ECON 1A - CH 27

Suppose a political candidate hired you to develop two arguments in favor of a flat tax. Consider the following list of arguments about changing to a flat​ tax: A. There would be a reduction in paperwork and the compliance cost of the tax system. B. The complexities in the current tax code allow the government to pursue other policy goals. C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on​ high-income taxpayers would be reduced. D. There are potential increases in labor​ supply, savings, and investment from a lower marginal tax rate. 1. Which two out of the above list of arguments would you advance in favor of a flat​ tax? 2. Consider the same list of arguments about changing to a flat tax. Which two out of the above list of arguments would you advance against a flat​ tax?

1. A and D 2. B and C

Consider the following​ statement: ​"Real GDP is currently​ $17.7 trillion, and potential real GDP is​ $17.4 trillion. If Congress and the president would decrease government purchases by​ $300 billion or increase taxes by​ $300 billion, the economy could be brought to equilibrium at potential​ GDP." 1. If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by A. less than​ $300 billion. B. exactly​ $300 billion. C. more than​ $300 billion. D. None of the​ above; equilibrium real GDP would actually increase. 2. Therefore, the statement above is (correct/incorrect).

1. C 2. incorrect

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase? A. ​Yes, because fiscal policy and monetary policy are separate things. B. ​Uncertain, because it depends on the response of investment and consumption to the interest rate. C. ​No, because without an expansion of the money​ supply, the government cannot spend more money. D. ​Yes, because the government can expand the money supply itself.

A

It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. ​However, tax laws have become increasingly complicated because A. the tax laws are used to encourage certain activities and discourage others. B. the more complicated the tax laws the more fair they are. C. households would benefit more from simpler taxes than businesses would. D. simpler tax forms would make it easier for businesses and households to cheat on their taxes.

A

The national debt is best measured as A. the total value of U.S. Treasury securities outstanding. B. the value of all debts of private citizens and businesses. C. the difference between federal government spending and federal taxes. D. the total value of stocks issued in a country.

A

What changes should they make if they decide a contractionary fiscal policy is​ necessary? A. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. B. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. C. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. D. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

A

Government spending and taxes that increase or decrease without any actions taken by the government are referred to as A. government expenditures. B. automatic stabilizers. C. monetary policy. D. discretionary fiscal policy.

B

When actual GDP is below potential GDP the budget deficit increases because​ of: A. a decrease in transfer payments and a decrease in tax revenues. B. an increase in transfer payments and a decrease in tax revenues. C. an increase in transfer payments and an increase in tax revenues. D. an decrease in transfer payments and an increase in tax revenues.

B

Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.) A. The government spends more on the military to provide assistance to England after a natural disaster. B. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. C. Additional taxes are collected as the economy experiences an increase in income resulting from economic growth. D. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. E. A state government borrows money to finance the building of a new bridge. F. The president and Congress reduce tax rates to increase the amount of investment spending.

B, D, E

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up A. about 85 percent of federal government expenditures. B. about 45 percent of federal government expenditures. C. less than 10 percent of federal government expenditures. D. less than 1 percent of federal government expenditures.

C

The largest and​ fastest-growing category of federal expenditures is A. defense spending. B. grants to state and local governments. C. transfer payments. D. interest on the national debt.

C

What is the difference between the federal budget deficit and federal government​ debt? A. The federal budget debt is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government deficit is the accumulation of all past debts. B. The federal budget deficit is the​ year-to-year surplus in tax revenues relative to government spending ​ (T > G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits. C. The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits. D. The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through corporate bonds. The federal government debt is the accumulation of all past deficits.

C

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending? A. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to a decrease in induced spending. B. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to a decrease in induced spending. C. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending. D. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to an increase in induced spending.

C

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession? A. Consumers spend more than they would in the absence of social insurance​ programs, like unemployment. B. During​ recessions, tax obligations fall due to falling wages and profits. C. Transfer payments to households increase. D. All of the above.

D

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes? A. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. B. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. C. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. D. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

D

What is fiscal​ policy? A. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

D

What is meant by crowding​ out? A. Crowding out is a decline in private expenditures as a result of decreases in government purchases. B. Crowding out is an increase in private expenditures as a result of decreases in government purchases. C. Crowding out is an increase in private expenditures as a result of increases in government purchases. D. Crowding out is a decline in private expenditures as a result of increases in government purchases.

D

Which can be changed more​ quickly: monetary policy or fiscal​ policy? A. Fiscal policy can be changed more quickly than monetary policy. Monetary policy has much longer delays due to the larger number of legislators involved. B. Fiscal policy can be changed more quickly than monetary policy. Fiscal policy has much shorter delays due to the smaller number of legislators involved. C. Monetary policy can be changed more quickly than fiscal policy. Fiscal policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. D. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

D

Which of the following are categories of federal government​ expenditures? A. grants to state and local governments B. interest on the national debt C. transfer payments D. All of the above.

D

Which of the following best describes the difference between crowding out in the short run and in the long​ run? A. In the short run and the long​ run, most economists believe that an increase in government purchases will result in complete crowding out of private expenditures. B. In the short run and the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the simulative effect of an increase in government purchases on aggregate demand. C. In the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the simulative effect of an increase in government purchases on aggregate demand. In the short​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. D. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the simulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

D

Who is responsible for fiscal​ policy? A. The federal government and the Federal Reserve jointly control fiscal policy. B. Fiscal policy is controlled by market forces. C. The Federal Reserve controls fiscal policy. D. The federal government controls fiscal policy.

D

If the government increases expenditure without raising​ taxes, this will A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector. C. cause a decrease in the domestic exchange rate which will increase exports and decrease imports. D. All of the above. E. A and B only.

E