Module 11: Fiscal Policy

A contractionary fiscal policy by a government may result in which of the following? a. lower interest rates b. a reduction in government borrowing c. An increased trade deficit d. crowding out of private investment

a. lower interest rates

Which of the examples below is a true example of government spending for investment? a. The federal government spends $2 million on new paint for three federal office buildings. b. The federal government spends $1 million on printing new maps of the Smithsonian museums. c. The federal government grants $10 million to a university's engineering program to develop more durable highway bridges.

c. The federal government grants $10 million to a university's engineering program to develop more durable highway bridges

Which of the following affects aggregate demand? a. Federal government spending. b. Crop failures due to weather events. c. A productivity increase.

a. Federal government spending

How would a balanced budget amendment affect a decision by Congress to grant a tax cut during a recession? a. The government would have to make up the revenue either by raising taxes in a different area or cutting spending. b. The government would have to make up the revenue by either cutting taxes or increasing spending. c. The government would have to increase spending to compensate for the tax cut. d. The government would have to increase automatic stabilizers in the economy and reduce discretionary fiscal policy.

a. The government would have to make up the revenue either by raising taxes in a different area or cutting spending

If Congress wanted to implement a tax cut during a recession but had to keep a balanced budget, what would they need to do? a. The government would have to reduce spending. b. The government would have to cut taxes in another area. c. The government would have to increase spending.

a. The government would have to reduce spending

How would a balanced budget amendment change the effect of automatic stabilizer programs? a. They would lose flexibility because spending could not increase unless funds were there. b. Automatic stabilizers would facilitate a balanced budget. c. They could no longer exist because the government would not have a way to pay for these programs. d. They would increase in flexibility because they could kick in before Congress has time to adjust the budget.

a. They would lose flexibility because spending could not increase unless funds were there

Looking at a list of where tax revenue is being used for funding, it includes libraries, parks, police and fire protection, hospitals and roads. From this list, it can be accurately concluded that the funding entity for these services is a. a State government. b. from foreign and a state government. c. the Federal government.

a. a State government

If a state with a balanced budget law runs a budget surplus, its options include a. a spending increase. b. drawdown of previous budgetary savings. c. a tax increase. d. a reduction of road repair programs

a. a spending increase

The government can use ________ in the form of ________ to increase the level of aggregate demand in the economy. a. an expansionary fiscal policy; an increase in government spending b. a contractionary fiscal policy; a reduction in taxes c. an expansionary fiscal policy; an increase in corporate taxes

a. an expansionary fiscal policy; an increase in government spending

A country's government should ________ when inflation begins to climb to unacceptable levels in the economy. a. decrease aggregate demand by using contractionary fiscal policy b. increase aggregate demand by using expansionary fiscal policy c. decrease aggregate demand by using expansionary fiscal policy d. increase aggregate demand by using contractionary fiscal policy

a. decrease aggregate demand by using contractionary fiscal policy

When the government increases its spending, it is conducting a. fiscal policy. b. trade policy c. supply-side policy. d. monetary policy.

a. fiscal policy

Sales taxes are a. generally considered to be regressive. b. imposed based on ownership of assets. c. a tax burden that is entirely paid by consumers.

a. generally considered to be regressive

A major concern of fiscal policy is a. how federal government taxing and spending affects aggregate demand. b. controlling international trade balances c. how changes to the budget affect the money supply. d. how changes to the money supply affect aggregate demand.

a. how federal government taxing and spending affects aggregate demand

A tax that is a flat percentage of all wages earned is a a. proportional tax. b. a lump sum tax c. progressive tax. d. regressive tax.

a. proportional tax

The Joint Economic Committee of the U.S. Congress recommends additional government spending to stimulate the aggregate demand. The council appears to follow a. the Keynesian approach to fiscal policy. b. the neoclassical approach to fiscal policy. c. the supply side approach to fiscal policy.

a. the Keynesian approach to fiscal policy

Google runs a lucrative business and will pay corporate income tax to the federal government. On what is the corporate tax based? a. Google's investment expenditure. b. Google's profits. c. Google's sales revenues.

b. Google's profits

Which of the following examples describe a progressive tax? a. Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn. b. Income tax with a 10% tax rate on low income households and 20- 30% tax rates on higher income households. c. Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000. d. State income tax with a 10% tax rate on low income households and 8% tax rates on higher income households.

b. Income tax with a 10% tax rate on low income households and 20-30% tax rates on higher income households

Assume that the government of Ostentia for its current budget plans to collect taxes in the amount of $10 billion and to spend $9 billion. A civil war breaks out and the government spends an additional $1 billion and tax collection is down by $1 billion. What is the result? a. The expected budget deficit turns in to a $1 billion surplus. b. The expected budget surplus turns in to a $1 billion deficit. c. The budget is now balanced. d. The expected budget surplus turns in to a $2 billion deficit.

b. The expected budget surplus turns in to a $1 billion deficit

Which number is higher? a. Yearly federal government tax revenue. b. U.S. federal debt. c. U.S. budget surplus. d. U.S. budget deficit.

b. U.S. federal debt

When does a balanced budget occur? a. When government spending exceeds government tax revenues. b. When government spending equals government tax revenues. c. When the rate of increase in government spending equals the rate of increase in government tax revenue collections.

b. When government spending equals government tax revenues

In 2016, the federal government spent $200 billion but collected $180 billion in taxes, therefore in 2016, the government accumulated a. a federal debt of $20 billion. b. a budget deficit of $20 billion. c. a federal debt of $666 billion. d. a budget surplus of $20 billion.

b. a budget deficit of $20 billion

An expansionary fiscal policy can increase the level of aggregate demand by all of the following EXCEPT a. government promotion of US exports to other nations. b. decreasing government purchases. c. cutting personal income tax rates to increase disposable income and spending. d. reducing corporate tax rates to increase investment spending.

b. decreasing government purchases

When the government passes a new law that explicitly increases overall tax rates and reduces spending levels, it is enacting: a. discretionary and expansionary. b. discretionary and contractionary c. automatic and contractionary. d. automatic and expansionary.

b. discretionary and contractionary

An argument to promote capital deepening is that it will a. lead to a more equitable (fair) distribution of income. b. increase productivity and economic growth in the long run. c. lead to a more stable economy.

b. increase productivity and economic growth in the long run

Assume the government has a balanced budget and that the economy is experiencing a period of growth higher than predicted. The tax revenue collected by the government is likely to ________, which would lead to a ________. a. decrease; budget surplus b. increase; budget surplus c. decrease; budget deficit d. increase; budget deficit

b. increase; budget surplus

Assume the government has a budget deficit and that the economy is experiencing a period of growth higher than predicted. Tax revenues collected by the government are likely to ________, which would ________ a. increase; increase the budget deficit b. increase; reduce the budget deficit c. decrease; increase the budget deficit

b. increase; reduce the budget deficit

When ________ contractionary fiscal policy is the recommended choice. a. a recession has taken place. b. inflation has reached harmful levels c. unemployment is on the rise. d. there is a risk of deflation.

b. inflation has reached harmful levels

State and local tax revenue sources do NOT include a. transfers from the federal government. b. social security taxes. c. sales taxes. d. income taxes.

b. social security taxes

Which of the following example(s) describe a regressive tax? a. Income tax with a 10% tax rate on low income households and 20- 30% tax rates on higher income households. b. State income tax with a 10% tax rate on low income households and 15% tax rates on higher income households. c. Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000. d. Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn.

c. Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000

According to the Keynesian approach to fiscal policy a. The crowding out effect occurs only when high inflation is present. b. The crowding out effect is a significant problem that reduces the aggregate demand. c. The crowding out effect is quite limited as the demand for private loans is low in times of recessions. d. The crowding out effect is a significant problem that reduces the effectiveness of expansionary fiscal policy.

c. The crowding out effect is quite limited as the demand for private loans is low in times of recessions

What do goods like gasoline, tobacco, and alcohol typically have in common? a. A proportional tax is imposed on each of them. b. A progressive tax is imposed on each of them. c. They are all subject to government excise taxes. d. They are all subject to tariffs.

c. They are all subject to government excise taxes

Which of the following is NOT an example of an expansionary, discretionary fiscal policy? a. an increase in government purchases. b. a reduction in income tax rates. c. an increase in tax rates. d. an increase in federal spending on infrastructure.

c. an increase in tax rates

If in 2017, the government spent over $650 billion more from its budget than it brought in during that year. This is called the a. budget surplus. b. federal debt. c. budget deficit.

c. budget deficit

State and local government spending goes predominantly towards a. interest payments on debt. b. national defense. c. education. d. Social Security.

c. education

Former President Ronald Reagan was a supporter of supply side economics. Supply side economists believe that a. reducing tax rates increases aggregate demand. b. increasing tax rates decreases aggregate demand. c. reducing tax rates increases aggregate supply. d. reducing tax rates decreases aggregate supply.

c. reducing tax rates increases aggregate supply

The crowding out concept suggests that, holding all else constant, when government borrows to pay for budget deficits, interest rates ________ borrowing and spending by businesses and households.\ a. fall and discourage. b. fall and encourage. c. rise and discourage d. rise and encourage.

c. rise and discourage

Assuming that the income tax is the only source of revenue for the government, if tax revenues are $50 billion and government spending totals $70 billion, which of the following is true of the government's budget? a. The government has a budget surplus of $20 billion. b. The government has a balanced budget of $70 billion. c. The government has a budget deficit of $120 billion. d. The government has a budget deficit of $20 billion.

d. The government has a budget deficit of $20 billion

When does a budget surplus occur? a. When the increase in the rate of government spending is smaller than the rate for government tax collections. b When government spending equals government tax revenues. c. When government spending exceeds government tax collections. d. When government tax revenues exceed government spending.

d. When government tax revenues exceed government spending

If an economy moves into an inflationary period, examples of fiscal policies that act as automatic stabilizers include a. a flat tax on households' income. b. a decrease in tax revenues as household incomes fall. c. an increase in government defense spending. d. a decrease in transfer spending, such as unemployment benefits.

d. a decrease in transfer spending, such as unemployment benefits

An increase in government borrowing can a. cause a substantial decrease in interest rates. b. give the incentive to banks to lend more. c. increase the incentive for private investment. d. crowd out private investment.

d. crowd out private investment

An argument to promote research and development in technology is that it will a. lead to too many patents on innovations. b. lead to a more equitable (fair) distribution of income. c. lead to higher prices d. promote economic growth in the long run.

d. promote economic growth in the long run

Besides education, what other areas within its borders is a state responsible for funding? a. banks, weather mitigation equipment, stadiums and their security. b. housing developments and media outlets c. federal highways and parks and religious organizations. d. roads, parks, police and fire protection, libraries

d. roads, parks, police and fire protection, libraries

According to Keynesian economics, an increase in government purchases it causes a shift in the aggregate demand curve to the right by an amount equal to a. the increase in government purchase divided by the expenditure multiplier. b. the initial increase in government purchases. c. the expenditure multiplier. d. the increase in government purchases times the expenditure multiplier.

d. the increase in government purchases times the expenditure multiplier

If the economy is producing less than its potential GDP, ________ will show a smaller deficit than the actual deficit. a. expansionary fiscal policy. b. discretionary fiscal policy. c. the automatic stabilizers. d. the standardized (or full) employment deficit

d. the standardized (or full) employment deficit