Chapter 11, 12, 13

progressive tax

If a person is taxed $100 on an income of $1,000, taxed $220 on an income of $2,000, and taxed $390 on an income of $3,000, this person is paying a(n):

increasing taxes by $125 billion

If no fiscal policy changes are implemented, suppose the future aggregate demand curve will exceed the current aggregate demand curve by $500 billion at any level of prices. Assuming the marginal propensity to consume (MPC) is 0.80, this increase in aggregate demand could be prevented by

approximately the same size in 1950

Currently, the national debt as a percentage of GDP is

20 trillion

Currently, the national debt is approximately

ability to pay

"The poor should not pay income taxes." This statement reflects which of the following principles of taxation? Fairness of contribution. Benefits received. Inexpensive to collect. Ability to pay.

Supply-side fiscal policy

A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level.

Laffer curve

A graph depicting the relationship between tax rates and total tax revenues.

regressive tax

A 5 percent sales tax on food is an example of a

Budget deficit

A budget in which government expenditures exceed government revenues in a given time period.

Budget surplus

A budget in which government revenues exceed government expenditures in a given time period.

are close to 40 percent of GDP

Currently, total government expenditures in the United States:

debt ceiling

A legislated legal limit on the national debt.

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.

smaller fraction of income as income rises

A tax is regressive if it collects a:

Progressive tax

A tax that charges a higher percentage of income as income rises.

Regressive tax

A tax that charges a lower 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.

progressive tax

A tax that is structured so that people with higher incomes pay a larger percentage of their income for the tax than do people with smaller incomes is called a (an)

c

According to public choice theory, why might government policy benefit only a narrow interest group? a. If the benefits to the narrow interest group are relatively large, they have an incentive to invest a lot of money and effort in lobbying government. b. If the costs of this policy are spread out among the general population, and are a very small burden for any one person, then those paying the costs have little incentive to organize opposition. c. Both answers a. and b. are correct. d. None of the answers above are correct

e

According to the Laffer curve, the federal tax rate affects: a. incentive to work. b. savings. c. investment. d. tax revenue. e. All of these.

short-run benefits and long-run costs

According to the shortsightedness effect, politicians favor projects with

short-run benefits and long-run costs.

According to the shortsightedness effect, politicians tend to favor projects with:

Balanced-budget multiplier

An equal change in government spending and taxes, which changes aggregate demand by the amount of the change in government spending.

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.

decreasing government spending or increasing taxes

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through

d

As the national debt grows as a percentage of the U.S. economy, which of the following is (are) true? a. Future U.S. citizens will be forced to spend a larger percentage of their tax revenues on servicing the national debt, limiting the money that is available for health care, education, and national defense. b. If today's deficit spending is primarily designed to benefit people today, and is not being invested to make the economy grow, then we are robbing the future for the sake of the present. c. If rising levels of federal borrowing today crowds out private borrowing for productive investment, then economic growth in the future will slow, and future living standards will fall. d. All of the answers above are correct.

d

As the size of a nation's outstanding debt gets larger and larger relative to the size of the economy... a. eventually it will become difficult for the country to borrow in global credit markets. b. the country will have to pay higher real interest rates in order to induce investors to purchase its bonds. c. at some point, the country will be more or less forced to bring spending into line with revenues in order to maintain the confidence of investors. d. All of the answers above are correct.

$2,500 billion

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.80, and the government increases spending by $500 billion. As a result, aggregate demand will rise by

right by $750 billion

Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:

left by $750 billion

Assume the marginal propensity to consume (MPC) is 0.75 and the government increases taxes by $250 billion. The aggregate demand curve will shift to the

demand-pull inflation

Beginning at equilibrium E1 in Exhibit 11-3, when the government increases spending or cuts taxes the economy will experience:

left by $900 billion

Beginning at equilibrium E1 in Exhibit 12 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

$400 billion

Beginning at equilibrium E1 in Exhibit 12, suppose the marginal propensity to consume (MPC) is 0.75, and the government wishes to lower the price level form 170 to 150 while maintaining a balanced budget. The government should reduce both spending and taxes by

were completely removed

During 1998-2001, federal government budget deficits

Automatic stabilizers

Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes referred to as nondiscretionary fiscal policy.

Government expenditures

Federal, state, and local government outlays for goods and services, including transfer payments.

progressive

Generally, most economists feel that a _________ type of income tax is a fairer way to raise government revenue than a sales tax.

proportional

Margaret pays a local income tax of 2 percent, regardless of the size of her income. This tax is

increasing taxes by $100 billion

If no fiscal policy changes are implemented, suppose the future aggregate demand curve will shift and exceed (MPC) the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is 0.90, this increase in aggregate demand could be prevented by

government spending by $200 billion

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC) is 0.80, federal policymakers could follow Keynesian economics and restrain inflation by decreasing

4

If the MPC = .75, the spending multiplier is:

surplus, smaller

If the federal government runs a budget ___, then the national debt becomes ________.

2.5

If the marginal propensity to consume (MPC) is 0.60, the value of the spending multiplier is

−$50 million

If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

deficit, raise

If the national debt rises to the debt ceiling and there is currently a budget _________ , the 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.

.50

If your income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC) is:

cut spending to move to AD2

In Exhibit 11-6, if the aggregate demand curve is at AD3, the government should:

b

In Exhibit 12-3, if the income tax system is currently progressive, we know that: a. Hillary has a larger tax bill than Meredith, although they pay the same tax rate. b. Meredith has a larger tax bill than Hillary and pays a higher tax rate. c. Meredith has a larger tax bill than Hillary, although they pay the same tax rate. d. Hillary has a larger tax bill than Meredith and pays a higher tax rate. e. Meredith's and Hillary's tax bills are equal.

progressive tax

In Exhibit 12-4, line B represents a:

1 − [1/(1 − MPC)]

Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC) is given by the formula

net public debt

National debt minus all government interagency borrowing.

benefits-received principle

Some cities finance their airports with a departure tax. Every person leaving the city by plane is charged a small fixed dollar amount that is used to help pay for building and running the airport. The departure tax follows the

Ronald Reagan

Supply-side economics is most closely associated with

more than 4000

Suppose a person with an income of $20,000 pays a tax of $2,000. If the tax is progressive, then how large of a tax will a person with an income of $40,000 pay?

d

Suppose fairness is defined as those who receive the greatest benefits from government should pay the most in taxes, then which of the following taxation systems would be consistent with this notion of fairness? a. User fees for national parks. b. Gasoline taxes to fund highway maintenance. c. A tax on the poor to finance food stamps and other low-income assistance programs. d. All of the answers above are consistent with this fairness concept.

a progressive tax on income

Suppose fairness is defined as those with the highest incomes can afford to pay a greater proportion of their income in taxes. Then which of the following taxation systems would be consistent with this notion of fairness? A true flat tax. A flat sales tax on consumption purchases. A progressive tax on income.

increasing taxes by $200 billion

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume (MPC) is 0.75, federal policy-makers could follow Keynesian economics and restrain inflation by

d

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? a. Those with low incomes would be made better off, and those with high incomes would be made worse off. b. People at all income levels would be better off. c. People at all income levels would be worse off. d. Those with low incomes would be made worse off, and those with high incomes would be made better off.

$250 billion

Suppose the economy in Exhibit 11 is in equilibrium at point E1 , and the marginal propensity to consume (MPC) is 0.80. Following Keynesian economics, to restore full employment, the government should cut taxes by

$100 billion

Suppose the economy in Exhibit 12 is in equilibrium at point E1 and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by

Public choice theory

The analysis of the government's decision-making process for allocating resources.

Tax multiplier

The change in aggregate demand (total spending) resulting from an initial change in taxes. As a formula, tax multiplier equals 1 - spending multiplier.

Marginal propensity to consume (MPC)

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

Marginal propensity to save (MPS)

The change in saving resulting from a given change in income.

Benefit-cost analysis

The comparison of the additional rewards and costs of an economic alternative.

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.

Discretionary fiscal policy

The deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy.

selling Treasury securities

The federal government finances a budget deficit by

progressive tax

The federal personal income tax is an example of a (an)

Marginal tax rate

The fraction of additional income paid in taxes.

change in consumer spending to a change in income

The marginal propensity to consume measures the ratio of the:

1 − MPC

The marginal propensity to save is

internal national debt

The portion of the national debt owed to a nation's own citizens.

external national debt

The portion of the national debt owed to foreign citizens.

Spending multiplier (SM)

The ratio of the change in real GDP to an initial change in any component of aggregate expenditures, including consumption, investment, government spending, and net exports. As a formula, spending multiplier equals 1/(1-MPC) or 1/MPS.

government spending

The result of the balanced budget multiplier is that aggregate demand changes by the amount of the initial change in

regressive tax above a certain income level.

The social security tax is a:

1/(1 − marginal propensity to consume)

The spending multiplier is defined as

1

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always equals

Average tax rate

The tax divided by the income.

Fiscal policy

The use of government spending and taxes to influence the nation's spending, employment, and price level.

Rational ignorance

The voter's choice to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it.

World War II

Total U.S. government expenditures as a percentage of GDP were largest during which of the following periods of time? a. The Great Depression. b. World War II. c. The Vietnam War. d. The Energy Crisis of the mid- and late- 1970s

education and health

Which of the following accounted for the second largest percentage of total federal government expenditures in recent years? Income security. National defense. Interest on the national debt. Education and health.

interest on national debt

Which of the following categories accounted for the lowest percent of the total federal government expenditures in recent years? a. Education and health. b. Interest on the national debt. c. Income security. d. National defense.

income security

Which of the following contributed the second largest percentage of total federal government expenditures in recent years? Interest on the national debt. Education and health. National defense. Income security.

c

Which of the following correctly describes the national debt? a. The excess of annual federal expenditures over annual federal tax revenues. b. Federal expenditures less annual federal tax revenues plus foreign U.S. annual bonds purchases. c. The total amount of money owed by the federal government. d. None of the answers above are correct.

australia

Which of the following countries has the smallest national debt as a percentage of GDP?

sweden

Which of the following country devote(s) about the same percentage of its GDP to taxes as the United States? Sweden. Italy. United Kingdom. Japan.

Increase government spending

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

Defense spending

Which of the following is not an automatic stabilizer?

b

Which of the following represents the basic principle of public choice theory? a. Politicians act consistently in the public's interest. b. Politicians follow their own self-interest and seek to maximize their reelection chances, rather than promote the best interests of society. c. Politicians act in the public interest once they are elected, but follow their own self-interest and seek to maximize their reelection chances during a political campaign. d. None of the above answers are correct.

d

Which of the following statements is correct? a. A sales tax on food is a regressive tax. b. A flat tax is also a proportional tax. c. Social Security is a regressive tax. d. All the above are true statements.

a proportional tax is equal to a fixed dollar amount

Which of the following statements is false? a. A proportional tax is equal to a fixed dollar amount. b. The largest source of federal government tax revenue is individual income taxes. c. The largest source of state and local governments tax revenue is sales and excise taxes. d. A sales tax on food is a regressive tax.

a

Which of the following statements is true? a. A reduction in tax rates along the downward-sloping portion of the Laffer curve would increase tax revenues. b. According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. c. The presence of automatic stabilizers tends to destabilize the economy. d. To combat inflation, Keynesians recommend lower taxes and greater government spending.

a

Which of the following statements is true? a. The most important source of tax revenue to the federal government is individual income taxes. b. Corporate income taxes are about percent of total federal government receipts. c. The taxation burden, measured by taxes as a percentage of GDP, is lighter in the United States than in most other advanced industrial countries. d. All of the above answers are correct.

a

Which of the following statements relating to public choice is true? a. A low voter turnout may result when voters perceive that the marginal cost of voting exceeds its marginal benefit. b. If the marginal cost of voting exceeds its marginal benefit, the vote is unimportant. c. Special-interest groups always cause the will of a majority to be imposed on a minority. d. All of the answers above are correct.

b

Which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment? a. A recession would develop. b. The r ate of inflation would rise. c. Interest rates would fall. d. The rate of inflation would decline.

national debt

the total amount owed by the federal government to owners of government securities