TPD Lesson 2

What does experience show about the relationship between taxation and work?

A tax cut does not cause workers to work significantly more hours.

What impact can political pressures have on fiscal policy?

Elected officials often make policy decisions based on voter reaction rather than long-term effects.

Which of the following best describes the relationship between a budget deficit and the national debt?

Every year of budget deficits adds to the national debt.

According to the Laffer Curve, if the government raises taxes from 50 percent to 75 percent of income, what will happen?

Government revenues will decrease.

What is one reason that many Americans worry about the situation shown on the graph?

Holders of U.S. debt might stop buying U.S. bonds.

During the Great Depression, why did people begin to question classical economics?

It could not say how long the market would take to return to equilibrium.

Robin buys several new Treasury bonds that will mature in 30 years. How does her purchase affect the federal budget?

It is a loan to the government that can be used to pay for the budget.

What is a major argument against a constitutional amendment requiring a balanced budget?

It would be too inflexible.

What economy theory was the basis of President Lyndon Johnson's Great Society program?

Keynesian economics

What is one of the major problems caused by a high national debt?

Money spent on servicing the debt cannot be spent on other things.

This graph best supports which of the following conclusions?

More than half of all U.S. foreign debt was held by three countries.

Why is it difficult for the federal government to increase or decrease its spending?

More than half the federal budget is set aside for entitlement spending.

What is a major reason that the federal government does not reduce the budget deficit by printing more money?

Printing more money to cover a deficit can lead to hyperinflation.

Why is the federal government limited in how much it can change spending levels?

The bulk of the budget is entitlements and interest on the national debt.

How did the Great Depression change fiscal policy?

The government shifted from classical to Keynesian economics.

Why do some people want to amend the Constitution to require a balanced budget?

They believe an amendment would force the government to be careful about spending.

How did the Great Depression bring about a shift in philosophy towards fiscal policy?

To combat the Depression, the government shifted from classical to Keynesian economic thought.

What do you think the artist's main message is in this cartoon?

Today's fiscal policies will harm future generations.

Which of the following contributes to the crowding-out effect?

a federal budget deficit

What did John Maynard Keynes believe should be the government's role in the economy?

active involvement

According to Keynesian economics, the government could prevent, or reduce the severity of, inflation by

applying a contractionary fiscal policy.

What has reduced the severity of changes to real GDP in the U.S. economy since World War II?

automatic stabilizers

What is the main job of the Office of Management and Budget?

create the federal budget

The main job of the Office of Management and Budget is to

create the federal budget based on the needs of various agencies.

The Gramm-Rudman-Hollings Act tried to prevent budget deficits by

creating automatic spending cuts if the deficit exceeded a certain amount.

Which of the following is an example of contractionary fiscal policy?

decreasing government spending

An example of contractionary fiscal policy would be

decreasing government spending.

What did the 1990 Budget Enforcement Act require Congress to do?

find a way to increase revenue before it could spend money on new programs

Which of the following is an example of classical economics?

free markets regulating themselves

Keynesian economics failed when applied to

high inflation in the 1970s.

What problem did the Great Depression highlight that classical economics did not address?

how long the market would take to return to equilibrium

What might happen if the government creates more money to cover a large deficit?

hyperinflation

When the government attempts to cover large deficits by creating more money, what is a possible result?

hyperinflation

What limits of fiscal policy are reflected in this cartoon?

inability to predict future and delayed results

Which statement best describes the federal government's fiscal policies in the 1980s?

income tax rates were reduced, but spending was increased.

An example of expansionary fiscal policy would be cutting

income taxes.

According to Keynesian economics, what can the government do to prevent recessions?

increase government spending

It is difficult for the federal government to increase or decrease spending because

more than half of all government spending is on entitlements.

What is one action Congress can take if the President vetoes the budget?

override the veto by a two-thirds majority vote

What economic theory did Ronald Reagan base his policies upon after becoming President in 1980?

supply-side economics

What economic theory was the basis of President Ronald Reagan's policies?

supply-side economics

What was the state of the federal budget at the end of the twentieth century?

surplus for the first time in 30 years

Which factors contributed to the federal government's return to deficit spending in the early 21st century?

tax cuts and the end of a stockmarket boom

This graph best supports the conclusion that, in July 2008,

three countries accounted for more than half of all U.S. foreign debt.

What is the purpose of PAYGO?

to decrease deficits by requiring Congress to raise enough money to pay for spending increases

Why does the government sometimes use an expansionary fiscal policy?

to encourage economic growth and create jobs

Why does the government sometimes use an expansionary fiscal policy?

to encourage growth and try to stop or prevent a recession

What is one of the major uses of government fiscal policy?

to prevent big changes in the level of GDP

How were the fiscal policies of Democrat John F. Kennedy similar to those of Republican Ronald Reagan?

Both supported tax cuts.

What is one possible consequence of the time it takes new fiscal policy to affect the economy?

By the time the change takes effect, the economy might be moving in the opposite direction.

What is a major reason that the federal government does not reduce the budget deficit by creating more money?

Creating more money to cover a deficit can lead to hyperinflation.