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Econ Test 3-11

63 Questions
Econ Test 3-11

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Questions and Answers
  • 1. 
    A balanced budget occurs when
    • A. 

      The national debt is reduced to zero dollars.

    • B. 

      A budget deficit during one year is matched by a budget surplus in the next year.

    • C. 

      Transfer payments equal tax revenues.

    • D. 

      Government expenditures equal tax revenues.

  • 2. 
    A federal budget surplus
    • A. 

      Occurs when government expenditures exceed tax revenues.

    • B. 

      Occurs when tax revenues exceed government expenditures.

    • C. 

      Occurs when tax revenues exceed transfer payments.

    • D. 

      Occurs when monetary policy works in the opposite direction of fiscal policy.

    • E. 

      Is an impossibility.

  • 3. 
    A federal budget deficit
    • A. 

      Occurs when government expenditures exceed tax revenues.

    • B. 

      Occurs when tax revenues exceed government expenditures.

    • C. 

      Occurs when transfer payments exceed tax revenues.

    • D. 

      Will always result when Congress and the president cannot agree on expenditures.

    • E. 

      Occurs when monetary policy works in the opposite direction of fiscal policy.

  • 4. 
    Fiscal policy refers to
    • A. 

      Efforts to balance a government's budget.

    • B. 

      Changes in the money supply to achieve particular economic goals.

    • C. 

      Changes in government expenditures and taxation to achieve particular economic goals.

    • D. 

      The change in private expenditures that occurs as a consequence of changes in government spending.

  • 5. 
    Suppose Congress increases income taxes. This is an example of
    • A. 

      Expansionary fiscal policy.

    • B. 

      Expansionary monetary policy.

    • C. 

      Contractionary fiscal policy.

    • D. 

      Contractionary monetary policy.

  • 6. 
    Suppose Congress decreases income taxes. This is an example of
    • A. 

      Expansionary fiscal policy.

    • B. 

      Expansionary monetary policy.

    • C. 

      Contractionary fiscal policy.

    • D. 

      Contractionary monetary policy.

  • 7. 
    Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while contractionary fiscal policy actions include __________ government spending and/or __________ taxes.
    • A. 

      Increasing; increasing; decreasing; decreasing

    • B. 

      Decreasing; decreasing; increasing; increasing

    • C. 

      Increasing; decreasing; increasing; decreasing

    • D. 

      Decreasing; increasing; increasing; decreasing

    • E. 

      Increasing; decreasing; decreasing; increasing

  • 8. 
    Which of the following is an example of crowding out?
    • A. 

      A decrease in the rate of growth of the stock of money decreases GDP.

    • B. 

      A deficit causes an increase in interest rates, which causes a decrease in investment spending.

    • C. 

      An increase in tariffs causes a decrease in imports.

    • D. 

      A decrease in government housing subsidies causes an increase in private spending on housing.

  • 9. 
    If there is complete crowding out as a result of an increase in government purchases, there will be
    • A. 

      A decrease in aggregate demand.

    • B. 

      No change in aggregate demand.

    • C. 

      An increase in aggregate demand.

    • D. 

      A downward movement along the aggregate demand curve.

  • 10. 
    Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million. This is an example of
    • A. 

      Incomplete crowding out.

    • B. 

      Complete crowding out.

    • C. 

      Zero crowding out.

    • D. 

      A and c

    • E. 

      None of the above

  • 11. 
    The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
    • A. 

      Rise; rise

    • B. 

      Rise; fall

    • C. 

      Fall; rise

    • D. 

      Fall; fall

  • 12. 
    The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes.
    • A. 

      Rise; rise

    • B. 

      Rise; fall

    • C. 

      Fall; rise

    • D. 

      Fall; fall

  • 13. 
    Fiscal policy may not work as policymakers intend it to work because of
    • A. 

      Crowding out.

    • B. 

      Lags

    • C. 

      The position of the physical production possibilities frontier.

    • D. 

      A and b

    • E. 

      A, b, and c

  • 14. 
    Suppose the government attempts to stimulate the economy by increasing purchases without increasing taxes. Which of the following statements is most likely to be accepted by someone who believes in crowding out?
    • A. 

      The government's actions will have their intended effect.

    • B. 

      The government's actions will cause businesses to become more optimistic about the economy, and they will increase their output even more than the government had intended.

    • C. 

      The government's actions will raise interest rates, causing decreased investment and consumption, and the economy will not expand as much as the government had intended.

    • D. 

      This is a trick question, because the federal government is required by law to increase taxes by the same amount as it increases expenditures.

  • 15. 
    Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million. This is an example of
    • A. 

      Incomplete crowding out.

    • B. 

      Complete crowding out.

    • C. 

      Zero crowding out.

    • D. 

      A and c

    • E. 

      None of the above

  • 16. 
    The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
    • A. 

      Rise; rise

    • B. 

      Rise; fall

    • C. 

      Fall; rise

    • D. 

      Fall; fall

  • 17. 
    Which of the following illustrates the data lag?
    • A. 

      The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006.

    • B. 

      Policymakers wait and see what is really going on with the economy.

    • C. 

      Policymakers implement policy X on September 12, 2006, but the effects are not felt until six months later.

    • D. 

      The data lag is illustrated equally well by a, b, and c.

  • 18. 
    Which of the following illustrates the wait-and-see lag?
    • A. 

      Policymakers believe an economic downturn has occurred, but they decide not to take action until they are sure.

    • B. 

      Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.

    • C. 

      Policymakers first learn of the recession when it is five months old.

    • D. 

      Policymakers implement policy X, but it will be a few months before it starts working.

    • E. 

      Policymakers agree to policy X, but it will be at least two months before the policy is implemented.

  • 19. 
    The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.
    • A. 

      Effectiveness

    • B. 

      Transmission

    • C. 

      Legislative

    • D. 

      Data

  • 20. 
    The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.
    • A. 

      Data

    • B. 

      Wait-and-see

    • C. 

      Legislative

    • D. 

      Transmission

  • 21. 
    If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.
    • A. 

      Average

    • B. 

      Fixed

    • C. 

      Total

    • D. 

      Marginal

  • 22. 
    Taxable Income Taxes
    $0 - $23,000 9% of taxable income
    $23,001 - $42,000 $2,070 + 13% of everything over $23,000
    $42,001 - $69,000 $4,540 + 17% of everything over $42,000
    Refer to Exhibit 11-4.  If a person’s taxable income is $20,000, how much does he pay in taxes?
    • A. 

      $180 $18,000 $180

    • B. 

      $2,000

    • C. 

      $18,000

    • D. 

      $1,800

  • 23. 
    Taxable Income Taxes
    $0 - $23,000 9% of taxable income
    $23,001 - $42,000 $2,070 + 13% of everything over $23,000
    $42,001 - $69,000 $4,540 + 17% of everything over $42,000
    Refer to Exhibit 11-4.  If a person’s taxable income is $30,000, how much does he pay in taxes?
    • A. 

      $1,345

    • B. 

      $1,950

    • C. 

      $3,900

    • D. 

      $2,980

  • 24. 
    Taxable Income Taxes
    $0 - $23,000 9% of taxable income
    $23,001 - $42,000 $2,070 + 13% of everything over $23,000
    $42,001 - $69,000 $4,540 + 17% of everything over $42,000
    Refer to Exhibit 11-4.  If a person’s taxable income is $50,000, how much does he pay in taxes?
    • A. 

      $3,760

    • B. 

      $8,500

    • C. 

      $5,900

    • D. 

      $6,840

  • 25. 
    • A. 

      $7,600.

    • B. 

      $10,200.

    • C. 

      $8,780.

    • D. 

      $15,300.

  • 26. 
    Taxable Income Taxes
    $0 - $23,000 9% of taxable income
    $23,001 - $42,000 $2,070 + 13% of everything over $23,000
    $42,001 - $69,000 $4,540 + 17% of everything over $42,000
    Use the information provided in Exhibit 11-4.  What is the marginal tax rate on the 23,000th dollar earned?
    • A. 

      9%

    • B. 

      13%

    • C. 

      17%

    • D. 

      It is impossible to determine the answer to this question.

  • 27. 
    Suppose aggregate demand is too high to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n) _____________________ to close this inflationary gap.
    • A. 

      Increase in government spending

    • B. 

      Decrease in government spending

    • C. 

      Increase in taxes

    • D. 

      Decrease in taxes

    • E. 

      B or c

  • 28. 
    If the structural deficit is $330 billion and the cyclical deficit is $80 billion, it follows that the __________ is __________ billion.
    • A. 

      Public debt; $410

    • B. 

      Total budget deficit; $250

    • C. 

      Total budget deficit; $410

    • D. 

      Net public debt; $250

    • E. 

      None of the above

  • 29. 
    If an economy has a structural surplus and a cyclical deficit, it may be concluded that
    • A. 

      Fiscal policy is expansionary.

    • B. 

      Fiscal policy is contractionary.

    • C. 

      The economy is in a boom.

    • D. 

      The economy is in a recession.

  • 30. 
    Suppose that government expenditures are currently $700 billion and tax revenues are currently $550 billion.  Assume further that the government estimates that if the economy were operating at full employment government expenditures would only be $685 billion and tax revenues would be $600 billion.  In this case, the total budget deficit is _____________ billion.
    • A. 

      $85

    • B. 

      $65

    • C. 

      $150

    • D. 

      $215

  • 31. 
    Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the budget deficit?
    • A. 

      $116

    • B. 

      $284

    • C. 

      $140

    • D. 

      $144

  • 32. 
    Suppose that government expenditures are currently $700 billion and tax revenues are currently $550 billion.  Assume further that the government estimates that if the economy were operating at full employment government expenditures would only be $685 billion and tax revenues would be $600 billion.  In this case, the structural deficit is _____________ billion.
    • A. 

      $85

    • B. 

      $65

    • C. 

      $150

    • D. 

      $215

  • 33. 
    Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the structural deficit?
    • A. 

      $116

    • B. 

      $284

    • C. 

      $140

    • D. 

      $144

  • 34. 
    Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the cyclical deficit?
    • A. 

      $1,260

    • B. 

      $284

    • C. 

      $144

    • D. 

      $1,008

  • 35. 
    That part of the deficit due to output being below Natural Real GDP is called the __________ deficit.
    • A. 

      Net

    • B. 

      Gross

    • C. 

      Cyclical

    • D. 

      Structural

  • 36. 
    The deficit that exists when the economy operates at full employment is called the __________ deficit.
    • A. 

      Net

    • B. 

      Gross

    • C. 

      Cyclical

    • D. 

      Structural

  • 37. 
    Which of the following statements is true?
    • A. 

      A budget deficit occurs when government expenditures exceed tax receipts during any single year.

    • B. 

      The public debt is the total amount the federal government owes its creditors.

    • C. 

      The gross public debt is greater than the net public debt.

    • D. 

      B and c

    • E. 

      A, b, and c

  • 38. 
    Senator Smith proposes that the income tax structure be revised to have two tax rates. The first, 16 percent, applies to persons whose income is between $0 and $40,000 a year. The second, 23 percent, applies to persons whose income is more than $40,000 a year. This is a
    • A. 

      Regressive income tax structure.

    • B. 

      Proportional income tax structure.

    • C. 

      Progressive income tax structure.

    • D. 

      Cyclical income tax structure.

  • 39. 
    Jim and Janet each buy a computer and each pays $200 in sales taxes. Jim's annual income is $40,000 and Janet's annual income is $60,000. The sales tax is
    • A. 

      Progressive

    • B. 

      Cyclical

    • C. 

      Proportional.

    • D. 

      Regressive

  • 40. 
    A "flat tax" is another term for __________ tax.
    • A. 

      A progressive

    • B. 

      A proportional

    • C. 

      A regressive

    • D. 

      The inflation

  • 41. 
    The U.S. income tax is currently a __________ tax.
    • A. 

      Progressive

    • B. 

      Proportional

    • C. 

      Regressive

    • D. 

      Proactive

  • 42. 
    The top 1% of income earners in the U.S. (those with the highest taxable incomes) pay
    • A. 

      About the same percentage of their incomes in tax as the average U.S. taxpayer.

    • B. 

      A much lower percentage of their incomes in tax than the average U.S. taxpayer.

    • C. 

      A much higher percentage of their incomes in tax than the average U.S. taxpayer.

    • D. 

      About 15 percent of their incomes in income taxes

    • E. 

      A and d

  • 43. 
    What are the two types of discretionary fiscal policy?
    • A. 

      Automatic and expansionary

    • B. 

      Expansionary and contractionary

    • C. 

      Expansionary and recessionary

    • D. 

      Automatic and contractionary

  • 44. 
    If the economy is on the downward-sloping portion of the Laffer curve, a(an) __________ in tax rates will __________ tax revenues.
    • A. 

      Decrease; lower

    • B. 

      Increase; raise

    • C. 

      Decrease; raise

    • D. 

      Decrease; not change

    • E. 

      Increase; not change

  • 45. 
    If there is complete crowding out, the effective value of the multiplier is
    • A. 

      Zero

    • B. 

      One

    • C. 

      Infinite

    • D. 

      There is not enough information to answer the question.

  • 46. 
    A curve showing the relationship between tax rates and tax revenues is called a __________ curve.
    • A. 

      Phillips

    • B. 

      Keynesian

    • C. 

      Gaussian

    • D. 

      Laffer

  • 47. 
    If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.
    • A. 

      Average

    • B. 

      Fixed

    • C. 

      Total

    • D. 

      Marginal

  • 48. 
    The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.
    • A. 

      Data

    • B. 

      Wait-and-see

    • C. 

      Legislative

    • D. 

      Transmission

  • 49. 
    Elaine's taxable income increases by $1 and her tax payment increases by $0.28. Her marginal tax rate is
    • A. 

      72 percent.

    • B. 

      28 percent.

    • C. 

      56 percent.

    • D. 

      There is not enough information to answer the question.

  • 50. 
    Refer to Exhibit 11-2. Compare points A and B. Which of the following is true?
    • A. 

      At A and B, the tax rates are the same, but tax revenues are different.

    • B. 

      At A tax rates are higher than at B, but tax revenues are the same.

    • C. 

      At B tax rates are higher than at A, but tax revenues are the same.

    • D. 

      None of the above

  • 51. 
    Refer to Exhibit 11-2. At point A, if we cut tax rates slightly, tax revenues
    • A. 

      Increase.

    • B. 

      Decrease

    • C. 

      Will not change.

    • D. 

      Drop to zero.

  • 52. 
    Refer to Exhibit 11-2. At point B, if we cut tax rates slightly, tax revenues
    • A. 

      Increase

    • B. 

      Decrease

    • C. 

      Will not change.

    • D. 

      Drop to zero.

  • 53. 
    Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is complete crowding out. As a result, the aggregate demand (AD) curve in the exhibit
    • A. 

      Maintains its present position at AD1.

    • B. 

      Shifts rightward, but does not shift rightward by enough to go through point 2.

    • C. 

      Shifts rightward by enough to go through point 2.

    • D. 

      Shifts leftward.

  • 54. 
    Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose
    • A. 

      An increase in government purchases.

    • B. 

      A decrease in government purchases.

    • C. 

      An increase in taxes.

    • D. 

      A and c

  • 55. 
         8.   __________ flows from government to households.
    • A. 

      A transfer payment

    • B. 

      A tax payment

    • C. 

      The Laffer Curve

    • D. 

      Crowding out

  • 56. 
         9.   An expansionary fiscal policy will
    • A. 

      Always result in a budget deficit.

    • B. 

      Always result in a budget surplus.

    • C. 

      Sometimes result in a budget deficit.

    • D. 

      Never result in a budget surplus.

    • E. 

      More information is necessary to answer this question.

  • 57. 
    110.   A taxpayer pays __________ tax rate on additional income if the income tax structure is progressive, __________ tax rate on additional income if the income tax structure is proportional, and __________ tax rate on additional income if the income tax structure is regressive.
    • A. 

      A higher; a lower; the same

    • B. 

      A higher; the same; a lower

    • C. 

      A lower; a higher; the same

    • D. 

      The same; a lower; a higher

    • E. 

      The same; a higher; a lower

  • 58. 
       92.   The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable?
    • A. 

      No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and if the increase in tax revenues equals the increase in government purchases there is no deficit.

    • B. 

      Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues.

    • C. 

      No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and if the decrease in tax revenues is less than the increase in government purchases there is no deficit.

    • D. 

      Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and higher interest rates discourage investment spending.

  • 59. 
       94.   Both Jones and Smith agree that the economy is in a recessionary gap. Jones proposes a tax cut. Smith couldn't agree more. Jones says that lower taxes will result in higher Real GDP. Again, Smith couldn't agree more. It follows that
    • A. 

      Both Jones and Smith believe that lower taxes will raise aggregate demand, but not aggregate supply.

    • B. 

      Both Jones and Smith believe that lower taxes will raise aggregate supply, but not aggregate demand.

    • C. 

      One person believes lower taxes will raise Real GDP by increasing aggregate demand and the other person believes lower taxes will raise Real GDP by increasing aggregate supply.

    • D. 

      Both Jones and Smith believe that lower taxes will raise Real GDP by increasing both aggregate demand and aggregate supply.

    • E. 

      C or d

  • 60. 
       96.   Which of the following is not an example of crowding out?
    • A. 

      Government purchases rise, the budget deficit rises, the federal government's demand for loanable funds rises, the interest rate rises, and investment falls.

    • B. 

      Government spends more on X, prompting individuals to spend less on X.

    • C. 

      Taxes decline, the budget deficit rises, the federal government's demand for loanable funds rises, the interest rate rises, the demand rises for U.S. dollars, the dollar appreciates, and net exports decline.

    • D. 

      Business firms spend more on X, prompting households to spend less on Y.

    • E. 

      None of the above

  • 61. 
       97.   Which piece of evidence is consistent with zero crowding out?
    • A. 

      Government purchases rise and Real GDP does not change.

    • B. 

      Government purchases rise and investment spending declines.

    • C. 

      Government purchases rise and net exports decline.

    • D. 

      Government purchases rise and consumption declines.

    • E. 

      None of the above

  • 62. 
       51.   Some of the crowding out of private expenditures may come in the form of
    • A. 

      An increase in consumption.

    • B. 

      An increase in net exports.

    • C. 

      A decrease in taxes.

    • D. 

      A decrease in net exports.

  • 63. 
       50.   The crowding-out effect suggests that
    • A. 

      High taxes reduce both consumption and saving.

    • B. 

      Increases in consumption are always at the expense of saving.

    • C. 

      Increases in government spending may raise the interest rate, thereby reducing investment.

    • D. 

      Increases in government spending will close a recessionary gap.