Econ Last Test

The government debt is best measured as the:

sum of past budget deficits minus the sum of past budget surpluses.

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

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

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

budget surplus

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.

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

increase consumption

When the economy is in a recession, the government can:

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

Budget deficits automatically __________ during recessions and __________ during expansions.

increase, decrease

We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.

smaller

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

budget deficit

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 an automatic fiscal policy?

An unemployment benefit program is an example of an automatic fiscal policy. Automatic stabilizers are government spending and taxes that automatically increase or decrease depending on the phase of the business cycle. Unemployment benefits automatically increase during recessions and help to keep the recession's impact from being as severe as it would be without the program in place. Increasing tax rates and government spending do not happen automatically but instead require legislative action, which make them discretionary fiscal policy.

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

a recognition lag.

Every time the federal government runs a budget deficit, the government must:

borrow, which adds to the government debt.

The American Recovery and Reinvestment Act of 2009 is a clear example of:

discretionary fiscal stimulus. The American Recovery and Reinvestment Act of 2009 is a clear example of discretionary fiscal stimulus. This legislation involved increases in government spending and tax cuts both designed to increase aggregate demand. Discretionary fiscal restraint (or contractionary policy) would be designed to reduce aggregate demand and would involve increasing taxes and reducing government spending. An automatic fiscal policy does not require explicit action from policymakers.

For the United States budget, the fiscal year runs from January 1 to December 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

The structural budget deficit or surplus:

is measured as if the economy were at full employment.

The largest and fastest growing category of federal expenditures is __________.

transfer payments The largest and fastest growing category of federal expenditures is transfer payments. Some of these programs, such as Social Security and unemployment insurance, were started in the 1930s. Others such as Medicare began in the 1960s or later. In any case, transfer payments comprise over 60% of federal government expenditures. Defense spending is about 20% and paying interest on the national debt currently takes about 10%

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

Many economists believe that tinkering with the economy via discretionary fiscal policy is not effective due to the presence of time lags. There is a period of time before a problem is recognized, another period of time before policy can be formulated and passed, and another period of time before the policy impacts the economy. According to some economists, the presence of all these lags makes discretionary fiscal policy ineffective or even counterproductive since the timing is never right.

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

Supply-side theory maintains that tax policy can either create or destroy incentives to work, save, and invest. Higher tax rates reduce output because they are a disincentive to work, save, and invest. Conversely, lower tax rates will stimulate output since people have more incentive to work, save, and invest. This differs from the theories based on the aggregate demand side of the economy. Keynesian theory advocates active government intervention via fiscal policy when the economy is in recession in order to stimulate aggregate demand. Keynes believed that sticky wages and prices would keep the economy from adjusting without government intervention. The Council of Economic Advisors monitors the economy and keeps the President and the public informed about the current state of the economy and forecasts. They may agree or disagree with supply side theory, as it is controversial and not universally accepted.

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

When government spending is greater than government tax revenues there is borrowing by the government and the government debt rises. The government has to enter the financial markets and borrow money from households to cover the shortfall. This is accomplished through the issuance of U.S. Treasury securities - bills, notes, and bonds.

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

Many economists believe that increases in government debt are not necessarily problematic if the funds are used to build infrastructure. Building infrastructure, or investments in education, can increase productive capacity and efficiency and therefore translate to economic growth. For this reason, many economists support additional deficit spending during recessions if it is on infrastructure projects.

If the federal government's expenditures are less than its revenue, there is a __________.

budget surplus

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

According to supply-side theory, fiscal policymakers can combat the impact of recessions by lowering tax rates. Supply-siders believe that lowering taxes will encourage investment spending and increase overall output via an increase in supply. Prices will also fall as a result of that shift. Raising taxes would push the economy deeper into recession. And, increases in government spending is a Keynesian philosophy. previous

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?

According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, side B shows an inappropriate stabilization policy. A stabilization policy should smooth the GDP and keep the economy closer to the full employment level of output as shown in graph A. The policy implemented in Graph B makes the situation worse instead of better.

Changes in tax rates impact the economy through:

Changes in tax rates impact the economy through both aggregate demand and aggregate supply. A lower tax rate stimulates aggregate supply according to supply-side theory because it provides greater incentive to work, save, and invest. However, it can also increase aggregate demand because it increases disposable income that can be used for consumption.

Which of these is the main reason for the long-run funding problems of Social Security?

Demographic changes The main reason for the long-run funding problems of Social Security is demographic changes - the number of workers per retiree continues to decline. Falling birth rates after 1965 will mean long-run problems for the Social Security system, as the number of workers per retiree will continue to decline. Currently there are only about three workers per retiree and that ratio will decline to two workers per retiree in the coming decades. Declining life expectancy and postponing retirement age would actually help Social Security since it would lead to retirees drawing benefits for shorter periods of time.

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​ ______.

From the graphs in the​ textbook, you can see that during 2011 and​ 2012, transfer payments and government expenditure increased. In​ particular, transfer payments exploded when the government tried to stimulate economic activity.

Which type of fiscal policy would cause the move of the AD curve represented in this graph? (shift rightward)

Higher government spending Higher government spending would cause the move of the AD curve represented in this graph. Higher government spending would increase aggregate demand which is represented by a rightward shift in the AD curve. Higher taxes and lower money supply would cause the AD curve to shift to the left. In addition, decreasing the money supply is monetary policy and not fiscal policy.

Which of these are the largest sources of federal government revenues? Property taxes and excise taxes Corporate income taxes and sales tax Personal income taxes and Social Security taxes

Personal income taxes and Social Security taxes Personal income taxes and Social Security taxes are the largest sources of federal government revenues. The federal government derives roughly 75 percent of its revenue from these two sources. Corporate income tax comprises about 14 percent of federal government revenue with the remainder coming from all other sources.

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

Supply-side economics emphasizes the role that taxes play in the supply of output in the economy. Supply-side theory focuses on the impact of a reduction in taxes on aggregate supply. Specifically reducing taxes will increase the supply of labor and increase overall output. For this reason, proponents of supply-side economics believe that lowering tax rates stimulates growth. In general, they are also in favor of limited government intervention outside of tax reduction.

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

Supply-side economists point to the Laffer curve as evidence that higher taxes can lead to lower overall government revenues. According to the Laffer curve, tax rates can become so high they are a disincentive to make additional revenue. The marginal benefit to entrepreneurs of making an extra dollar is not sufficient to justify the marginal cost. Therefore, overall tax revenues fall as output falls even though the profits are taxed at a higher rate. Supply-side economists advocate lowering taxes to incentivize higher production and output and maintain that tax revenues can increase as a result. Additional Learning Would you rather have 25% of $100, or 100% of $10? The supply-side argument is that lowering the tax rate from 100% to 25% will generate more tax revenue because output will increase. Of course this example is severe to emphasize the point.

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

Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called automatic fiscal policy. The progressive tax system automatically collects higher taxes as income increases which serves to rein in spending during economic expansions. Conversely, when the economy is contracting automatic increases in government spending occur as more welfare and unemployment benefits are distributed. These automatic stabilizers serve to smooth the fluctuations in the business cycle. Discretionary fiscal policy can be used to stabilize the economy but it does not occur automatically. Structural fiscal policy is not a term used in this context.

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

The decline in private expenditures that results from an increase in government borrowing is known as crowding out. If government borrowing increases interest rates, it will reduce business investment and consumer spending. This spending reduction is due to crowding out. Stabilization attempts to smooth fluctuations in the economy.

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?

The government might want to increase income tax rates if the economy is operating at too high a level of output. Policy advocates argue that the government needs contractionary policies during times when the economy is operating at too high a level of output. These would include decreasing government spending and/or increasing taxes. Increasing the money supply and lowering interest rates is expansionary monetary policy, not contractionary fiscal policy. Higher taxes take money away from disposable income and reduce consumption by more than that amount depending on the size of the multiplier.

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

The shift from c to b, and then to a best represents the impact of a decrease in government spending through the multiplier process. The initial shift from c to b is equal to the decrease in government spending. But, after a brief period of time, total aggregate demand will fall even further as the decrease in government spending in turn decreases worker income that was used for consumption. Additional Learning The multiplier effect works in both directions.

When the economy is in a recession, the government can:

When the economy is in a recession, the government can increase government purchases or decrease taxes in order to increase aggregate demand. Because changes in government purchases and taxes lead to changes in aggregate demand, they can affect the level of real GDP, employment, and the price level. When the economy is in recession, the government can stimulate aggregate demand by increasing purchases or putting more money in consumers' pockets to spend via a tax cut. Cutting government expenditures while holding taxes constant will push the economy deeper into recession. The lower purchases and higher taxes may decrease aggregate supply, but that would make the recession worse, not better.

Read the news​ clip, then answer the following question. A​ "credible business​ plan" for the government to adopt is a plan to​ ______.

decrease government expenditure

Congress can pass budget laws only once a year

false

The President has veto power to eliminate specific items in a budget bill and approve others

false

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 not be in favor of a balanced federal budget mandate. A balanced budget mandate ties the hands of government and does not allow for automatic and discretionary fiscal policy action to move the economy out of a recession. However, many might support a structurally balanced budget that still allowed for cyclical imbalances. In this case, the budget would be in surplus during strong economic times and in deficit during recessions. Over the long term it would balance, but not necessarily be balanced in any given year.

Congress debates and amends the President's budget proposals and enacts a budget before the start of the fiscal year on October 1

true