Econ Chapter 10

Economist Arthur Laffer argued what theory on tax​ rates? A. Excessivly high tax rates lead to lower government revenue. B. High tax rates make people want to work harder. C. High tax rates are a fair way to redistribute wealth. D. High tax rates should be used to punish the rich.

A. Excessivly high tax rates lead to lower government revenue.

Which of the following is an entitlement​ program? A. Medicaid spending. B. Corporate income taxes. C. Private investment spending. D. Personal consumption expenditure.

A. Medicaid spending.

What was unique about the tax cuts proposed and enacted during Ronald​ Reagan's presidency in​ 1981? A. They were meant to punish the rich. B. They were justified on the basis of increasing economic incentives. C. They were not proposed to increase supply of output. D. They were meant to make the rich pay their​ 'fair share'.

B. They were justified on the basis of increasing economic incentives.

Income taxes and social insurance taxes comprise approximately what percentage of federal​ revenues? A. ​65% B. ​95% C. ​85% D. ​55%

C. ​85%

Which program takes up the largest portion of the federal budget​ currently? A. Food Stamps. B. Social Security. C. ​Medicare/Medicaid. D. Defense.

C. ​Medicare/Medicaid.

What is the difference between inside lag and outside​ lag? A. Inside lag is the time it takes for the policy to​ work, outside lag is the time it takes to formulate a policy. B. Inside lag is the time it takes to formulate a​ policy, outside lag is the time it takes to debate policy. C. Inside lag is the time it takes for investors to​ approve, outside lag is the time it takes for the policy to work. D. Inside lag is the time it takes to formulate a​ policy, outside lag is the time it takes for the policy to work.

D. Inside lag is the time it takes to formulate a​ policy, outside lag is the time it takes for the policy to work.

Modern fiscal policy came to be accepted during the early​ 1960s, in the presidency of A. Franklin D. Roosevelt. B. Richard Nixon. C. Lyndon B. Johnson. D. John F. Kennedy.

D. John F. Kennedy.

The U.S. economy witnessed federal budget surpluses in the late 20th century under Regan, carter, or clinton

President Clinton

tax multiplier

change y -------------- change t

government spending multiplier

change y ________________ change g

To increase aggregate​ demand, a government can either ___________ spending or _________ taxes.

increase decrease

Net interest will increase when ___(interest, depreciation)_____ rates rise and when the stock of _____(capital, debt)_______ held by the public increases.

interest debt Net interest will increase when interest rates rise and when the stock of debt held by the public increases.

​Long-run average income is known as

permanent income

n the​ U.S., virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a​ recession, states should _______(reduce, increase)_____ their spending and perhaps also ____(increase, lower)______their taxes to balance their budgets.

reduce increase

An expansionary fiscal policy shifts the aggregate demand curve to the ________, ________ prices and _________ real GDP

right raises increases

In​ 2000, the Chinese government mandated three​ one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. how is the graph affected

supply to the right

Suppose that the government gave each U.S. legal resident​ $10 but everyone decided to save the money and not spend it. In this​ case, the fiscal multiplier would be A. one. B. one tenth. C. zero. D. ten.

zero It would be​ zero, because with no additional spending there would be no economic activity.

Corporate taxes are the largest component of federal revenue. A. False B. True

​False, it is individual taxes.

If the multiplier for taxes is negative 1.30 and taxes are increased by ​$160 ​billion, calculate the amount by which the demand curve will ultimately shift. Shift of the demand curve​ = ​$ ___________ billion. ​

-208​ Thus, income increases by change Y ​= multiplier times change G for an increase in government spending and decreases by change Y ​= multiplier times change T for an increase in taxes. This represents the amount by which the demand curve shifts.

Which of the following factors led the United States from federal surpluses at the end of the 1990s to deficits in the first decade of​ 2000? A. Tax cuts combined with increased spending. B. Tax cuts combined with spending cuts. C. Tax hikes combined with increased spending. D. Tax hikes combined with spending cuts.

A. Tax cuts combined with increased spending

Which of the following is one of the primary sources of federal government​ revenue? A. The social insurance tax. B. The excise tax. C. The corporate income tax. D. The capital gains tax.

A. The social insurance tax. Federal government revenue comes from two main​ sources: individual income taxes and social insurance taxes that are levied on earnings. These two sources provide the government with​ 80% of its total revenue.

Based on the​ Laffer's theory why do lower tax rates increase government​ revenue? A. When workers get to keep more of their​ salary, they will work harder thus increasing the tax base. B. Workers will be willing to work less when taxes are lower. C. Workers will think it is unfair when the government taxes them less. D. Companies will hire fewer workers when taxes are lower.

A. When workers get to keep more of their​ salary, they will work harder thus increasing the tax base.

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called A. automatic stabilizers. B. multipliers. C. permanent stabilizers. D. generalized stabilizers.

A. automatic stabilizers. Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called automatic stabilizers.

From 1966 to​ 1969, there was a 10 percent surcharge that A. did not decrease consumer spending as much as economists had initially estimated. B. increased consumer spending less than economists had initially estimated. C. increased consumer spending more than economists had initially estimated. D. decreased consumer spending more than economists had initially estimated.

A. did not decrease consumer spending as much as economists had initially estimated. From 1966 to​ 1969, the overall unemployment rate fell below 4 percent. Policymakers became concerned that the economy was overheating and this would lead to a higher inflation rate. In​ 1968, a temporary tax surcharge of 10 percent was enacted to reduce total demand for goods and services. The 10 percent surcharge was a​ "tax on a​ tax," so it raised the taxes paid by households by 10 percent.​ Essentially, the surcharge was specifically designed to be temporary and expired within a year. The surcharge did not decrease consumer spending as much as economists had initially​ estimated, however. Part of the reason was that it was temporary. Economists who have studied consumption behavior have noticed that consumers often base their spending on an estimate of their​ long-run average​ income, or permanent​ income, not on their current income.

Fiscal policy that has the intention of increasing aggregate demand is known as being A. expansionary. B. debt seeking. C. inflationary. D. contractionary.

A. expansionary.

Suppose you had a large unpaid balance on your credit card and were paying a high rate of interest. You then received a​ one-time tax rebate from the government and decided to pay down the balance on your credit card. If there were many others like you in the​ economy, would the tax cut be an effective​ stimulus? A. ​No, since debt reduction would not stimulate consumption. B. ​Yes, since debt reduction will increase credit card use. C. ​No, since debt reduction can lower interest rates. D. ​Yes, since most people use credit cards for purchases.

A. ​No, since debt reduction would not stimulate consumption. In this​ case, everyone would be effectively saving their tax cut and not spending it.

Go to the Web site for the Congressional Budget Office​ (www.cbo.gov) and find their 10 year projections for debt as a fraction of GDP.​ See, for​ example, https://www.cbo.gov/publication/49892. As of​ 2015, the​ ten-year projections just show A. a slight decrease in this measure. B. a slight increase in this measure. C. no change in this measure.

B. a slight increase in this measure. As of​ 2015, the​ ten-year projections just show a slight increase in this measure.

The multiplier effect occurs because A. any change in aggregate supply results in a change in aggregate demand. B. an initial change in output will affect the income of households and thus change consumer spending. C. changes in population always result in a change in spending and aggregate demand. D. changes in aggregate demand result in changes in aggregate supply.

B. an initial change in output will affect the income of households and thus change consumer spending. The multiplier effect occurs because an initial change in output will affect the income of households and thus change consumer spending. For​ example, an increase in government spending of​ $10 billion will initially raise household incomes by​ $10 billion and lead to increases in consumer spending.

During a​ recession, policymakers should A. identify the sectors of the economy that are the weakest and spend less there. B. either increase government spending or cut taxes. C. either decrease government spending or increase taxes. D. determine the right policy based on the status of the deficit.

B. either increase government spending or cut taxes. If the budget were initially balanced and the economy plunged into a​ recession, a budget deficit would emerge as tax revenues fell and expenditures increased. To combat the​ recession, policymakers could then either increase government spending or cut taxes. Both​ actions, however, would increase the deficit. Despite concerns about increasing the​ deficit, this is precisely the right policy. If policymakers tried to avoid running a deficit by raising taxes or cutting​ spending, that would actually make the recession worse. The key lesson here is that during a​ recession, we should focus on what our fiscal policy actions do to the​ economy, not what they do to the deficit.

Federal​ spending, spending by the U.S.​ government, consists of two broad​ components: A. education spending and federal government purchases of goods and services. B. federal government purchases of goods and services and transfer payments. C. military spending and foreign policy spending. D. federal government purchases of goods and services and military spending.

B. federal government purchases of goods and services and transfer payments. Federal​ spending, spending by the U.S.​ government, consists of two broad​ components: federal government purchases of goods and services and transfer payments. Discretionary spending constitutes all the programs that Congress authorizes on an annual basis that are not automatically funded by prior laws. It includes defense spending and all nondefense domestic spending. Entitlement and mandatory spending constitutes all spending that Congress has authorized by prior law.

Aggregate demand will increase when A. investment spending decreases because investment spending is a component of aggregate demand. B. government spending increases because government spending is a component of aggregate demand. C. taxes increase because it will provide more revenue for government spending which is a component of aggregate demand. D. government spending increases because government spending increases investment and this will increase aggregate demand.

B. government spending increases because government spending is a component of aggregate demand. Increases in government purchases directly increase aggregate demand because they are a component of aggregate demand. Decreases in government purchases directly decrease aggregate demand. Changes in taxes affect aggregate demand indirectly. For​ example, if the government lowers taxes consumers​ pay, consumers will have more income at their disposal and will increase their consumption spending. Because consumption spending is a component of aggregate​ demand, aggregate demand will increase as well. Increases in taxes will have the opposite effect. Consumers will have less income at their disposal and will decrease their consumption spending. As a​ result, aggregate demand will decrease. Changes in taxes can also affect businesses and lead to changes in investment spending.​ Suppose, for​ example, that the government cuts taxes in such a way as to provide incentives for new investment spending by businesses. Because investment spending is a component of aggregate​ demand, the increase in investment spending will increase aggregate demand.

Suppose the typical business cycle becomes shorter. This makes the conduct of active fiscal policy A. easier because the cycle is shorter. B. harder because lags in policy can now do potentially more harm. C. easier because fiscal policy is designed for short fluctuations. D. harder because fiscal policy is designed for long fluctuations.

B. harder because lags in policy can now do potentially more harm. It is very difficult to implement stabilization policies for two big reasons.​ First, there are​ lags, or​ delays, in stabilization policy. Lags arise because decision makers are often slow to recognize and respond to changes in the​ economy, and fiscal policies and other stabilization policies take time to operate. Inside lags refer to the time it takes to formulate a policy. Outside lags refer to the time it takes for the policy to actually work.

The time taken by policy makers to recognize an economic problem and take appropriate actions is known as A. policy lags. B. inside lags. C. administrative lags. D. outside lags.

B. inside lags.

As the population ages and entitlement spending on Social Security and Medicare​ increase, some have argued that we should just raise taxes to pay for them. The main argument against this solution is that the level of entitlements as a fraction of GDP is predicted to A. fall so low that raising taxes would dramatically decrease the tax burden on the economy and impede economic growth. B. rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth. C. rise so high that raising taxes would dramatically increase the tax burden on the economy and increase economic growth too much. D. fall so low that raising taxes would dramatically decrease the tax burden on the economy and increase economic growth too much.

B. rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth. The problem is that the level of entitlements as a fraction of GDP is predicted to rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth.

Under a parliamentary system like in​ Britain, there are fewer checks and balances on the government than in the United States. In a parliamentary​ system, the party that controls the legislature also runs the executive branch. Consider the inside lag for fiscal policy in England compared to that in the United States. The inside lag would be A. longer in England since it would be more difficult to reach a consensus on policy changes. B. shorter in England since it would be easier to reach a consensus on policy changes. C. shorter in the U.S. since changes in taxes or spending are approved by Congress and by the president. D. longer in England since it could take longer for the policy to work.

B. shorter in England since it would be easier to reach a consensus on policy changes. Economists recognize two broad classes of​ lags: inside lags and outside lags. Inside lags refer to the time it takes to formulate a policy. In a parliamentary​ system, the party that controls the legislature also runs the executive branch. This would make it easier to reach a consensus on policy changes.

The Congressional Budget Office​ (CBO) makes​ long-run budget deficit projections. Although these projections are based on restrictive and often unrealistic​ assumptions, the CBO makes these projections A. because they are required by law to make such projections. B. to help guide future fiscal policy. C. to help individuals plan their retirement. D. to help guide future monetary policy.

B. to help guide future fiscal policy.

If U.S. federal government spending is higher than​ revenue, resulting in a​ deficit, how could it cover the​ shortfall? A. Buy government bonds. B. Print money. C. Sell government bonds. D. All of the above.

C. Sell government bonds.

The 1981 tax cuts that occured during the beginning of the first term of President Ronald Reagan emphasized the effects of A. aggregate demand and not increases in aggregate supply. B. productivity and the budget. C. aggregate supply and not increases in aggregate demand. D. investment and consumption.

C. aggregate supply and not increases in aggregate demand. The tax cuts enacted during 1981 at the beginning of the first term of President Ronald Reagan were significant.​ However, they were not proposed to increase aggregate demand.​ Instead, the tax cuts were justified on the basis of improving economic incentives and increasing the supply of output. In other​ words, they were​ supply-side motivated. Taxes can have important effects on the supply of​ labor, saving, and economic growth. Proponents of the 1981 tax cuts emphasized the effects of supply and not increases in aggregate demand.

In recent​ years, many large organizationslong dashsuch as global accounting firmslong dashhave been structured as partnerships for tax purposes rather than corporations. This meant that they did not have to pay the corporate tax. The growth of partnerships as a form of business organization can explain some of the A. increase in the corporate tax rate that has occurred. B. rise in corporate tax revenue that has occurred. C. drop in corporate tax revenue that has occurred. D. decrease in the corporate tax rate that has occurred.

C. drop in corporate tax revenue that has occurred. The corporate tax is a tax levied on the earnings of corporations. This tax raised less than 8 percent of total federal revenues during fiscal year 2011. The tax was a more important source of revenue in past decades but has declined to​ today's relatively low level. This decline has been attributed to many​ factors, including falling corporate profits as a share of​ GDP, the growth of opportunities for tax​ shelters, incentives provided by Congress to stimulate business investment and research and​ development, and complex rules for taxing multinational corporations that operate on a global basis.

It is very difficult to implement stabilization policies because of A. consumer choices and individual decision making. B. changes in the expected price level and consumer reactions to it. C. lags and the inability to accurately forecast aspects of the economy. D. the tendency for the economy not to change.

C. lags and the inability to accurately forecast aspects of the economy. It is very difficult to implement stabilization policies for two big reasons.​ First, there are​ lags, or​ delays, in stabilization policy. Lags arise because decision makers are often slow to recognize and respond to changes in the​ economy, and fiscal policies and other stabilization policies take time to operate.​ Second, economists simply do not know enough about all aspects of the economy to be completely accurate in all their forecasts.

Unlike the U.S. federal​ government, virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a​ recession, A. state budgets go into deficits since states spend less to offset the increase in federal spending. B. state budgets do not get affected because the federal budget and state budgets are completely separate. C. state budgets go into deficits as tax revenues decline. D. state budgets do not get affected because all state budgets are always automatically balanced.

C. state budgets go into deficits as tax revenues decline.

Here is one unusual fiscal​ policy: The government would issue​ time-dated debit cards to each person that had to be spent on goods and services produced only by U.S. firms within a fixed period​ (say, three​ months) or become worthless. Suppose the government was considering whether to issue​ $400 in​ time-dated debit cards to each household or give each household​ $400 in cash instead. As far as the administration of the two programs is​ concerned, A. the debit card program is easier to administer since it can be set up as a​ food-stamps type program. B. they are equally easy to administer. C. the cash payments program is easier to administer through a tax rebate program. D. the debit card program is easier to operate since no cash transactions need to be made.

C. the cash payments program is easier to administer through a tax rebate program.

Here is one unusual fiscal​ policy: The government would issue​ time-dated debit cards to each person that had to be spent on goods and services produced only by U.S. firms within a fixed period​ (say, three​ months) or become worthless. Suppose the government was considering whether to issue​ $400 in​ time-dated debit cards to each household or give each household​ $400 in cash instead. Which of the following statements regarding the two plans is​ true? A. Cash payments would have greater immediate impact on spending since they could be spent or invested and the higher the value of the​ MPC, the greater the initial spending as well as the total impact on spending and income. B. Cash payments would have greater impact on immediate and total spending but the lower the value of the​ MPC, the larger the impact on immediate consumption spending. C. ​Time-dated debit cards would have greater immediate impact on consumption spending since they had to be spent within a specific period of time and the higher the value of the​ MPC, the greater the total impact on spending and income. D. Both programs would have the same impact on spending since they made payments of equal size and the value of the MPC would have no impact on spending.

C. ​Time-dated debit cards would have greater immediate impact on consumption spending since they had to be spent within a specific period of time and the higher the value of the​ MPC, the greater the total impact on spending and income.

Social insurance taxes and individual income taxes together comprise​ _____ percent of total federal revenue. A. 75 B. 90 C. 80 D. 60

C. 80 The single largest component of federal revenue is the individual income tax. Tax returns calculating the tax individuals or couples owed during the prior year must be filed by April 15 of every year. During the​ year, the federal government collects in advance some of the taxes due by withholding a portion of​ workers' paychecks. Taxpayers not subject to withholding or who earn income through investments must make estimated tax payments each​ quarter, so the tax due the federal government is paid evenly over the year in which it is earned. The​ second-largest component of federal revenue is social insurance​ taxes, which are taxes levied on earnings to pay for Social Security and Medicare.​ Today, social insurance taxes are almost as large as individual income​ taxes, and together they comprise 80 percent of total federal revenue. Unlike individual income​ taxes, social insurance taxes are paid only on wages and not on income from investments.

Why are stabilization policies difficult to implement​ effectively? A. Forecasting the right amount of fiscal policy is problematic. B. Fiscal policies take time to operate. C. It takes time for economic policy makers to formulate and implement new policy. D. All of the above.

D. All of the above.

If the government distributes a rebate ​(as part of a temporary tax cut​) to tax​ payers, A. a college student who receives the tax rebate is likely to use the rebate to increase current​ consumption, since she bases her consumption on current​ income, but a middle aged married man is likely to save the​ rebate, since he bases his consumption on permanent or​ long-term average income. B. a college student who receives the tax rebate is likely to save the​ rebate, since she bases her consumption on current​ income, but a middle aged married man is likely to spend the​ rebate, since he bases his consumption on permanent income. C. both the college student and the middle aged married man tend to save the​ rebate, because they base their current saving on current income. D. a college student who receives the tax rebate is likely to use the rebate to increase current​ consumption, since she bases her consumption on permanent​ income, but a middle aged married man is likely to save the​ rebate, since he bases his consumption on current income.

D. a college student who receives the tax rebate is likely to use the rebate to increase current​ consumption, since she bases her consumption on permanent​ income, but a middle aged married man is likely to save the​ rebate, since he bases his consumption on current income.

Annual government spending not stipulated by existing laws is called A. entitlement. B. inflationary. C. mandatory. D. discretionary.

D. discretionary.

From 2001 until​ 2008, A. tax increases were used to slow economic activity. B. productivity fell and increased inflation. C. wages were frozen to curb inflation. D. expansionary policies were used to stimulate the economy.

D. expansionary policies were used to stimulate the economy.

In the Great​ Depression, during the​ 1930s, A. taxes decreased. B. government spending decreased. C. politicians strongly believed in modern fiscal policy. D. there was no net fiscal expansion.

D. there was no net fiscal expansion. During the​ 1930s, politicians did not believe in modern fiscal​ policy, largely because they feared the consequences of government budget deficits. According to​ Brown, fiscal policy was expansionary only during 2 years of the Great​ Depression, 1931 and 1936. In those​ years, Congress voted for substantial payments to​ veterans, over objections of presidents Herbert Hoover and Franklin Roosevelt. Although government spending increased during the​ 1930s, taxes increased sufficiently during that same​ period, with the result that there was no net fiscal expansion.

A budget ______(deficit, surplus)____ is the amount by which government spending exceeds revenues in a given year. A budget ____(surplus, deficit)___ is the amount by which government revenues exceed government expenditures in a given year.

deficit surplus

Suppose you are trying to decide whether to take a summer job at​ Clark's Camera Store that pays ​$16 an​ hour, or work for your uncle as his graphic assistant for ​$12 an hour. At​ Clark's Camera Store you would have to pay both income and social insurance taxes on your​ earnings, but if you work for your​ uncle, he will pay you in cash so you can avoid the tax. You will prefer to work at Clark's Camera Store if the income and social insurance tax rate

less than 25% Your uncle will pay you ​$12 an hour to be his graphic assistant. The income and social insurance taxes on the ​$16 hourly earnings at​ Clark's Camera Store would have to be ​$4 to be equivalent. This would be an income and social insurance tax rate of 25​%. If the income and social insurance tax rate is less than 25​%, you will earn more working at Clark's Camera Store.

Suppose you are trying to decide whether to take a summer job at​ Clark's Camera Store that pays ​$10 an​ hour, or work for your uncle as his graphic assistant for ​$5 an hour. At​ Clark's Camera Store you would have to pay both income and social insurance taxes on your​ earnings, but if you work for your​ uncle, he will pay you in cash so you can avoid the tax. You will prefer to work for your uncle if the income and social insurance tax rate

more than 50% Determine how much the income and social insurance taxes on the hourly earnings at​ Clark's Camera Store would have to be to equal the hourly wage paid by your uncle. As the income and social insurance tax rate​ increases, it makes more sense to earn untaxed earnings. Your uncle will pay you ​$5 an hour to be his graphic assistant. The income and social insurance taxes on the ​$10 hourly earnings at​ Clark's Camera Store would have to be ​$5 to be equivalent. This would be an income and social insurance tax rate of 50​%. If the income and social insurance tax rate is more than 50​%, you will earn more working for your uncle.

In​ 1999, the Internal Revenue Service began to mail out refund checks because of changes in the tax law in 1998. Assuming that taxpayers did know that they would receive refunds but comma as consumers comma based their spending decisions solely on their current levels of income​, the result of the refund would be (increase, decrease, no change) in consumption expenditure.

no change

In​ 2000, the Chinese government mandated three​ one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. Although consumption spending rose during the vacation​ period, the data show that consumption fell before and after the vacation by approximately the same amount as spending rose during the vacation. As a​ result, there was ___(a significantly positive a significantly negative no change)___ in aggregate demand and the overall policy of stimulating the economy through mandated vacations was ___(not, very)____ effective.

no, not

Fiscal year 2015 began on __________

oct 1, 2014 The federal​ government's fiscal year in the U.S. is not the same as the calendar​ year, rather it starts on October 1 of the previous year.​ Thus, the fiscal year 2015 began on October​ 1, 2014.