Assignment 9
1. Which of the following does not qualify as an automatic stabilizer?
a) Proportional income taxes
b) Unemployment compensation
c) Progressive income taxes
d) Welfare payments
e) Food stamps
2. Supply-side economics, where the emphasis of fiscal policy is given to greater incentives to produce created by lower taxes, is most related to which of the following economic ideas?
a) The idea of the invisible hand
b) The permanent income hypothesis
c) The Laffer curve
d) Ricardian equivalence
e) The idea of the paradox of thrift
3. The European Union states that member nations must keep their government deficits below
a) 1 percent of GDP.
b) 3 billion euros.
c) 3 percent of GDP.
d) 1 billion euros.
e) They must always keep a budget surplus.
4. Crowding out refers to
a) a decrease in exports because of higher government spending.
b) a decrease in government spending caused by higher private sector spending.
c) an increase in the consumption of imports at the expense of domestic goods and services.
d) a decrease in consumption or investment spending caused by government spending.
e) an increase in the consumption of domestic goods and services at the expense of imports.
5. If all U.S. government bonds are held by U.S. citizens, then
a) there is no net change in national wealth when the national debt changes.
b) the bondholders earn no interest income.
c) there is no tax liability for funding the debt.
d) government bonds are worthless.
e) the tax liability for funding the debt is not offset by the interest earnings of bondholders.
6. Refer to the figure above. Assume the economy is originally in equilibrium at point A. If government spending increases, causing AD1 to shift to AD2 the absolute change in the price level would be
a) zero.
b) greater than if the economy had been in equilibrium at point B.
c) the same as the change resulting from an equal increase in government spending at equilibrium point B.
d) greater than the change resulting from an equal increase in government spending at equilibrium point B.
e) less than the change resulting from an equal increase in government spending at equilibrium point B.
7. The fact that government borrowing could function like increased current taxes, reducing current household and businesses expenditures is known as
a) Ricardian equivalence.
b) Ricardian function.
c) intertemporal function.
d) intertemporal equivalence.
e) crowding out equivalence.
8. We would expect the U.S. federal government to receive most of its tax revenue from
a) federal income taxes.
b) sales taxes.
c) tariffs on foreign imports.
d) value-added taxes.
e) state income taxes.
9. Which of the following statements is not true?
a) Government deficits can have no effect on international trade.
b) Increased government borrowing raises interest rates.
c) Government deficits can lower the level of output in the economy.
d) Higher interest rates can depress investment.
e) Lower investment means fewer capital goods in the future.
10. If the government decreases spending by $10 billion and, at the same time, increases taxes by the same amount, what is the total effect?
a) Equilibrium real GDP decreases by more than $10 billion and less than $20 billion.
b) Equilibrium real GDP decreases by $20 billion.
c) Equilibrium real GDP is unchanged.
d) Equilibrium real GDP decreases by more than $20 billion.
e) Equilibrium real GDP increases.
11. An increase in government spending of $100 million that results in a decrease of private investment by $100 million is an example of
a) a balanced-budget change in fiscal policy.
b) the crowding-out effect and will leave equilibrium income unchanged.
c) discretionary monetary policy and will increase equilibrium income by $100.
d) the crowding-out effect and will increase equilibrium income by $100.
e) the principle of Ricardian equivalence and will reduce equilibrium income by $100.
12. The effect of an increase of government spending on real GDP is reduced,
a) the steeper the aggregate supply curve.
b) the faster money is converted into goods.
c) the smaller the crowding-out effect.
d) the larger the government budget surplus.
e) the smaller the percentage of government spending financed by tax increases.
13. When we compare fiscal policies over time and across countries, we find that government spending as a fraction of GNP
a) is a function of fluctuations in the business cycle.
b) is a poor reflection of a country's economic progress.
c) is much larger in the United States than in Western Europe.
d) has followed similar growth patterns in all industrial nations.
e) has fallen in all industrial countries since the 1970s.
14. Fiscal policy refers to
a) the adjustment of the GDP for inflation.
b) the use of government spending and taxation to influence the level of economic growth and inflation.
c) a policy action by Congress to overrule unpopular budget cuts by the president.
d) the purchase and sale of U.S. government securities to regulate the money supply.
e) the use of fines to penalize unfair business practices.
15. What is the main reason that public sector investment spending plays a larger role in developing nations than in industrial nations?
a) Hyperinflation prevents any private investment in developing countries.
b) Businesses of developing countries invest all their money abroad.
c) Most governments in developing countries are communist.
d) There is a larger percentage of state-owned enterprises in developing countries.
e) Most developing countries suffer from large government deficits, which cause complete crowding out of private investment.
16. A major benefit of automatic stabilizers is that they
a) guarantee a balanced budget over the course of the business cycle.
b) require legislative review by Congress before they can be implemented.
c) help increase recessionary gaps in the economy.
d) have the tendency to reduce the national debt.
e) moderate the effect of fluctuations in the business cycle.
17. Which of the following is not related to fiscal policy?
a) Balancing the budget deficit
b) Foreign exchange market intervention
c) Welfare
d) Increasing taxes
e) All of these
18. According to the figure above, if there was a 100 percent tax rate,
a) tax revenue would be greater than if the tax rate was zero percent.
b) no one would be willing to work.
c) tax revenue would be less than if the tax rate was zero percent.
d) there would be a strong incentive to work.
e) tax revenue would be maximized.
19. Personal income taxes are more important in industrial countries than in developing countries because
a) the governments of developing countries rely solely on foreign aid for revenue.
b) taxes on businesses in industrial countries are difficult to collect.
c) personal taxes are more difficult to collect in agricultural nations.
d) people are more willing to pay income tax in industrial countries.
e) developing countries have no system in operation for collecting income taxes.
20. Value-added tax is
a) an indirect tax collected at each stage of production.
b) an income tax.
c) a property tax.
d) a direct tax on individuals and firms.
e) a social security tax.
Essay Questions
1. In 1981, in the midst of a major economic recession, President Reagan proposed and Congress passed a major tax cut whereby personal income taxes were reduced by 25 percent over a three-year period. What conclusions can you draw about possible effects of this tax cut on U.S. unemployment, inflation, and output growth?
2. What is the role of the aggregate demand in elimination the GDP gap? How does the slope of the AS curve affect the fiscal policy actions necessary to eliminate the GDP gap?