Economics Chapters: 16,17,18
Explain the relationship between budget deficits and the national debt.
The national debt is the sum of past federal budget deficits. When budget deficits are large, the national debt increases at a rapid rate. When budget deficits are small, the national debt increases at a lower rate.
internal national debt
The portion of the national debt owed to a nation's own citizens.
What are the primary tax revenue sources at the federal, state, and local levels of government?
The primary sources are individual income taxes at the federal level, sales and excise taxes at the state level, and property taxes at the local level.
Board of Governors of the Federal Reserve System
The seven members appointed by the president and confirmed by the U.S. Senate who serve for one nonrenewable 14-year term. Their responsibility is to supervise and control the money supply and the banking system of the United States.
10. Which definition of the money supply includes credit cards?
a. M1. b. M2. c. Each of the answers includes credit card balances. d. None of the answers include credit card balances.
18. Which of the following is a desirable property of money? a. Scarcity. b. Portability. c. Divisibility. d. All of the answers above are correct.
a. Scarcity. b. Portability. c. Divisibility. d. All of the answers above are correct.
7. Which of the following is false?
a. The national debt's size decreased steadily after World War II. b. The national debt increases in size whenever the federal government has a surplus budget. c. The size of the national debt currently is about the same size as it was during World War II. All are false
12. Which of the following U.S. Treasury securities represents ownership of the national debt?
bonds owned by the banks insurance companies, bonds owned by the social security administration, bonds owned by private individuals
13. Crowding out refers to the situation in which
borrowing by the federal gov raises interest
Benefits received principle
The concept that those who benefit from government expenditures should pay the taxes that finance their benefits.
Ability to pay principle
The concept that those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of benefits received.
M2
The definition of the money supply the equals M1 plus near monies, such as savings deposits and small time deposits of less than $100,000
barter
The direct exchange of one good or service for another good or service, rather than for money.
2. If the fiscal year begins without a budget and Congress fails to pass a continuing resolution, then
The federal government shuts down
7. Which of the following is an example of a progressive tax?
The federal personal income tax
. What is the difference between the marginal tax rate and the average tax rate?
The marginal tax rate is the percentage of additional income paid in taxes. The average tax rate is the amount of taxes paid as a percentage of income.
What are the components of the most narrowly defined money supply in the United States?
The narrowest definition of money in the United States is M1.M1 5 currency (coins 1 paperbills) 1 checkable deposits.
M1
The narrowest definition of the money supply. It includes currency and checkable deposits
19. If a person is taxed $100 on an income of $1,000; taxed $180 on an income of $2,000; and taxed $220 on an income of $3,000, this person is paying a
regressive tax
9. In Exhibit 16-10, line A represents a(an)
regressive tax
8. M1 money includes all but which one of the following?
savings accounts
9. Compared to the United Kingdom, the national debt as a percentage of GDP in the United States is
slightly larger
6. A tax is regressive if it collects a
smaller fraction of income as income rises
14. People who often create benefits for the minority and impose the cost on the majority are called
special-interest groups
store of value
the ability of money to hold value over time
public choice theory
the analysis of the government decision process for allocating resources
8. Which of the following is true?
the current U.S. national debt is over $17 trillion
marginal tax rate
the fraction of additional income paid in taxes
unit of account
the function of money to provide a common measurement of the relative value of goods and services
external national debt
the portion of the national debt owed to foreign citizens
medium of exchange
the primary function of money to be widely accepted in exchange for goods and services
5. To finance a federal budget deficit, the U.S. Treasury borrows by selling
treasury bills, treasury notes, treasury bonds
2. Comparing how many dollars it takes to attend college each year to annual earnings on a job rep- resents the use of money as a
unit of account
4. Anything can be money if it acts as a .
unity of account, store of value, medium of exchange
14. The crowding-out effect can be
zero, partial, complete
14. The major protection against sudden mass attempt to withdraw cash from banks is the
deposit insurance
5. The ease with which an asset can be converted into a medium of exchange is known as
liquidity
1. Buying a cup of coffee with a dollar bill represents the use of money as a
medium of exchange
fiat money
money accepted by law and not because of its redeem ability or intrinsic value
7. Which of the following statements is true?
money must be relatively "scarce" if it is to have value , money must be divisible and portable, M1 is the narrowest definition of money
currency
money, including coins and paper money
4. The sum of past federal budget deficits is the
national debt
19. The national debt is unlikely to cause national bankruptcy because the
national debt can be refinanced by issuing new bonds
6. Most of the U.S. 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
13. The study of the decision-making process of gov- ernment is the study of
public choice theory
10. The national debt is unlikely to cause national bankruptcy because the federal government can
raise taxes, print money, refinance its debt
15. Voters may choose to remain uninformed about an issue because of
rational ignorance
3. Which of the following items does not provide a store of value?
credit cards
15. "Crowding in" refers to federal government deficits
used for public infrastructure will offset any decline in business investment
1. Each year, the president must submit a budget proposal to Congress by
February
Benefit Cost Analysis
The comparison of the additional rewards and costs of an economic alternative.
rational ignorace
The voter's choice to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it
money
anythings that serves as a medium of exchange, unit of account, and store of value
Government expenditure
Federal, state, and local government outlays for goods and services, including transfer payments.
Complete the following table, which describes the sales tax paid by individuals at various income levels. Indicate whether the tax is progressive, proportional, or regressive.
Sales tax paid as a percentage of income 10% 7% 6% 4% Because the sales tax paid as a percentage of income falls as income rises, the tax is regressive.
20. According to the shortsightedness effect, politicians tend to favor projects with
Short run benefits and long run costs
federal reserve system
The 12 Federal Reserve district banks that service banks and other financial institutions within each of the Federal Reserve districts; popularly called the Fed.
What is the major purpose of the Federal Reserve System? What is the major responsibility of the Board of Governors and the Federal Open Market Committee?
The Fed's most important function is to regulate the U.S. money supply. The Board of Governors is composed of seven persons who have the responsi- bility to supervise and control the money supply and the U.S. banking system. The Federal Open Market Committee (FOMC) controls the money supply by directing the buying and selling of U.S. government securities.
Federal Open Market Committee (FOMC)
The Federal Reserve's committee that directs the buying and selling of U.S. government securities, which are major instruments for controlling the money supply. The FOMC consists of the seven members of the Federal Reserve's Board of Governors, the president of the New York Federal Reserve Bank, and the presidents of four other Federal Reserve district banks.
20. The Monetary Control Act of 1980 extended the Fed's authority to
impose requires-reserve ratios on all depository institutions
3. Between 1998 and 2001, the federal budget was
in surplus
16. Which of the following categories accounted for the lowest percent of the total federal government expenditures in recent years?
interest on the national debt
17. With regard to the national debt, to whom does the federal government owe money?
investors who buy U.S. Treasury bill, bonds, and notes
11. In recent years, net interest on the national debt paid by the federal government as a percentage of GDP is equal to approximately
1%
19. The Federal Reserve System was founded in
1913
1. Currently, total government expenditures in the United States is approximately
35 percent of GDP
Federal Deposit Insurance Corporation (FDIC)
A government agency established in 1933 to insure commercial bank deposits up to a specified limit.
monetary control act
A law, formally titled the Depository Institutions Deregulation and Monetary Control Act of 1980, that gave the Federal Reserve System greater control over nonmember banks and made all financial institutions more competitive.
Compare "dollar voting" in private markets with "majority voting" in the political decision-making system.
A profit-maximizing firm follows the marginal rule that units will be produced so long as the marginal benefit exceeds or equals the marginal cost. Dollars can measure the intensity of benefits in relation to costs. A "one-person, one-vote" system does not necessarily measure benefits in proportion to the dollar value of benefits among individual voters. Thus, a majority of voters can approve projects for which costs exceed benefits and reject projects for which benefits exceed costs.
crowding out effect
A reduction in private-sector spending as a result of federal budget deficits financed by U.S. Treasury borrowing. When federal government borrowing increases interest rates, the result is lower consumption by households and lower investment spending by businesses.
Progressive tax
A tax that charges a higher percentage of income as income rises.
Proportional tax
A tax that charges the same percentage of income, regardless of the size of income. Also called a flat-tax rate or simply a flat tax.
18. "It would be an undue hardship to require people whose income is below $15,000 per year to pay income taxes." This statement reflects which of the following principles for a tax?
Ability to pay
12. In Exhibit 16-10, if A represents state and local taxes and B represents federal income taxes, what is the result of imposing both types of taxes?
An ability to pay tax
crowding in effect
An increase in private-sector spending as a result of federal budget deficits financed by U.S. Treasury borrowing. At less than full employment, consumers hold more Treasury securities and this additional wealth causes them to spend more. Business investment spending increases because of optimistic profit expectations.
Which banks must be insured by the FDIC? Which banks can choose not to be insured by the FDIC?
Banks that belong to the Fed must join the FDIC. Banks chartered by the states may affiliate with the FDIC. There are relatively few nonmember, nonin- sured state banks.
13. The Fed's principal decision-making body, which directs buying and selling U.S. government securities, is known as the
Federal open market committee
During the presidential campaign of 1932 in the depth of the Great Depression, candidates Herbert Hoover and Franklin D. Roosevelt both advocated reducing the budget deficit using tax hikes and/or expenditure reductions. Evaluate this fiscal policy.
During a depression, tax hikes and/or expenditure cuts would only reduce aggregate demand and, in turn, real GDP, jobs, and income. Because the econ- omy is operating in the Keynesian segment of the ag- gregate demand curve, this fiscal policy would have no impact on the price level.
8. A tax is structured so that people with the same income pay the same percentage of their income in taxes is called a(an)
Flat tax
2. Which of the following categories accounted for the largest percentage of total federal government expenditures in recent years?
Income Security
3. Which of the following taxes contributed the great- est percentage of total federal government tax rev- enues in recent years?
Individual income taxes
17. The difference between M1 and M2 is given by which of the following?
M1 is made up of currency and chechable deposits, whereas M2 contains M1 plus savings deposits
Discuss this statement: "A man with a million dol- lars who is lost in the desert learns the meaning of money."
Money is worthless in and of itself. The value of money is to serve as a medium of exchange, a unit of account, and a store of value.
net public debt
National debt minus all government interagency borrowing.
11. With respect to controlling the money supply, the law requires the Fed to take orders from
No one - the Fed is an independent agency
10. In Exhibit 16-10, line B represents a
Progressive tax
11. In Exhibit 16-10, line C represents a(an)
Proportional tax
Explain this statement: "The national debt is like taking money out of your left pocket and putting it into your right pocket."
The statement makes the argument that most of the debt is internal national debt that one U.S. citizen owes to another U.S. citizen. Suppose the federal government finances a deficit by having the Trea- sury sell government bonds to one group of U.S. citizens, thereby increasing the national debt. When the bonds mature, the government can pay the inter- est and principal by issuing new government bonds (rolling over the debt) to another group of U.S. citi- zens. This argument ignores the income distribution problem that results because interest payments go largely to those who are better off financially.
Average tax rate
The tax divided by the income
national debt
The total amount owed by the federal government to owners of government securities.
checkable deposits
The total of checking account balances in financial institutions convertible to currency "on demand" when a check is written without advance notice.
Suppose you are the economic policy adviser to the president and are asked what should be done to eliminate a federal deficit. What would you recommend?
This answer should be logical and supported by a thoughtful explanation. For example, the federal deficit might be the result of a recession and you could argue that the deficit is correct fiscal policy. When the recession ends, the deficit will decline. Other arguments include some combinations of cut- ting spending or increasing taxes.
Explain why federal, state, and local expenditures account for about 40 percent of GDP, but total government spending (G in GDP) is only about 20 percent of GDP.
Transfer payments account for the difference be- tween total government expenditures, or outlays, and total government spending. Transfers do not "use up" resources; they reallocate purchasing power by collecting taxes from one group and pay- ing benefits to other groups.
4. How does total taxes as a percentage of GDP in the United States compare to those of Western European countries, such as the United Kingdom, Germany, and Sweden?
U.S. taxation is smaller
Suppose the percentage of the federal debt owned by foreigners increases sharply. Would this trend concern you? Why or why not?
When the government makes interest payments on internally held debt, the money remains in the hands of U.S. citizens. External debt is very different. Re- payment of interest and principal to foreigners with- draws purchasing power from U.S. citizens in favor of citizens abroad.
18. When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of
World War II
debt ceiling
a legislative legal limit on the national debt
regressive tax
a tax that charges a lower percentage of income as income rises
16. Which of the following is a store of value?
a. Federal Reserve notes. b. Debit card. c. Passbook savings deposit. d. Each of the answers is a store of value.
Suppose the federal government has no national debt and spends $100 billion, while raising only $50 billion in taxes. a. What amount of government bonds will the U.S. Treasury issue to finance the deficit? b. Next year, assume tax revenues remain at $50 billion. If the government pays a 10 percent rate Zero, Partial, and Complete Crowding Out AS E2 E′2 E1 AD2 (zero crowding out) AD1 (c AD omplete Full e ′2 (partial crowdi crowding out) mployment ng out) Price level (CPI) 215 210 0 13 13.5 14 15 Real GDP (trillions of dollars per year) CAUSATION CHAIN Government spends and borrows Government competes with private borrowers Interest rates rise Consumers and business spending decrease AD and real GDP increase dampened of interest, add the debt-servicing interest pay- ment to the government's $100 billion expendi- ture for goods and services the second year. c. For the second year, compute the deficit, the amount of new debt issued, and the new national debt.
a. In year one, the federal deficit begins at $50 bil- lion, and the U.S. Treasury issues $50 billion worth of bonds to finance the deficit. b. The next year the federal government must pay interest of $5 billion to service the debt ($50 bil- lion bonds 3 0.10 interest rate). Adding the interest payment to the $100 billion spent for goods and services yields a $105 billion expendi- ture in year two. c. For the second year, the deficit is $55 billion ($105 billion in expenditures - $50 billion in taxes), and the U.S. Treasury borrows this amount by issuing new bonds. The new national debt is $105 billion, consisting of the $50 billion in bonds issued in the first year and the $55 bil- lion in bonds issued in the second year.
Consider each of the items in Question 2 in terms of scarcity, portability, divisibility, and uniformity.
a. The quantity of credit cards can be controlled. Credit cards are portable, divisible, and uniform in quality. b. The quantity of Federal Reserve notes is con- trolled by the U.S. government. These notes are portable, divisible, and uniform in quality. c. The quantity of dogs is difficult to control. Dogs are not very portable or divisible, and they are certainly not uniform. d. The quantity of beer mugs can be controlled. Beer mugs are not very portable or divisible, but they could be made fairly unifor
15. The Monetary Control Act of 1980 a. created less competition among various financial institutions. b. allowed fewer institutions to offer checking account services. c. restricted savings and loan associations to long-term loans. d. None of the answers above are correct.
a. created less competition among various financial institutions. b. allowed fewer institutions to offer checking account services. c. restricted savings and loan associations to long-term loans. d. None of the answers above are correct.
20. An increase in our federal government's budget deficit will likely
a. increase the national debt. b. increase interest rates. c. decrease borrowing by households and businesses d. be less effective in stimulating the economy than the spending multiplier implies because of crowding out. all are correct
Ms. Jones has a taxable income of $30,000, and she must pay $3,000 in taxes. Mr. Smith has a taxable income of $60,000. How much tax must Mr. Smith pay for the tax system to be a. progressive? b. regressive? c. proportional?
a. more than $6,000 b. less than $6,000 c. $6,000
commodity money
anything that serves as money while having market value in other uses
17. Since 1929, total government taxes as a percentage of GDP
climbed from 10% to about 30%
6. Which of the following items is included when computing M1?
coins in circulation, currency in circulation, checking account entries
16. 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
12. Which of the following is not part of the Federal Reserve System?
council of economic advisors
9. Which of the following is counted as part of M2?
currency, check able deposits at commercial banks, money market funds
5. The benefits-received principle of taxation is most evident in
excise taxes on gasoline