C. The primary current budget deficit equals the primary budget deficit plus net interest payments. D. The primary current budget deficit equals the primary budget deficit minus net interest payments. Why are three deficit concepts​ needed? A. The overall deficit tells how much the government must borrow currently to pay for its​ outlays; the primary deficit tells whether future revenues are sufficient to pay for future​ programs; the primary current deficit tells whether current revenues are sufficient to pay for current programs other than government entitlement programs. B. The overall deficit whether future revenues are sufficient to pay for future​ programs; the primary deficit tells tells how much the government must borrow currently to pay for its​ outlays; the primary current deficit tells whether current revenues are sufficient to pay for current programs other than government entitlement programs. C. The overall deficit tells how much the government must borrow currently to pay for its​ outlays; the primary deficit tells whether current revenues are sufficient to pay for current​ programs; the primary current deficit tells whether current revenues are sufficient to pay for current programs other than government investment. D. The overall deficit whether current revenues are sufficient to pay for current​ programs; the primary deficit tells tells how much the government must borrow currently to pay for its​ outlays; the primary current deficit tells whether current revenues are sufficient to pay for current programs other than government investment.

D. The overall budget deficit equals the primary budget deficit plus net interest payments. A. The primary current budget deficit equals the primary budget deficit minus government investment. C. The overall deficit tells how much the government must borrow currently to pay for its​ outlays; the primary deficit tells whether current revenues are sufficient to pay for current​ programs; the primary current deficit tells whether current revenues are sufficient to pay for current programs other than government investment.

Which of these statements best characterizes the movement of the U.S. federal government​ debt-GDP ratio since​ 1939? A. The​ debt-GDP ratio fell sharply in World War​ II, rose from 1946 to the early​ 1970s, fell from the 1980s to​ 2000, and has been rising since then. B. The​ debt-GDP ratio fell sharply in World War​ II, rose from 1946 to the early​ 1970s, fell in the 1980s and early​ 1990s, rose from the​ mid-1990s to​ 2000, and has been falling since then. C. The​ debt-GDP ratio rose sharply in World War​ II, declined from 1946 to the early​ 1970s, rose from the 1980s to​ 2000, and has been declining since then. D. The​ debt-GDP ratio rose sharply in World War​ II, declined from 1946 to the early​ 1970s, rose in the 1980s and early​ 1990s, declined from the​ mid-1990s to​ 2000, and has been rising since then. Which two factors would both cause the​ debt-GDP ratio to rise​ quickly? A. a low deficit relative to GDP and a fast rate of GDP growth B. a low deficit relative to GDP and a slow rate of GDP growth C. a high deficit relative to GDP and a slow rate of GDP growth D. a high deficit relative to GDP and a fast rate of GDP growth

D. The​ debt-GDP ratio rose sharply in World War​ II, declined from 1946 to the early​ 1970s, rose in the 1980s and early​ 1990s, declined from the​ mid-1990s to​ 2000, and has been rising since then. C. a high deficit relative to GDP and a slow rate of GDP growth

What are the major components of government​ outlays? A. government​ purchases, government​ consumption, and taxes B. taxes, government​ consumption, and net interest payments C. government​ purchases, transfer​ payments, and government investment D. government​ purchases, transfer​ payments, and net interest payments What are the major sources of government​ revenues? A. personal​ taxes, direct business​ taxes, and indirect business taxes B. contributions for social insurance and indirect business taxes C. personal​ taxes, contributions for social​ insurance, indirect business​ taxes, and corporate taxes D. personal​ taxes, welfare​ payments, indirect business​ taxes, and sales taxes How does the composition of the Federal​ government's outlays and revenues differ from that of state and local​ governments? A. Most spending on non-defense goods and services is done by state and local governments. B. The federal government spends far less on transfers than on nonmilitary goods and services. C. State and local governments are large payers of net​ interest, while the federal government is a net recipient of interest payments. D. Most of state and local​ governments' revenues come from personal taxes and contributions for social​ insurance, while the federal government relies more heavily on indirect business taxes​ (sales taxes)

D. government​ purchases, transfer​ payments, and net interest payments C. personal​ taxes, contributions for social​ insurance, indirect business​ taxes, and corporate taxes A. Most spending on non-defense goods and services is done by state and local governments.

Which of these represents an example in which there is a difference between the average tax rate and the marginal tax rate on a​ person's income. A. no tax on income below​ $15,000, then a tax at​ 20% on income above​ $15,000, for a person with an income of​ $12,000. B. a tax at​ 20% on all​ income, for a person with an income of​ $75,000. C. a tax at​ 20% on all income up to​ $100,000, for a person with an income of​ $47,000. D. no tax on income below​ $15,000, then a tax at​ 20% on income above​ $15,000, for a person with an income of​ $30,000. For a constant​ before-tax real​ wage, which type of tax rate most directly affects how wealthy a person​ feels? average tax rate Which type of tax rate affects the reward for working an extra​ hour? marginal tax rate

D. no tax on income below​ $15,000, then a tax at​ 20% on income above​ $15,000, for a person with an income of​ $30,000.

1.) Under a​ pay-as-you-go system, as described in the​ article, the payroll taxes paid by​ today's workers A. pay interest on loans taken out to pay for​ workers' future retirement needs. B. are spent on other​ non-Social Security programs today. C. are set aside for those same workers when they retire. D. pay for the benefits of those receiving benefits today. ​ 2.) Which of the following statements accurately represents dates given in the Application​ box? A. In​ 2034, payouts from Social Security as a percentage of GDP are scheduled to increase sharply. B. The Social Security trust fund is scheduled to be exhausted by 2034. C. In​ 2021, payouts from Social Security are estimated to exceed tax revenues by about​ 1.3% of GDP. D. In​ 2016, Social Security is scheduled to start spending more tax revenue than it takes in. ​ 3.) One of the possible fixes for Social Security would be an increase in taxes. Which of the​ following, based on the Application​ box, is a downside to this​ method? A. Increases in taxes distort labor supply decisions. B. Increases in taxes could pay for future recipients but not current recipients. C. Increases in taxes would have to be invested in​ high-risk choices like the stock market. D. None of the above are mentioned in the Application box as a possible downside.

D. pay for the benefits of those receiving benefits today. B. The Social Security trust fund is scheduled to be exhausted by 2034. A. Increases in taxes distort labor supply decisions.