Macroeconomics 5,6
Mr. Smith earns $100,000 per year. Each year he spends $50,000 and saves $50,000. He pays a 5 percent sales tax on all of his spending. Assuming the sales tax is the only tax he pays, his average tax rate out of his income is
2.5%
--Advocates of a progressive income tax use arguments EXCEPT for which of the following
A progressive tax system taxes according to benefits received.
An appreciation of the US $ should result in
a lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves.
Budget deficits may reduce
both domestic investment and net foreign investment
The pending problems with Social Security have been known for years but solutions have not been implemented due to
the political costs
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If there is decreased security about jobs and future income, which of the following is the best description of the outcome in the economy?
Aggregate demand decreases
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If the US dollar appreciates, which of the following is the best description of the outcome in the economy?
Aggregate demand decreases.
What would cause a fall in the tax base?
Either of the above.
Which of these are the largest sources of federal government revenues?
Individual income taxes and social security withholdings
When imports are greater than exports, as is usually the case for the United States, which of these must be true?
The United States must be a net foreign borrower from abroad.
Suppose that the rental rate of machinery increased temporarily. The result of this would be best described by
an decrease in the short-run aggregate supply curve only.
Which of the following changes will shift the consumption function upward?
an increase in wealth
A government agency arranges to make loans to businesses whenever an economic downturn begins. This is an example of
automatic fiscal stabilizer
As the economy heats up, the resulting increase in equilibrium real GDP immediately results in higher income tax payments, which dampen consumption spending somewhat. This is an example of
automatic fiscal stabilizer
In the long run, the rate of inflation is determined by the
growth of the money supply
The federal government periodically has to debate spending because the total federal debt
has a maximum legal limit.
Budget deficits automatically __________ during recessions and __________ during expansions.
increase, decrease
According to Keynesian theory, fiscal policymakers can combat the impact of recessions by:
increasing government spending
The relationship between the MPC and the MPS indicates that the entire decrease in household disposable income
is distributed between consumption and saving.
The cyclically adjusted budget deficit
is measured as if the economy were at potential real GDP.
If real GDP rises above total planned expenditures the economy will see
production and employment decreases
The classical model assumes
pure competition.
Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. This outcome can be explained by all of the following, except one. Which one of the following is the exception?
Automatic stabilizers
Using the figure at right, if the government levies a new unit tax in this market, S represents the original supply curve, and S1 represents the after-tax supply curve, then the revenues that the government collects from imposing this tax is represented on this graph by
BAEC
Which of these countries is a net lender to the rest of the world
China
When a household's disposable income falls to zero, what do we expect will happen?
Consumption will fall to the level of autonomous consumption
Which of the following is an argument that the incidence of corporate taxation falls entirely on consumers?
Corporations pass their tax burdens on to consumers by charging higher prices.
In what type of analysis could an increase in the tax rate lead to a decrease in tax revenues?
Dynamic tax analysis
A city government imposes a proportional income tax on all people who earn income within its city limits. In 2004, the city's income tax rate was 0.04 (4 percent), and it collected $20.00 million in income taxes. In 2005, it raised the income tax rate to 0.05 (5 percent), and its income tax collections declined to $19.20 million. What happened to the city's income tax base between 2004 and 2005?
It fell by $166 million.
Which of these equals the amount of public saving?
The government's tax revenue minus the sum of government purchases and transfer payments to households.
Which of the following statements is true when considering an economy with an upward-sloping short-run aggregate supply curve?
The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that there is decreased security about jobs and future income, the new short run position of the economy finds itself in is termed
a recessionary gap
The Congressional meetings, discussions, arguments, debates over fiscal policy and the subsequent signing or vetoing by the President of a bill are part of the
action time lag
The extent to which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by
all the above
As the economy starts to recover from a recession and more people go back to work, government funded unemployment compensation payments begin to decline. This is an example of
automatic fiscal stabilizer
Every time the federal government runs a budget deficit, the Treasury must
borrow funds from savers by selling U.S. Treasury securities.
A government that spends more than it collects in taxes experiences a
budget deficit
One problem associated with the recent fiscal stimulus designed to move the economy out of the 2009 recession is
it contributed to higher budget deficits
Say's Law
supply creates its own demand
The graph shows aggregate demand and the short-run aggregate supply curve, using modern Keynesian analysis. Suppose that the dollar becomes weaker in foreign exchange markets. Consider the two effects of a weaker dollar. Due to the weakening of the dollar, the price level ________, and real GDP _________.
will increase, may increase or decrease depending on the size of the shifts
Some economists argue that corporate income taxes are typically not paid by firms, but by
stockholders, employees, and consumers.
The Modern Keynesian short-run aggregate supply curve is best described by which of the following statements?
It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.
The income-expenditure model of real GDP determination is due to the work of
John Maynard Keynes
The slope of the consumption function is the
MPC
What is the relationship between the gross public debt and the net public debt?
The net public debt only included government debt held by the public.
If the government begins running a budget deficit, what impact will the deficit have on the loanable funds market?
The supply of loanable funds will decrease
Which of the following statements is true when considering time lags?
Time lags in fiscal policy can be extremely long and may take several years before any impact is felt.
Suppose that the value of the US $ yesterday was $1 = 4 pesos. Today the exchange rate changed such that $1 = 5 pesos. One can say the
US $ appreciated.
What happens when government spending is greater than government tax revenues
What happens when government spending is greater than government tax revenues
Which of these statements about the federal debt is correct
Which of these statements about the federal debt is correct
One criticism of the corporate income tax is that
a portion of the corporations' tax burden is passed on to consumers via higher prices for goods and services and to workers via lower wages.
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that the US dollar appreciates, the new short run position of the economy finds itself in is termed
a recessionary gap.
Higher government deficits arise from increased government spending or tax cuts, which raise aggregate demand. Thus, larger government budget deficits can raise real GDP in ▼ a recessionary an inflationary gap situation. If the economy is already at the full-employment level of real GDP, however, higher government deficits can only temporarily push equilibrium real GDP ▼ below above the full-employment level.
a recessionary, above
A government that collects more in taxes than it spends experiences a
budget surplus
If the federal government's expenditures are less than its revenue, there is a
budget surplus
In the classical model, when households save
business investment will offset that savings.
Suppose that there is a temporary, but significant increase in oil prices in an economy with an upward-sloping SRAS curve. As a policy response to this short-lived but sudden increase in oil prices, a central bank
cannot stabilize both the price level and the real GDP simultaneously
Spending on new goods and services out of a household's current income is
consumption
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.
In the Keynesian model, if disposable income were to decrease households would
decrease both their consumption and saving
A federal government budget deficit will
decrease the supply of loanable funds and increase the equilibrium interest rate
One way to reduce federal budget __________________ is to increase taxes.
deficits
Another way to decrease federal budget is to cut back on government spending, particularly on defined as benefits guaranteed under government programs such as Social Security and Medicare.
deficits, entitlements
To stem an overheated economy, the President, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on government programs. This is an example of
discretionary fiscal policy
In early 2008, it appeared that the U.S. economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as ___________ and was intended to ______________.
discretionary fiscal policy; increase consumer spending
The balance of trade is
equal to the difference between exports of goods and imports of goods
In the Keynesian model equilibrium national income
equals planned consumption, investment, government, and net export expenditures.
autonomous consumption
is measured by the intercept of the consumption function and the Y-axis.
Since the modern Keynesian Model allows for some price response, the aggregate supply curve
is upward sloping
If a country has a deficit in its balance of trade, it means that this country imports
more goods than it exports
To obtain the dollars required to purchase newly issued U.S. government bonds, foreign residents must sell ▼ more fewer goods and services in the United States than U.S. residents sell abroad. Thus, U.S. imports must ▼ be less than exceed U.S. exports. For this reason, the federal budget deficit and the international trade ▼ surplus deficit tend to be related.
more, exceed, deficit
Most economists are __________ a balanced federal budget mandate.
not in favor of
At the point at which the consumption function intersects the 45 degree reference line
planned real consumption equals real disposable income.
Another name for a "flat-rate tax" in which the same tax rate applies to all income earners is a
proportional tax
A tax system in which the average and marginal tax rates are the same for every level of taxable income and every change in income is an example of
proportional taxation
The multiplier is weakened in inflationary gaps because of
rapid price level increases.
In the Keynesian range of SRAS, if AD shifts to the left, then
real GDP falls
If the government wishes to maximize its tax revenue, it should
recognize that too high of a tax rate can decrease the tax base.
Reduction or elimination of dividend taxes is designed, in part, to
reduce the double taxation burden on individuals.
The U.S. Social Security tax is an example of a
regressive tax
The corporate income tax in the United States
results in individuals' being doubly taxed on corporate earnings.
Saving differs from savings in that?
saving is a flow, while savings is a stock.
Suppose that the value of the US dollar ($) yesterday was $1 = 4 euros. Today the exchange rate changed such that $1 = 8 euros. Given that the US $ has appreciated, the aggregate demand in the United States should
shift to the left
Given that the US $ has appreciated, the short-run aggregate supply in the United States should
shift to the right
Keynes maintained that the economy could remain long-term at levels of output below the full-employment level of output due to
sticky wages and prices
Which of the following is not a source of funding available to governments?
stock sales
When annual real federal receipts exceed annual real federal expenditures, the government operates with a budget deficit and, consequently, adds to its indebtedness during those years. The net public debt increases during those years.
surplus, does not add, decreases
The modern Keynesian Model assumes that
that prices respond to changes in aggregate demand but not fully.
In the Keynesian model, in a depression
the economy operates in the horizontal range of the SRAS curve.
Classical economists, according to John Maynard Keynes, are the ones that developed economic theory prior to
the great depression
Autonomous consumption is defined as
the level of real consumption spending that is independent of real disposable income.
In a progressive tax system
the marginal tax rate and the average tax rate increase as income levels increase and the marginal tax rate exceeds the average tax rate.
The marginal propensity to consume (MPC) is
the percentage of an additional dollar of real disposable income that will go toward additional real consumption spending.
The total value of all outstanding federal government securities is
the public debt
The national debt is best measured as the
the total value of U.S. Treasury securities outstanding.
During normal times, fiscal policy probably achieves most of its impact through
the workings of automatic stabilizers.
Should the government wish to lower the price of gasoline to the consumer, one approach might be
to reduce the gasoline excise tax.
In 2010, the United States ran a __________ with all of its major trading partners and with every region of the world.
trade deficit
The largest and fastest growing category of federal expenditures is
transfer payments
If federal budget deficits increase, then a part of that deficit
will be financed by foreign dollar holders, who will buy fewer U.S. exports, thus increasing the U.S. trade deficit