Econ Chapter 13

• According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, which side shows an inappropriate stabilization policy?

B

If receipts exceed government outlays, the government has a budget deficit.

F A budget deficit occurs when receipts, that is, tax revenues, fall short of government outlays.

Increasing the tax rate on interest income decreases saving but increases equilibrium investment.

F Increasing the tax rate on interest income decreases saving, which increases the equilibrium real interest rate and decreases equilibrium investment.

It is predicted that the current generation will pay about 75 percent of the current fiscal imbalance.

F It is predicted that the current generation will pay about 43 percent of the fiscal imbalance.

The federal government has run small budget surpluses for most of the last two decades.

F Since 1980, the federal government ran a budget surplus only between 1998 and 2001.

Supply-side effects have no effect on the government expenditure multiplier or the tax multiplier.

F Supply-side effects decrease the size of the government expenditure multiplier and increase the size of the tax multiplier.

Increasing the tax rate always increases tax revenue

F The Laffer curve shows that if the tax rate is high enough, increasing it decreases tax revenue.

The Council of Economic Advisers proposes the federal government's budget to Congress.

F The President proposes the budget to Congress. The Council of Economic Advisers helps the President by monitoring the economy and offering policy proposals.

social security hanse effect on fiscal imbalances

F The government's Social Security obligations are a large part of the fiscal imbalance.

The tax wedge in the United States is larger than the tax wedge in the United Kingdom and in France.

F The income tax wedge in the United States is smaller than that in the United Kingdom and much smaller than that in France.

Over a business cycle, the structural deficit rises and falls.

F The structural deficit shows what the deficit would be if real GDP equaled potential GDP.

Which of the following statements about U.S. government receipts is correct?

Federal receipts have ranged between 15 and 20 percent of gross domestic products for the past few decades

when the economy is in recession, the government can

Increase government purchases or decrease taxes in order to increase aggregate demand

if GDP is less than potential GDP, a tax cut can return GDP to potential GDP.

T A tax cut increases aggregate demand and aggregate supply and therefore increases real GDP.

increasing the income tax rate decreases potential gap

T Increasing the income tax rate decreases the amount of full employment, which decreases potential GDP.

Most nations have a government budget deficit.

T Most nations have government budget deficits.

Tax revenues change automatically with the state of the economy.

T Needs-tested spending is another factor in the government budget that changes automatically with the state of the economy.

One factor hindering the use of fiscal policy is the law-making time lag.

T The law-making time lag reflects the fact that it usually takes Congress a long time to change taxes or government purchases.

Generational accounting measures a generation's lifetime tax burden and government benefits.

T The question gives the definition of generational accounting.

Generational accounting shows that the present value of the government's commitments to pay benefits is ___ the present value of its taxes. a. greater than b. equal to c. less than d. not comparable to

a Currently generational accounting estimates that the present value of the government's commitments to pay benefits exceeds the present value of its taxes by about $79 trillion.

Which of the following is largest? a. Federal government outlays. b. Federal government receipts. c. The budget deficit. d. Federal government receipts equal the budget deficit.

a Federal government outlays (approximately $4.1 trillion) are larger than receipts (about $3.1 trillion) and the budget deficit (about $1.0 trillion).

A hike in income taxes is an example of a. discretionary fiscal policy. b. automatic fiscal policy. c. expansionary fiscal policy. d. a multiplier in action.

a If the tax increase does not occur automatically, it is a discretionary fiscal policy.

Most economists believe that in the United States an increase in the tax rate a. increases total tax revenue. b. does not change total tax revenue. c. decreases total tax revenue. d. probably changes total tax revenue but the direction of the change is ambiguous.

a Though it is possible for the tax rate to be so high that an increase in it lowers tax revenue, most economists think that in the United States the tax rate is not that high.

What is the largest component of federal government outlays? a. Transfer payments b. Expenditures on goods and services c. International purchases d. Interest on the debt

a Transfer payments are the largest component of federal government outlays.

The time between when an economic problem begins and policymakers determine there is a need for fiscal policy is known as:

a recognition lag

Which of these fiscal policy actions will increase real GDP in the short run?

an increase in government expenditures

which of these fiscal policy actions will increase real GDP in the short run

an increase in government expenditures

which of these is an example of automatic fiscal policy

an unemployment benefit program

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

automatic fiscal policy

The tax wedge measures the gap between a. potential GDP and real GDP. b. before-tax and after-tax wage rates. c. the demand for labor and the supply of labor. d. government spending and tax revenues.

b An income tax lowers the after-tax wage rate so that it is less than the before tax-wage rate.

In the United States today, which of the following is the largest source of revenue for the federal government? a. Corporate income tax b. Personal income tax c. Indirect tax d. Government deficit

b Personal income taxes are the largest source of tax revenue, followed by social security taxes.

A balanced budget occurs when the government's a. outlays exceeds its receipts. b. outlays equal its receipts. c. outlays are less than its receipts. d. total debt equals zero.

b. outlays equal receipts

every time the federal government runs a budget deficit, the government must

borrow, which adds to the government debt

changes in tax rates impact the economy through

both aggregate demand and aggregate supply

A government that spends more than it collects in taxes experiences a:

budget deficit

a government that collects more in taxes than it spends experiences a

budget surplus

If the economy has a recessionary gap, in order to restore full employment one potential fiscal policy is a. a tax hike. b. a cut in government expenditures. c. a tax cut. d. a decrease in the tax multiplier.

c A recessionary gap needs an expansionary policy to offset it, so an increase a tax cut is an appropriate policy because the tax cut will increase aggregate demand and aggregate supply.

Supply-side effects generally ____ the impact an increase in government spending has on real GDP and generally ____ the impact a tax cut has on real GDP. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; increase

c An increase in government spending increases the budget deficit. The real interest rate rises, which decreases investment and offsets the initial increase in real GDP from the increase in government expenditure. A tax cut reduces the tax wedge, which increases labor supply and hence increases aggregate supply. The increase in aggregate supply raises real GDP and reinforces the initial increase in real GDP from the tax cut.

Which of the following happens automatically when the economy goes into a recession? a. Government expenditure on goods and services increases. b. Income taxes rise. c. A budget deficit rises. d. Needs-tested spending falls.

c During a recession, tax revenues fall and transfer payments rise, thereby increasing the budget deficit.

It is estimated that the current generation will pay ____ percent of the fiscal imbalance and future generations will pay ____ percent. a. 89; 11 b. 50; 50 c. 43; 57 d. 18; 82

c It is estimated that the current generation will pay 43 percent of the fiscal imbalance, leaving more than half to be paid by future generations.

Suppose that the federal government's outlays in a year are $2.5 trillion, and that its receipts for the year are $2.3 trillion. The government is running a budget a. surplus of $2.3 trillion. b. surplus of $0.2 trillion. c. deficit of $0.2 trillion. d. deficit of $2.5 trillion.

c The government's deficit equals its outlays, $2.5 trillion, minus its receipts, $2.3 trillion.

Because taxes are imposed on the nominal interest rate, an increase in the inflation rate ____ the aftertax real interest rate. a. raises b. does not change c. lowers d. at first raises and then lowers

c The increase in inflation raises the nominal interest rate, which increases the amount that must be paid in taxes.

Supply-side economists point to the Laffer curve as evidence that higher taxes:

can lead to lower overall government revenues

The decline in private expenditures that results from an increase in government borrowing is known as:

crowding out

If the federal government's budget is in deficit even when the economy is at full employment, the deficit is said to be a. persisting. b. non-cyclical. c. discretionary. d. structural.

d A structural deficit exists even when the economy is producing at full employment

Currently the United States has a budget ____ and Japan has a budget ____. a. surplus; surplus b. surplus; deficit c. deficit; surplus d. deficit; deficit

d Although both Japan and the United States have government budget deficits, as a fraction of GDP the U.S. deficit is slightly larger than the Japanese deficit.

An increase in the income tax rate ____ employment and ____ potential GDP. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases

d Increasing the income tax rate decreases the supply of labor, which decreases equilibrium employment and potential GDP.

The huge 2009 fiscal stimulus was designed to increase ____ and thereby increase ____. a. aggregate supply; potential GDP b. aggregate demand; potential GDP c. aggregate supply; real GDP d. aggregate demand; real GDP

d The fiscal stimulus consisted of a large increase in government spending and a $288 billion tax cut, both of which were designed to increase aggregate demand and raise real GDP.

An increase in the income tax rate a. increases potential GDP. b. can eliminate the income tax wedge. c. increases the demand for labor d. decreases the supply of labor.

d The income tax hike decreases the return from work so the supply of labor decreases.

If government expenditure is increased by $500 billion then real GDP increases by ____. a. more than $500 billion b. exactly $500 billion c. less than $500 billion d. None of the above are necessarily correct because more information about the size of the government expenditure multiplier is needed.

d The size of the government expenditure multiplier is controversial, with some economists saying it exceeds 1 while others arguing it is less than 1.

An increase in the tax on interest income ____ the supply of saving and ____ the equilibrium amount of investment. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases

d The tax on interest income lowers the return from saving, so it decreases the supply of saving and thereby dec

In 2008, spending on Social Security, Medicare and Medicaid was less than 10% of the GDP. By 2030 this amount is expected to be around 17% of GDP. One government option to solve this problem is to:

decrease benefits

Read the news​ clip, then answer the following question. A​ "credible business​ plan" for the government to adopt is a plan to​ ______. ​It's the​ debt, stupid! Only when the government sets out a credible business plan will confidence and hiring rebound. ​Source: The Wall Street Journal​, October​ 7, 2010

decrease government expenditure

which of these is the main reason for the long run funding problems of social security

demographic changes

the america recovery and reinvestment act of 2009 is a clear example of

discretionary fiscal stimulus

congress can pass budget laws only once a year

false

for the united states budget, the fiscal year runs from jan 1 to dec 31

false

government policies that increase aggregate demand are called

fiscal stimulus

One of the primary goals of most governments with regard to the economy is:

full employment

Read the news​ clip, then answer the following question. The components of government outlays and receipts which have changed most to contribute to the huge budget deficits in 2011 and 2012 are​ ______. 2012​ Deficit: Smaller, But Still Big The Congressional Budget Office said the budget deficit was about​ $1.1 trillion in fiscal year 2012. That is about​ $200 billion smaller than in​ 2011, but still ranks as the​ fourth-largest deficit since World War II. ​Source: The Congressional Budget​ Office, October​ 5, 2012

government expenditure and transfer payments

• Which type of fiscal policy would cause the move of the AD curve represented in this graph?

higher government spending

When the economy is at full employment, a cut in household taxes will __________

increase consumption

Budget deficits automatically __________ during recessions and __________ during expansions.

increase, decrease

• Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?

increasing income tax rate

the structural budget deficit or surplus

is measured as if the economy is at full employment

According to supply-side theory, fiscal policymakers can combat the impact of recessions by:

lowering tax rates

Which of the following is not a role played by the Budget Committees of the House of Representatives and the Senate in creating fiscal​ policy?

making the initial budget proposal in february

Most economists would ____ a balanced federal budget mandate

not be in favor of

Most economists would __________ a balanced federal budget mandate.

not be in favor of

Which of these are the largest sources of federal government revenues?

personal income taxes and social security taxes

we would expect the tax multiplier to be ____ in absolute value than the government purchases multiplier

smaller

the government debt is best mesures as the

sum of past budget deficits minus the sum of past budget surplus

_____ maintains that tax policy can either create or destroy incentives to work, save and invest

supply side theory

Supply-side economics emphasizes the role that __________ play in the supply of output in the economy.

taxes

Many economists believe that tinkering with the economy via discretionary fiscal policy is not effective due to:

the presence of time lag

Which of these best represents the impact of a decrease in government spending through the multiplier process?

the shift from c to b to a

• What happens when government spending is greater than government tax revenues?

there is borrowing by the government and the government debt rises

Many economists believe that increases in government debt are not necessarily problematic if the funds are used:

to build infrastructure

the largest and fastest growing category of federal expenditure is

transfer payments

congress attempted to grant the president a line term veto but the supreme court declared this unconstitutional

true

congress debates and amends the presidents budget proposals and enacts a budget before the start of the fiscal year on oct 1

true