Econ Test 4

When countries have severe debt problems: expansionary fiscal policy can reduce real growth. they can continue to borrow forever without any adverse consequences. fiscal policy is an especially good idea. it makes no difference for fiscal policy.

expansionary fiscal policy can reduce real growth.

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The marginal tax rate for a person earning $30,000 is: 15%. 10%. 20%. more than 20%.

10%.

A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, what is that person's average tax rate? 10% 13.3% 15% 20%

13.3%

In the AD-AS diagram, a "tight" monetary policy shifts the: LRAS curve to the right. AD curve to the right. LRAS curve to the left. AD curve to the left.

AD curve to the left.

Which is a limitation of monetary policy in stabilizing the economy? Central banks have too much control over the money supply. Central banks have no discretion over policy tools. Most central bank policymakers are controlled by the government. Monetary policy is subject to uncertain lags.

Monetary policy is subject to uncertain lags.

If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable? cut taxes raise taxes No government action can achieve those goals. increase government spending

No government action can achieve those goals.

Which statement about Medicare and Medicaid is NOT correct? An individual must be at least 65 years old to qualify for Medicare. Social Security and Medicare together make up about 15% of the federal budget. Medicare reimburses the elderly for much of their medical care. Medicaid covers the poor and disabled.

Social Security and Medicare together make up about 15% of the federal budget.

The purpose of FICA taxes is to fund: presidential campaigns. health services for elderly people. Social Security payments. defense expenditures.

Social Security payments.

The largest spending program for the U.S. federal government is: Medicaid. Social Security. unemployment insurance. Medicare.

Social Security.

Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? The Fed has too much data to sort through quickly. All monetary policies must be approved by Congress before being implemented. The Fed's control of the money supply is incomplete and subject to uncertain lags. The effects of monetary policy always offset those of fiscal policy.

The Fed's control of the money supply is incomplete and subject to uncertain lags.

In what way are monetary and fiscal policies similar? They both target aggregate demand to overcome business fluctuations. Both are insulated from the political process. They are both effective when the economy suffers from real shocks. Neither involves a lag.

They both target aggregate demand to overcome business fluctuations.

Why is monetary policy not fully effective in combating a negative supply shock? When countering a negative supply shock to reduce unemployment, Fed action will raise inflation. When countering a negative supply shock, Fed action will cause deflation. The Fed has no tools that stimulate an economy after a negative supply shock. When countering a negative supply shock to reduce inflation, Fed action will raise unemployment.

When countering a negative supply shock to reduce unemployment, Fed action will raise inflation.

Deflation is: a decrease in prices; that is, a negative inflation rate. an increase in the rate of inflation. a reduction in the rate of inflation. an increase in prices.

a decrease in prices; that is, a negative inflation rate.

In a recession, automatic stabilizers cause: an increase in tax revenues and a decrease in government spending. a decrease in tax revenues and an increase in government spending. a decrease in both tax revenues and government spending. an increase in both tax revenues and government spending.

a decrease in tax revenues and an increase in government spending.

Disinflation is: a decrease in prices; that is, a negative inflation rate. a reduction in the rate of inflation. an increase in prices. an increase in the rate of inflation.

a reduction in the rate of inflation.

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be: a tax cut. an increase in money supply growth. a lower goal for inflation. an increase in government spending growth.

an increase in money supply growth.

Fiscal policy lags: are generally shorter than monetary policy lags. may be shorter or longer than monetary policy lags. are generally longer than monetary policy lags. are generally the same length as monetary policy lags.

are generally longer than monetary policy lags.

The FICA tax burden is: paid entirely by the employer. borne more by the employee even though the employer contributes an equal dollar amount. shared equally by employer and employee. the same amount as the alternative minimum tax burden.

borne more by the employee even though the employer contributes an equal dollar amount.

If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth: inflation will fall, but real GDP growth will remain unchanged compared to if the Fed had not acted. inflation will rise, but real GDP growth will remain unchanged compared to if the Fed had not acted. both inflation and real GDP growth will rise compared to if the Fed had not acted. both inflation and real GDP growth will fall compared to if the Fed had not acted.

both inflation and real GDP growth will rise compared to if the Fed had not acted.

Which of the following limits the effectiveness of fiscal policy? free riding behavior crowding out the big bucket effect the multiplier effect

crowding out

The primary tools of fiscal policy are: government expenditure and taxation. taxation and interest rates. government expenditure and money supply. money supply and money demand.

government expenditure and taxation

Under a regressive tax, people with higher incomes: pay fewer tax dollars. have the same average tax rates as those with lower incomes. have lower average tax rates. have higher average tax rates.

have lower average tax rates.

A problem that makes fiscal policy less effective is that: fiscal policy must be offset by monetary policy. government spending does not directly affect aggregate demand. higher taxes or increased borrowing to fund government spending can reduce aggregate demand. government spending is a relatively large portion of GDP.

higher taxes or increased borrowing to fund government spending can reduce aggregate demand.

If the economy is in a recession, the most appropriate fiscal policy would be to: decrease government spending in order to balance the budget. decrease both government spending and taxes. increase government spending and increase taxes in order to keep the budget balanced. increase government spending and cut taxes, thus running a higher budget deficit.

increase government spending and cut taxes, thus running a higher budget deficit.

In the case of a negative shock to aggregate demand, the central bank should: do nothing. decrease the rate of growth of the money supply to control inflation. increase the rate of growth of the money supply to restore spending growth. decrease the rate of growth of the price level to keep real growth high.

increase the rate of growth of the money supply to restore spending growth.

In the short run, an increase in government spending growth will cause the real GDP growth to: remain unchanged. increase. decrease. become unpredictable.

increase.

Increases in government spending financed through additional borrowing will typically have the largest impact on aggregate demand when: interest rates are high. increased uncertainty has caused a decrease in private sector investing. private sector spending is high. the stock market and other private investments are booming.

increased uncertainty has caused a decrease in private sector investing.

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by: decreasing money supply growth to spur the economy out of the recession. decreasing corporate taxes to encourage firms to increase their spending. increasing money supply growth, lowering real interest rates, and encouraging borrowing. increasing government expenditures to spur the economy out of the recession.

increasing money supply growth, lowering real interest rates, and encouraging borrowing.

What is the largest source of tax revenue for the U.S. federal government? individual income tax estate taxes corporate income tax Social Security and Medicare taxes

individual income tax

What are the three main sources of funds for the U.S. federal government? interest on government bonds, corporate income taxes, Social Security and Medicare taxes interest on government bonds, individual income taxes, corporate income taxes interest on government bonds, individual income taxes, Social Security and Medicare taxes individual income taxes, corporate income taxes, and Social Security and Medicare taxes

individual income taxes, corporate income taxes, and Social Security and Medicare taxes

When the Fed increases the money supply to counteract a negative real shock: half of the increase is seen in growth and half in inflation. inflation increases a lot and growth increases a little. growth remains stuck at the level of the negative real shock. growth usually returns to the level it was before the shock.

inflation increases a lot and growth increases a little.

Government spending on "interest on the debt" refers to: interest charged by the U.S. government on loans to states for education programs. interest paid to owners of government debt held by the public. spending by the U.S. government on education and highways. interest charged by the U.S. government for U.S. foreign aid to other countries.

interest paid to owners of government debt held by the public.

Which is regarded as a policy rule? keeping the money supply growth rate consistent with a given inflation rate adjusting policy actions to deal with the nature of the economic shocks discretionary changes to the money supply growth rate making policy on a case-by-case basis

keeping the money supply growth rate consistent with a given inflation rate

As a result of the multiplier effect, a tax cut causes a: smaller shift of the aggregate demand curve to the left. smaller shift of the aggregate demand curve to the right. larger shift of the aggregate demand curve to the left. larger shift of the aggregate demand curve to the right.

larger shift of the aggregate demand curve to the right.

Fiscal policy is: equally effective in dealing with real shocks as with aggregate demand shocks. more effective in dealing with real shocks than with aggregate demand shocks. less effective in dealing with real shocks than with aggregate demand shocks. not effective in dealing with either real shocks or aggregate demand shocks.

less effective in dealing with real shocks than with aggregate demand shocks.

Social Security has become _____ over time. more generous and less progressive less generous and less progressive more generous and more progressive less generous and more progressive

less generous and more progressive

If the Fed reduces M to fight inflation after a negative real shock, what should occur? no change in real growth higher real growth higher inflation lower real growth

lower real growth

The tax rate paid on an additional dollar of income is the: reserve tax rate. secondary tax rate. higher tax rate. marginal tax rate.

marginal tax rate.

The United States spends _____ on defense. a little more than other countries much less than any other country about as much as other countries much more than any other country

much more than any other country

The most appropriate monetary policy response to an asset price bubble for a central bank is to: not react to asset price bubbles because its actions will lead to a recession. react to asset price bubbles aggressively because they cannot be popped any other way. not react to asset price bubbles because monetary policy can affect only aggregate demand, not demand in a specific market. react to asset price bubbles because they can easily be identified.

not react to asset price bubbles because monetary policy can affect only aggregate demand, not demand in a specific market.

Ricardian equivalence: is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations. occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut, they save it to pay future taxes. is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. is the decrease in private spending that occurs when government increases spending.

occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut, they save it to pay future taxes.

The U.S. income tax system is: proportional. regressive. marginal. progressive.

progressive.

If you pay an average tax rate of 25% on your salary of $20,000 and your neighbor pays an average tax rate of 10% on his salary of $300,000, the tax system is: progressive. regressive. flat. proportional.

regressive.

In addition to monetary policy, the Fed also has the power to: oversee Treasury transactions. control the mortgage market. monitor the housing market. regulate banks.

regulate banks.

If, during a boom, the Fed attempts to pop an asset price bubble, such as one in the housing sector, what sector of the economy is it most sure of having the ability to influence? residential and commercial real estate consumer spending in general residential real estate the GDP of the broader economy

the GDP of the broader economy

An increase in government spending causes: an upward movement along the aggregate demand curve. a downward movement along the aggregate demand curve. the aggregate demand curve to shift to the left. the aggregate demand curve to shift to the right.

the aggregate demand curve to shift to the right.

Under a flat tax: people with higher incomes pay fewer tax dollars. the marginal tax rate is zero, but the average tax rate is one. the average tax rate is the same for people with different income levels. the amount of tax payment is the same for people with different income levels.

the average tax rate is the same for people with different income levels.

What is the annual difference between federal spending and revenues called? tax revenue shortfall spending as a percentage of GDP the deficit the national debt held by the public

the deficit

The crowding out effects of fiscal policy are smaller if: the economy is in a recession caused by low aggregate demand. real GDP growth is above the economy's long-run potential rate. the spending multiplier is also smaller. nominal wages and prices are flexible.

the economy is in a recession caused by low aggregate demand.

The Fed's power to influence aggregate demand is constrained by: the president and Congress. uncertainty and an inability for everyone to fully understand the complexity of the economy. the significant amount of U.S. dollars held in foreign reserves. contracting fiscal policy.

uncertainty and an inability for everyone to fully understand the complexity of the economy.