Ch 10

Kennedy Administration

- 1960s - Kennedy cut taxes - rapid growth, stimulated economy

Clinton/Bush

- 1998 - budget surplus - bush - 10 year tax cut plan - spending went way up after 9/11 -

federal U.S. government spending consists of two broad components:

- federal government G&S - transfer payments (not included in GDP)

Why has social security not been fixed already?

- ideological opposition - political strategies to get old people votes - opposing tax increases

budget deficit benefits:

1.) increased transfer payments increase the income of some households, partly offsetting the fall in household income 2.) other households whose incomes are falling pay less in taxes, which partly offsets the decline in their household income 3.) because the corporate tax rate depends on corporate profits and profits fall in a recession, taxes on businesses also fall

governments face several layers of identity problems usually revolving around:

1.) the market without government intervention 2.) sources of market failures 3.) best way to correct market failures 4.) size of the potential benefit from market corrections 5.) what is the size of the potential cost to market intervention

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

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. Next Question

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

C. discretionary.

automatic stabilizers

Taxes and transfer payments that stabilize GDP without requiring policymakers to take explicit action.

What happens to AD during a recession and during a state trying to balance a budget during a national recession

When the national economy experiences a​ recession, the aggregate demand curve shifts to the​ left, from AD1 to AD2. A new​ equilibrium, with lower output and price​ level, is reached at​ F, where AD2 intersects AS1. When the states cut spending​ and/or raise taxes to balance their​ budgets, aggregate demand further declines. The aggregate demand curve shifts to the​ left, from AD2 to AD3. A new​ equilibrium, with lower output and price​ level, is reached at​ G, where AD3 intersects AS1.

Medicaid

a federal and state government health program for the poor

Medicare

a federal government health program for older adults

Social Security

a federal government program to provide retirement support and host of other benefits

laffer curve

a relationship between the tax rates and taxes revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity discouraged

supply-side economics

a school of thought that emphasizes the role that taxes play in the supply of output in the economy

economic welfare typically refers to

aggregate utility - a concept of well-being - goal of democratic government should be to maximize the welfare of a nation as a whole rather than special interest groups

contractionary policies

government policy actions that lead to decreases

expansionary policies

government policy actions that lead to increases in aggregate demand

fiscal allocations

how the government gets income (taxes) and how the government sponds that income

Which of the following is one of the primary sources of federal government​ revenue? A. The individual income tax. B. The sales tax C. The tax on dividends. D. The estate tax.

income and social tax are the biggest sources of federal income

increases in government spending or decreases in taxes will

increase aggregate demand and shift it to the right

largest component of federal revenue is the

individual income tax

the beginning of the Great Depression when people were failing to recognize the severity of the problem is an example of _________ lag

inside lag

Net Interest in the Budget. Net interest will increase when _________ rates rise and when the stock of ______ held by the public increases.

interest, debt

a contractionary fiscal policy shifts the aggregate demand curve to the ______ and ______​prices ,and _______ real GDP.

left, lowers, decreases

In​ 1999, the Internal Revenue Service began to mail out refund checks because of changes in the tax law in 1998. Assuming that taxpayers were not aware that they receive refunds until they until they completed their income tax statements, the result of the refund would be ______________ in consumption expenditure.

no change in consumption expenditures because consumers would not be able to plan for a change in their consumption

the big issue when it come to fiscal policy decisions is that....

not everyone values the same thing and a good economy is good for some but may be bad for others

stabilization policies

policy actions taken to move the economy closer to full employment or potential output

In 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 ______ their spending and perhaps also ___________ their taxes to balance their budgets.

reduce, increase

entitlement and mandatory spending

spending that Congress has authorized by prior law, primarily providing support for individuals

expansionary and contractionary policies are both examples of

stabilization policy

government deficits can offset part of the adverse effect of the recession and ______________ the economy

stabilize

economists generally believe that permanent tax cuts will

stimulate the economy and lead to higher output, but disagree about why this happens

the only sensible fix to SS is a combination of

tax increases and spending cuts and no politicians have been willing to address this head on in fear of push-back

budget surplues

the amount by which government revenues exceed government expenditures in a year

outside lag

the time it takes for policy to work (implementation)

inside lag

the time it takes to formulate a policy (congress)

maximizing GDP should not be the sole goal of a democratically elected government

true

reasons why inside lag occurs

- it takes time to identify and recognize a problem - takes months to a year to identify problems with the economy

Vietnam War Era

- military research increased - unemployment very low - permanent income

Regan

- tax cuts 1981 - justified tax cuts on the basis of improving economic incentives - supply-side motivated - helped economy recover

Depression Era

- using government spending and taxes to stabilize economy - no fiscal expansion because both spending and taxes increased

an individual's opinion on climate change will vary depending on....

- where they live (near shores are effected more) - how old they are ( old people will be effected for fewer years) - their job opportunities (how will policies effect this) - their awareness and of the causes of climate change Groups that are strongly affected by the first 3 points will try to influence point 4

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 cash payments program is easier to administer through a tax rebate program. B. they are equally easy to administer. C. the debit card program is easier to administer since it can be set up as a​ food-stamps type program. D. the debit card program is easier to operate since no cash transactions need to be made.

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

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

B. False ​False, it is individual taxes.

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

B. Sell government bonds.

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 tenth. B. zero. C. one. D. ten.

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

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

B. ​85%

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

C. expansionary.

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 increase economic growth too much. B. rise so high that raising taxes would dramatically increase the tax burden on the economy and increase economic growth too much. C. fall so low that raising taxes would dramatically decrease the tax burden on the economy and impede economic growth. D. rise so high that raising taxes would dramatically increase the tax burden on the economy and impede economic growth.

D. 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.

Fiscal year 2015 began on..

October 1st, 2014

The U.S. economy witnessed federal budget surpluses in the late 20th century under President __________

President Clinton

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 is more than 50​%.

permanent income

as estimate of a household's long-run average level of income

fiscal policy

changes in government taxes and spending that affect the level of GDP

decreases in government spending or increases in taxes will shift the aggregate demand curve

decrease aggregate demand and shift the curve to the left

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

decrease, increase

​Long-run average income is known as _____________ income

permanent income

budger deficit

the amount by which government spending exceeds revenues in a given year

means tested

the amount of benefit is partly based on the income of the recipient

discretionary spending

the spending programs that congress authorizes on an annual basis ex: defense, non-defense

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

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

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 increase in this measure. B. no change in this measure. C. a slight decrease in this measure.

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

A. 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. Next Question

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

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

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

A. 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. Next Question

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 as tax revenues decline. B. state budgets go into deficits since states spend less to offset the increase in federal spending. C. state budgets do not get affected because all state budgets are always automatically balanced. D. state budgets do not get affected because the federal budget and state budgets are completely separate.

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

In recent​ years, many large organizations—such as global accounting firms—have 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. decrease in the corporate tax rate that has occurred. B. drop in corporate tax revenue that has occurred. C. increase in the corporate tax rate that has occurred. D. rise in corporate tax revenue that has occurred.

B. 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.

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. determine the right policy based on the status of the deficit. D. either decrease government spending or increase taxes.

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. Next Question

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

B. 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. Next Question

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

B. 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

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

B. ​Medicare/Medicaid. (previously social security)

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

C. Excessively high tax rates lead to lower government revenue.

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

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

If the government distributes a rebate ​(as part of a temporary tax cut​) to taxpayers, A. both the college student and the middle aged married man tend to save the​ rebate, because they base their current saving on current income. B. 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. C. 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. D. 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. 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.

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

C. expansionary policies were used to stimulate the economy. During his first year in office in​ 2001, President George W. Bush passed a​ 10-year tax cut plan that decreased tax​ rates, in part to eliminate the government surpluses and return revenues to​ households, but also to stimulate the economy that was slowing down as the​ high-tech investment boom was ending. In May​ 2003, President Bush signed another tax bill to stimulate the sluggish economy​ and, in​ particular, to increase investment spending. In​ 2008, a slowing economy led President Bush and Congress to adopt tax rebates and some investment incentives in early 2008. The tax cuts were relatively​ large, approximately 1 percent of​ GDP, and the​ rebates, some as large as​ $1,800, were designed to reach 128 million households. In February​ 2009, President Obama and Congress enacted the largest stimulus package in United States history. The stimulus package proved to be controversial both in its size and composition. While many economists believe it helped the economy​ recover, others have been more skeptical.

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

C. 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. Next Question

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

C. 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. Next Question

The time it takes for policy actions to have their effect on the economy is known as A. administrative lags. B. policy lags. C. outside lags. D. inside lags

C. outside lags.

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. to help individuals plan their retirement. B. because they are required by law to make such projections. C. to help guide future fiscal policy. D. to help guide future monetary policy.

C. to help guide future fiscal policy.

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. ​Yes, since most people use credit cards for purchases. B. ​No, since debt reduction can lower interest rates. C. ​No, since debt reduction would not stimulate consumption. D. ​Yes, since debt reduction will increase credit card use.

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

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. 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. D. 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.

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

D. All of the above.

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

D. John F. Kennedy. Modern fiscal policy came to be accepted during the early​ 1960s, in the presidency of John F. Kennedy. Next Question

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 hikes combined with increased spending. B. Tax cuts combined with spending cuts. C. Tax hikes combined with spending cuts. D. Tax cuts combined with increased spending.

D. Tax cuts combined with increased spending.

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

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

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

D. aggregate supply and not increases in aggregate demand. (Supply-Side focused tax cuts of 1981) 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.

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

D. 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.

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. longer in England since it could take longer for the policy to work. C. shorter in the U.S. since changes in taxes or spending are approved by Congress and by the president. D. shorter in England since it would be easier to reach a consensus on policy changes.

D. 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. Next Question

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. Suppose a family had large credit card​ debt, which it wished to reduce. Of the two​ plans, the family would prefer A. both of them​ equally, since they involved payments of equal size. B. the debit card​ program, since they did not need to use cash to buy goods and services. C. ​neither, since the credit card was fixed and was dependent on the interest rate. D. the cash payments​ program, since cash could be used to pay off some of the credit card debt.

D. the cash payments​ program, since cash could be used to pay off some of the credit card debt.