Download Chapter 10 The Federal Budget and Fiscal Policy

Chapter 10 The Federal Budget and Fiscal Policy
1. Suppose that a tax structure is implemented so that the tax rate rises as the income
level rises. This tax structure is best described as being a
a. regressive tax.
b. proportional tax.
c. flat tax.
d. progressive tax.
ANS:
a. Incorrect. A regressive tax takes less of one’s income as income rises.
b. Incorrect. A proportional tax takes the same percentage of everyone’s income
regardless of income level.
c. Incorrect. A flat tax is another name for a proportional tax, and a proportional tax
takes the same percentage of everyone’s income regardless of income level.
d. Correct.
2. Suppose that you are a member of the President’s Council of Economic Advisors and
the overall price level in the nation is beginning to rise at an unacceptable rate. Which
one of the following might you recommend to ease the inflationary pressures?
a. Reduce the marginal tax rates on personal income so that individuals will have more
income to spend.
b. Increase both the tax rate and the level of government spending.
c. Offer incentives for the nation’s producers and households to actively engage in
foreign trade.
d. Reduce the level of government spending, but leave the tax structure unchanged for
now.
ANS:
a. Incorrect. With additional income to spend, there will be greater pressure on prices to
rise.
b. Incorrect. Unless the tax rate increase is sufficiently large to completely offset the
increase in government spending, this policy will still put pressure on prices to rise.
c. Incorrect. Increased net exports will put pressure on prices to rise.
d. Correct.
3. Suppose that the economy is in a strong expansion and that actual Real GDP is greater
than Natural Real GDP, resulting in a rising price level. An appropriate fiscal policy
remedy might result in a(n) _____________ in the government’s budget deficit or a(n)
_____________________ in the government’s budget surplus.
a. increase; reduction
b. increase; increase
c. reduction; increase
d. reduction; reduction
ANS:
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a. Incorrect. The economy would be in an inflationary gap, and thus contractionary fiscal
policy is called for which would reduce a budget deficit or increase a budget surplus.
b. Incorrect. The economy would be in an inflationary gap, and thus contractionary
fiscal policy is called for which would reduce a budget deficit or increase a budget
surplus.
c. Correct.
d. Incorrect. The economy would be in an inflationary gap, and thus contractionary fiscal
policy is called for which would reduce a budget deficit or increase a budget surplus.
4. The Laffer curve shows that a decrease in the tax rate will result in a(n)
_____________ in tax revenues as long as the tax base ____________ by a(n)
___________________________ the percentage reduction in the tax rate.
a. increase; falls; greater percentage than
b. increase; rises; greater percentage than
c. decrease; rises; equal percentage as
d. decrease; rises; greater percentage than
ANS:
a. Incorrect. The government’s tax revenue is the product of the tax rate and the tax base.
In order for a tax cut to result in an increase in tax revenues, the percentage rise in the tax
base must be greater than the percentage fall in the tax rate.
b. Correct.
c. Incorrect. The government’s tax revenue is the product of the tax rate and the tax base.
In order for a tax cut to result in a decrease in tax revenues, the percentage rise in the tax
base must be lesser than the percentage fall in the tax rate.
d. Incorrect. The government’s tax revenue is the product of the tax rate and the tax base.
In order for a tax cut to result in a decrease in tax revenues, the percentage rise in the tax
base must be lesser than the percentage fall in the tax rate.
5. Discretionary fiscal policy refers to
a. automatic changes in government spending and/or tax collections.
b. changes in the money supply.
c. poorly planned changes in tax rates.
d. deliberate changes in government spending and/or tax collections designed to achieve
particular economic goals.
ANS:
a. Incorrect. Discretionary fiscal policy refers to deliberate changes in government
spending and/or tax collections designed to achieve particular economic goals.
b. Incorrect. Discretionary fiscal policy refers to deliberate changes in government
spending and/or tax collections designed to achieve particular economic goals.
c. Incorrect. Discretionary fiscal policy refers to deliberate changes in government
spending and/or tax collections designed to achieve particular economic goals.
d. Correct.
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
6. Thinking in terms of the multiplier, and ignoring crowding-out, if Congress wished to
close a $100 billion recessionary gap, assuming an MPC of 0.8, it should
___________________ government purchases by _______________ billion.
a. increase; $20
b. increase; $25
c. increase; $80
d. decrease; $25
ANS:
a. Correct.
b. Incorrect. The multiplier in this problem would be equal to 5, so the government would
need to spend $20 billion in order for the economy to grow by $100 billion.
c. Incorrect. The multiplier in this problem would be equal to 5, so the government
would need to spend $20 billion in order for the economy to grow by $100 billion. d.
Incorrect. The multiplier in this problem would be equal to 5, so the government would
need to spend $20 billion in order for the economy to grow by $100 billion.
7. If the government wished to use fiscal policy to combat inflation, Keynesian theory
would call for a(n)
a. tax cut.
b. increase in government spending.
c. increase in the money supply.
d. reduction in government spending or an increase in taxes.
ANS:
a. Incorrect. A tax cut would tend to shift AD curve to the right, making inflation worse.
b. Incorrect. An increase in government spending would tend to shift the AD curve to the
right, making inflation worse.
c. Incorrect. First, Congress is in charge of fiscal, not monetary policy. Second, an
increase in the money supply would tend to shift the AD curve to the right, worsening
inflation.
d. Correct.
8. True or False. The term automatic fiscal policy refers to intentional changes in
government purchases or in tax collections enacted by Congress.
a. True.
b. False.
ANS:
a. Incorrect. Automatic fiscal policy refers to changes in government expenditures or
taxes that occur automatically due to changes in the business cycle, and does not require
any new legislation.
b. Correct.
9. A budget surplus means that
a. exports exceed imports.
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
b. imports exceed exports.
c. government expenditures exceed tax receipts.
d. tax receipts exceed government expenditures.
ANS:
a. Incorrect. A budget surplus means that tax receipts exceed government expenditures.
b. Incorrect. A budget surplus means that tax receipts exceed government expenditures.
c. Incorrect. A budget surplus means that tax receipts exceed government expenditures.
d. Correct.
10. Those who are supporters of supply-side economics stress
a. that a change in marginal tax rates has no impact on either the AD curve or the SRAS
curve.
b. that a change in marginal tax rates will primarily affect the AD curve, but not the
SRAS curve.
c. that marginal tax cuts are a means to shift the SRAS curve leftward.
d. the effect that marginal tax rate cuts have on incentives, thereby shifting the SRAS
curve rightward.
ANS:
a. Incorrect. This school of thought in macroeconomics stresses that a change in tax rates
will impact aggregate supply by altering incentives, shifting the SRAS curve rightward
and the LRAS curve rightward (if the tax cuts are permanent).
b. Incorrect. This school of thought in macroeconomics stresses that a change in tax rates
will impact aggregate supply by altering incentives, shifting the SRAS curve rightward
and the LRAS curve rightward (if the tax cuts are permanent).
c. Incorrect. This school of thought in macroeconomics stresses that a change in tax rates
will impact aggregate supply by altering incentives, shifting the SRAS curve rightward
and the LRAS curve rightward (if the tax cuts are permanent).
d. Correct.
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.