Econ 330

A tax multiplier equal to −2.50 would imply that a $400 tax increase would lead to a:

$1,000 decrease in real GDP.

We can say a country is following a progressive tax rate if a person is charged:

$1,000 on an income of $20,000, $5,000 on an income of $50,000, and $20,000 on an income of $100,000.

Identify the correct definition of the crowding-out effect.

A reduction in private-sector spending as a result of federal budget deficits financed by U.S treasury borrowing

____ is an example of an automatic stabilizer.

A transfer payment

_____accounted for the lowest share of the total federal government expenditure in 2016.

Interest on national debt

Which of the following is true with regard to special-interest groups?

Special-interest groups can create government support for programs with costs outweighing their benefits.

Identify a likely impact of the crowding-out effect.

The spending multiplier is not fully effective.

Identify the correct statement about unemployment compensation payments.

These payments increase during recession and increase the budget deficit.

Discretionary fiscal policy involves:

changes in government spending and taxes as a result of legislation

According to supply-side economists:

changes in wage rates affect the incentive to work, save, and invest.

Fiscal policy is concerned with:

changing government spending and/or tax revenues.

Public choice theory studies the:

decision-making process of a government.

Since 1995, the net interest as a percentage of gross domestic product (GDP) has _____ in the United States.

declined to 1.3 percent

Between 1945 and 1980, the national debt as a percent of GDP:

decreased substantially.

The crowding-out effect _____.

diminishes the impact of a discretionary fiscal policy

Inflation is an increase in the:

general price level in an economy.

Crowding out occurs due to:

higher government spending leading to higher interest rates.

If the national debt were owed internally, there would be a:

redistribution of wealth in favor of the higher-income class.

A concern associated with crowding out is that it:

reduces business investment and rates of economic growth.

The concept of the Laffer curve in central to _____.

supply-side economics

Mathematically, the tax multiplier is given by the formula:

1 - spending multiplier. (1-1/mpc)

The balanced budget multiplier is always equal to:

1.

If the marginal propensity to consume (MPC) is 0.42, the value of the spending multiplier is:

1.72. 1/1-.42

As shown in the exhibit given below, the rate of inflation for Year 2 is:

10 percent.

The current national debt of the United States is approximately:

105 percent of gross domestic product.

Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now:

110*1000/100

Suppose Courtney earns an income of $55,000 and pays an amount of $10,000 in tax. The average tax rate faced by Courtney is:

18 percent

The inflation rate in the United States was the highest in _____.

1980

Audrey earns an income of $32,000 and pays $5,000 in taxes. Suppose her income increases to $56,000 and she pays an amount of $10,000 in taxes. Her marginal tax rate is _____.

20.8 percent

If the bank offers you a nominal interest rate of 9 percent on a student loan, and if inflation is 6 percent, then what is the real interest rate?

3 percent 9-6

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least:

3 percent. 8-5

In the exhibit given below, the rate of inflation for Year 5 is: yr. cpi 1. 100 2. 110 3 115 4. 120 5. 125

4.2 percent. (125-120)/120

Suppose George shopped for a basket of goods in Year X and it cost him $500. The same basket of goods adds up to $560 in Year Y. Using Year X as the base year, the consumer price index in Year Y will be:

560/100*100

In the United States, the private sector contributes _____ of GDP to the national output.

66 percent

Suppose a market basket of goods and services costs $600 in the base year and $690 in the current year. The consumer price index (CPI) for the current year is:

690/600*100 115

If the nominal rate of interest is 7.2 percent and the rate of inflation is zero, the real interest rate is _____.

7.2 percent

Suppose the consumer price index of a country was 180 in 1990 and 194 in 1991. The country's inflation rate during 1991 was:

7.8 percent. 194-180/ 180

Patrick earned an annual salary of $70,000 in 1991. The consumer price index (CPI) in 1991 was 90.5 and in 2005 it was 230. Patrick's salary in 2005 dollars is _____.

70,000 * 230/90.5 177,900.5

Which of the following is true of the relationship between national debt and budget deficit?

A budget deficit will increase the national debt.

Which of the following is true with regard to taxes in the United States?

Americans pay comparatively lower taxes as a percentage of GDP than other industrialized countries such as Germany, Sweden, and U.K.

_____ would overstate the consumer price index.

An improvement in the quality of products

____ can be a cause of cost-push inflation.

An increase in the expected cost of production

"He who pays a tax should receive the benefit from the expenditure financed by the tax." This statement reflects which of the following principles for a tax?

Benefits received

_____ according to the crowding-out effect.

Budget deficits will increase interest rates

Which of the following statements is true of deflation?

Deflation is a decrease in the general price level of goods and services in an economy.

Which of the following occurs in an economy if aggregate spending increases and the economy is operating at full employment?

Demand-pull inflation

The federal budget process begins when federal agencies submit their budget requests to the:

Department of Commerce (DOC).

Which of the following taxes charged by the federal government reflects the benefits received principle of taxation?

Excise taxes on gasoline

_____ lose due to inflation.

Fixed income earners

_____ in a balanced budget.

Government revenues equal government expenditures

_____ refers to a situation in which there is an extremely rapid rise in the general price level in an economy.

Hyperinflation

Which of the following categories has accounted for the largest percentage of total federal government expenditures in the recent past?

Income security

Suppose that your income during Year Y was $50,000 and the CPI for Year Y was 150 (base year = Year X). Back in Year X, your income was $30,000. Has your real income increased or decreased from Year X to Year Y? By how much?

Increased by $3,333.33

From which of the following taxes does the U.S. government receive the greatest percentage of total federal government tax revenues?

Individual income taxes

Which of the following is true of the debt ceiling?

It is a legislated legal limit on the national debt.

_____ is recognized as the founder of a body of economic literature called public choice theory.

James Buchanan

The _____ shows that beyond some point as the tax rate increases, the erosion of incentives reduces national income and total tax collections.

Laffer curve

_____ accounted for the second largest percentage of total federal government expenditures in 2016.

National defense

includes only goods and services bought by a typical urban consumer.

Nominal interst rate minus the inflation rate

Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what the borrowers and lenders expected, then who benefits from lower real interest rates?

Only the borrowers benefit

Which of the following offers theories to explain why the government, like the private sector, may also "fail"?

Public choice theory

Suppose last year Sean borrowed $100 at 10 percent interest from his neighbor to purchase a travel bag. This year Sean repaid his neighbor with interest. If the inflation rate was 16 percent last year, then:

Sean saved $6 on the travel bag.

Which of the following causes a crowding-out effect?

Selling government bonds

_____ causes the consumer price index to overstate the impact of higher prices of a product on the price level.

Substitution bias

Which of the following favors government policies to stimulate an economy by creating incentives for individuals and businesses to increase their productive efforts?

Supply-side economics

To finance the difference between government expenditures and revenues, the United States Treasury borrows by selling:

T-bills, notes, and bonds.

For which of the following countries is tax revenue the smallest percentage of its GDP?

The United States

Which of the following examples follow the ability-to-pay principle of taxation?

The average tax rate for a person who earns $10,000 is 5% and the average tax rate for a person who earns $50,000 is 10%.

Identify the main focus of supply-side fiscal policy.

The effect of tax cuts on labor supply

Which of the following is likely to be true if the fiscal year starts without a budget and Congress fails to pass a continuing resolution?

The federal government shuts down.

According to supply-side policy, which of the following is true if there is a reduction in the tax rates on wages?

The labor supply curve shifts rightward and the equilibrium wage rate decreases.

Which of the following is true about the size of the national debt of the United States?

The national debt has increased rapidly over the years.

Which of the following is a difference between the national debt and budget deficit?

The national debt is the total amount owed by the federal government to owners of government securities, while the budget deficit is the excess of expenditures over revenues in a year.

Which of the following statements is true with regard to the federal government expenditures?

The percentage of the federal budget spent for defense declined from 40 percent in 1970 to 15 percent in 2016.

Identify an example of a progressive tax in the United States.

The personal income tax

Which of the following happens due to inflation?

Those who lend money at an interest rate below the rate of inflation suffer economic losses.

Suppose that society had been using a progressive income tax, but shifted to a proportional or true flat tax. If total tax revenues to government were the same under the two plans, who would be made better off and who would be made worse off?

Those with low incomes would be made worse off, and those with high incomes would be made better off.

Which of the following is true in the case of a budget surplus?

Which of the following is true in the case of a budget surplus?

Total U.S. government expenditures as a percentage of GDP were largest during which of the following periods of time?

World War II

The national debt of the United States as a percentage of gross domestic product (GDP) reached its highest level during:

World War II because of rising military expenditures

The national debt is reduced if there is:

a budget surplus.

If the consumer price index (CPI) for a year is greater than 100, _____.

a consumer's real income for the current year will be less than her nominal income for that year

Amanda and Caroline are residents of Genovia. Amanda earns an income of $25,000 per year and pays $3,000 as tax, and Caroline earns $95,000 per year and pays $10,000 as tax. We can conclude that Genovia follows:

a regressive tax rate.

Increases in nominal wages lead to higher prices, which further lead to even higher nominal wages and prices. This refers to _____.

a wage-price spiral

The _____ of taxation is the concept that those who have higher incomes should pay a greater proportion of their income in taxes, regardless of benefits received.

ability-to-pay principle

The Congressional Budget Office performs the important task of:

advising Congress on the budget.

Medicaid is a part of a(n) _____.

automatic stabilizer

In recent years, net interest payment as a percentage of GDP has:

been decreasing.

An amusement park in the city of Baltonia charges an entry fee of $50. The funds generated by collecting the entry fee is used to maintain the park and the rides in the park. The entry fee charged by the park is an example of:

benefits-received principle.

Crowding out occurs when the federal government:

borrows by selling bonds to finance a deficit.

If an economy enters a recession, automatic stabilizers create _____.

budget deficits

Automatic stabilizers will increase the:

budget surplus during an economic expansion.

Marginal propensity to consume is the:

change in consumption spending resulting from a given change in income.

Supply-side fiscal policy would cause a change in real gross domestic product through a(n) _____.

change in resource prices

A base year is a year:

chosen as a reference point for comparison with another year.

The _____ measures changes in the average prices of goods and services purchased by a typical household in an economy.

consumer price index

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:

continuing resolution.

Decreasing government spending or increasing taxes to influence aggregate demand is a part of:

contractionary fiscal policy.

During the 1970s, the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which triggered higher inflation rates in the United States. This type of inflation is best classified as:

cost-push inflation.

The _____ dampens the stimulus to aggregate demand from increased federal government spending.

crowding-out effect

A fall in oil prices is likely to:

decrease cost-push inflation.

Assume Congress decides to implement a $5 million decrease in spending and a $5 million decrease in tax. The result of this approach is a(n):

decrease in aggregate demand by $5 million.

In the figure given below, a shift of the aggregate supply curve from AS1 to AS2 can result from a:

decrease in resource prices and technological advances.

If the national debt rises to the debt ceiling and there is currently a budget _____, then Congress and the President must agree to _____ the debt ceiling or else the federal government will have insufficient funds to pay its bills and will be forced to shut down.

deficit, raise

About 67 percent of the national debt of the United States was held by _____ in 2014.

domestic citizens

The third largest share of the total government expenditures was spent on _____ by the federal government in 2016.

education and health

Demand-pull inflation is caused by:

excessive spending by consumers.

Automatic stabilizers tend to "lean against the prevailing wind" of the business cycle because:

federal expenditures and tax revenues change as the level of real GDP changes.

It was observed that between 1991 and 2000, _____ in the United States.

federal government expenditures declined and federal government tax revenues increased

According to the Laffer curve, a 100 percent tax rate leads to a:

federal tax revenue value of zero.

Suppose a person is taxed $5,000 on an income of $50,000, taxed $3,500 on an income of $35,000, and taxed $6,500 on an income of $65,000. The person is charged a(n):

flat tax.

Automatic stabilizers are:

government expenditures and tax revenues that change on their own and thereby stabilize an economy.

Critics of Keynesian fiscal policy believe that:

government spending financed by borrowing has little effect on the growth of real gross domestic product.

Since 1950, total government expenditures in the United States:

grew from about one-quarter to about two-fifths of GDP.

According to the Bureau of Labor Statistics' survey, _____ accounts for the largest share in the total expenditure by a typical urban family in the United States.

housing

Legislation in Fordica defines a fair tax system as a one under which those with the highest incomes should pay a greater proportion of their income in taxes. In order to keep the tax system fair, the government in Fordica should:

implement a progressive tax rate.

Treasury bonds held by private investors:

impose a net interest burden on the federal government.

The consumer price index (CPI):

includes only goods and services bought by a typical urban consumer.

One way the consumer price index (CPI) differs from the GDP chain price index is that the CPI:

includes only goods and services bought by typical urban consumers.

Expenditures on federal retirement and disability benefit is part of the _____ program of the federal government.

income security

The major federal government expenditure is on:

income security.

The full-employment level of real gross domestic product in an economy is $700 billion and its equilibrium level of real GDP is $500 billion. The marginal propensity to consume (MPC) is 0.25. The government should _____ to reach the full-employment real GDP level.

increase its spending by $150 billion to shift the aggregate demand curve to the right (1/1-/25) =700-500 200 bilion *.75 =150

Suppose, the spending multiplier is 3 and an increase of $2,500 million in the aggregate demand can restore full employment in an economy. Following Keynesian policy prescriptions, the government of the country should:

increase spending by $833.33 million. Delta G *3=2500 million 2500/3= 833.33

Cost-push inflation is due to:

increases in production costs.

Financing of budget deficits by borrowing:

increases interest rates as the federal government competes with private borrowers for available savings.

Expansionary fiscal policy occurs when the government:

increases its spending or decreases its tax revenues.

The debt held by the private sector and government entities constitutes the _____.

internal national debt

Automatic government expenditure stabilizers are _____.

inversely related to changes in the level of real gross domestic product

The Laffer curve is a(n) _____.

inverted U-shaped curve

With regard to the national debt, the federal government owes money to the _____.

investors who buy U.S. Treasury bills, bonds, and notes

The portion of the national debt that _____ is the external national debt.

is owed to foreign citizens

Assume the marginal propensity to consume (MPC) is 0.90 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:

left by $900 billion. 100 billion * (1-spending multiplier= change in ad 1oo billion * (1/1-.9)

Assume the marginal propensity to consume (MPC) is 0.90. A $150,000 decrease in government spending, other things being equal, would result in a:

leftward shift of the aggregate demand curve and a $1,500,000 decrease in real GDP. 150,000 * 1/1-.9

When crowding out occurs, higher government spending results in higher interest rates, which in turn results in:

less consumption and investment.

A proportional tax is a tax that:

levies the same tax as a percentage income, regardless of the size of income.

The Morgans bought a deferred annuity that will pay them $1,500 per month in retirement benefits. They are likely to ____

lose from inflation

A negative real interest rate leads to a:

loss for lenders and savers because it implies that the inflation rate is higher than the nominal interest rate.

A change in a tax payer's tax bill as her income increases or decreases is determined by the:

marginal tax rate.

The national debt is unlikely to cause national bankruptcy because the:

national debt can be refinanced by issuing new bonds.

The sum of past federal budget deficits is the:

national debt.

Last year the Freemans earned $90,000 in a year. This year their family income is $120,000. If the inflation rate is 5 percent, the Freemans':

nominal as well as real income have increased.

Real income in Year X is equal to:

nominal income in year x/cpi/100

Suppose borrowers and lenders agree to loans with fixed nominal interest rates. If the inflation rate is lower than expected, _____ benefit from the transactions.

only lenders

The burden of the national debt on the current generation is the:

opportunity cost of private-sector goods and services foregone as resources are used to produce public-sector goods and services.

Most of the United States national debt is owed to _____. Thus, a rising national debt implies that there will be a future redistribution of income and wealth in favor of _____.

other U.S. citizens, bondholders

The cost-of-living index compares the:

prices of consumer goods and services that a household purchases to the prices of those goods and services in a base year.

The government of the United States can pay off the national debt by:

printing money.

Jose pays a tax of $24,000 on his income of $60,000, while Richard pays a tax of $3,000 on his income of $30,000. This tax is:

progressive.

Sharon pays a tax of $4,000 on her income of $40,000, while Brad pays a tax of $1,000 on his income of $20,000. This tax is:

progressive.

The basic principle of _____ is that politicians follow their own self-interest and seek to maximize their reelection chances, rather than promote the best interests of society.

public choice theory

The appropriate discretionary policy to use in an economy which is on the classical range of the aggregate supply curve and experiencing inflation is to _____.

raise taxes

Disinflation means a decrease in the:

rate of inflation

The spending multiplier is the:

ratio of the change in aggregate demand to an initial change in aggregate spending.

Suppose during elections, 50 percent of a city's population vote only after systematic research on various candidates, whereas the other 50 percent of the population choose their candidate on party affiliations. We can conclude that the latter 50 percent of the population is subject to:

rational ignorance.

The choice of a voter to remain uninformed because the marginal cost of obtaining information is greater than the marginal benefit from obtaining knowledge is called:

rational ignorance.

Keynesian economists recommends fiscal policy to fight _____.

recession CHAPTER 11

According to supply-side economists, a higher corporate profit tax will:

reduce investment and the real gross domestic product.

A decrease in government spending can be an appropriate policy to:

reduce the consumer price index in an economy.

If the Social Security trust fund collects more taxes than it pays in retirement benefits, it:

reduces the budget deficit of the federal government.

Inflation:

reduces the purchasing power of money.

During a recession, supply-side economics would advocate a(n):

reduction in government regulations on businesses.

The supply-side effect of a tax cut is a(n) _____.

reduction in unemployment and inflation, while the Keynesian demand-side effect is a reduction in unemployment but an increase in inflation

Consider a hypothetical example in which a person's income serves only two purpose, either paid as taxes or saved. Kimberly earns an income of $10,000 and saves an amount of $9,000. Suppose her income increases from $10,000 to $50,000. She now saves an amount of $46,000. We can say that Kimberly is facing a _____.

regressive tax rate

A tax is structured so that the tax as a percentage of income declines as the level of income increases is called a(n):

regressive tax.

When the federal government refinances its debts, it:

replaces old bonds with new ones.

It has been observed that income tax collections:

rise during an economic expansion and, ceteris paribus, reduce budget deficits.

Compared to Canada, France, and the United Kingdom, the national debt as a percentage of GDP in the United States is:

slightly larger.

The second largest source of federal government revenue is:

social insurance taxes.

Under majority rule, _____ can pass.

some public projects that fail a benefit/cost test

People who often impose cost on the majority in order to benefit certain groups are called:

special-interest groups.

During hyperinflation, people are likely to:

spend their earnings.

Supply-side fiscal policies emphasize government policies that:

stimulate aggregate supply to achieve long-run growth in output.

As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to a _____ bias in the consumer price index.

substitution

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to the _____ in the consumer price index.

substitution bias

The national debt is best described as the:

sum of all federal budget deficits, past and present.

Lower resource prices and decreased government regulation are the policy recommendations of _____

supply-side economics

Government subsidies are an example of _____.

supply-side policy

If the Social Security trust fund is running a:

surplus, it reduces the size of the budget deficit.

The Laffer curve shows the relationship between:

tax rates and total tax revenues.

If an increase in the national debt reduces private consumption, a likely effect will be that:

the aggregate demand curve will not shift.

Inflation is measured by an increase in:

the consumer price index.

The dominant trend in federal government spending since 1970 has been an increase in the portion of the budget spent on

the redistribution of income a decrease in the portion of the budget spent on defense

Suppose politicians in Fordica favor a program that provides immediate benefits but have hidden future costs. We can say that the politicians' decision is a result of:

the shortsightedness effect.

Unemployment compensation is a nondiscretionary fiscal policy because:

when an economy expands, unemployment falls, and government spending on unemployment compensation decreases.

The federal tax rate affects the _____ in the Laffer Curve.

willingness to work

Suppose an inflation rate of 5 percent automatically increasers the wages of workers by 5 percent in an economy. This implies that _____.

workers are entitled to cost-of-living adjustments in wages

Labor unions demand wage contracts with cost-of-living adjustments so that:

workers are protected from the effects of inflation.

If the marginal propensity to consume (MPC) is 0.80, the tax multiplier will be _____.

− 4

If the marginal propensity to consume (MPC) is 0.60, and if the government wishes to increase real GDP by $100 billion, the change in taxes should be:

−$66.6 billion. Delta t* (1-1/1-.6)= $100 bilion