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American Government 100
Patterson, pgs. 493-509, AG26-15
Part IV
Fiscal Policy As An Economic Tool
True or False Questions
1. Through changes in its level of spending and taxation historically, government has not been
able to stimulate or slow the economy when it deemed necessary. True or False
2. Keynes never distinguished between a milder economic recession and severe depression,
arguing that in both cases the government should engage in massive new spending programs to
speed the recovery. True or False
3. Lower- income Americans are a core Democratic constituency and are the most deeply
affected by rising unemployment. True or False
4. The $787 billion economic stimulus bill passed by Congress in 2009 was filled with demandside programs and was basically a Republican bill. True or False
5. Democratic policy-makers have pursued tax policies that favor working-class and lowermiddle-class Americans unlike Republicans whose tax policies favor the rich and business firms.
True or False
6. Bush’s supply-side tax cuts had the support of 90 percent of congressional Republicans and
only 20 percent of congressional Democrats. True or False
7. Today the use of demand-side and supply-side approaches to help stimulate the economy is no
longer possible because both strategies carry greater risk, argues Patterson. True or False
8. Monetarists believe in increasing the money supply when the economy needs a boost and
decreasing the supply when it needs to be slowed down. True or False
9. The Federal Reserve (FED) was created in 1913 to be the lender of last resort for banks that
did not have enough cash on hand to pay their depositors during a bank panic. True or False
10. By increasing the reserve rate of member banks, the Fed puts more money into circulation;
thus, helping grow the economy. True or False
11. When it sells government securities in exchange for cash, the Fed is increasing the amount of
money in circulation, thereby increasing the amount of money available for consumption and
investment. True or False
12. During the late 1970s and early 1980s, the Fed kept the prime interest rate above 10 percent
for seven years. True or False
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13. The inflation rate has not topped 5 percent in any year during the past two decades. True or
False
14. After the economic meltdown in 2008, the Fed had the federal government print more money
to buy billions of dollars in problematic mortgages from financial institutions. True or False
15. The greater flexibility of monetary policy is a reason the Fed has emerged as the institution
that has primary responsibility for keeping the U.S. economy on a steady course. True or False
16. The fact is the Fed is a wholly impartial body, representing the public interest and no special
interest. True or False
17. The restraints on the Fed are much stronger than those on popularly elected officials. True or
False
18. Although the American economy has suffered from economic downturns during the roughly
three-quarters of a century in which the U.S. government has played a significant policy role,
none of them has matched the severity of the depressions of earlier times. True or False
Multiple Choice Questions
1. Prior to the 1930s, the federal government adopted the following policy when dealing with the
nation's economy: a) had extensive policies in place to stimulate the economy, b) believed that
the market was self-regulating and assumed a passive role, c) supported industrial subsidies, but
avoided the same for farming interests, d) limited support programs to the unemployed worker,
but no one else.
2. What shattered the idea that the economy was self-regulating, able to correct any downturn
that came along? a) the Russian Revolution, b) the Progressive Era, c) Collective bargaining, d)
the Great Depression.
3. John Maynard Keynes offered the following economic policy when a depression occurs: a)
The government should curtail its expenditures to bring needed capital into private hands, b) The
government should print less money to assure that consumers and investors can help stimulate
the economy, c) The government should engage in massive deficit spending to help stimulate
recovery, d) The government should let the market rectify the economic downturn by limiting its
role.
4. Which residents of the following state are the biggest losers nationwide since they pay a lot
more in federal taxes than they receive in benefits ($.61 for every dollar they pay in federal
taxes): a) Arizona, b) California, c) New Jersey, d) Vermont.
5. Which residents of the following state are the biggest winners nationwide since they pay a lot
less in federal taxes than they receive in benefits ($2.03 for every dollar they pay in federal
taxes): a) Alabama, b) Florida, c) Idaho, d) New Mexico.
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6. A cornerstone of President Reagan's economic program, whereby tax breaks for businesses
and upper-income individuals was the way to stimulate economic growth: a) demand-side fiscal
policy, b) business stimulation theory, c) supply-side economics, d) private-sector capital
accumulation.
7. A tax that individuals pay on capital-investments, such as property and stocks: a) moneyinvestment tax, b) capital-gains tax, c) income-generated tax, d) capital-induced tax.
8. Under Bush, the capital-gains tax rate was cut from 28% to: a) 23%, b) 19%, c) 15%, d) 8%.
9. At what point does the social security tax (FICA) on income stop, limiting the tax liability for
wealthier people? a) $110,000, b) $225,000, c) $1.2 million, d) $2.2 million.
10. When Bush took office in 2001, the budget was balanced and the national debt stood at: a)
$3.3 trillion, b) $5.7 trillion, c) $8.2 trillion, d) $10.6 trillion
11. When the federal government spends more in a year than it receives in tax and other
revenues: a) monetary debt, b) budget deficit, c) economic windfall, d) short-term losses.
12. In 2014, for example, the federal government’s budget deficit was roughly $500 billion,
meaning that it borrowed more than a ________ of what it spent: a) one-tenth, b) one-fourth, c)
one-fifth, d) one-eighth.
13. According to Patterson, the U.S. government has not had a balanced budget in: a) ten years,
b) fifteen years, c) twenty years, d) twenty five years.
14. The federal government’s national debt is roughly: a) about $7.6 trillion, b) less than $12
trillion, c) about $15 trillion, d) exceeds $18 trillion.
15. What is the approximate percent of the federal budget that goes to pay interest? A) less than
10%, b) nearly 15%, c) about 21%, d) more than 25%.
16. The means by which government affects the economy based on the adjustments of the
amount of money in circulation: a) monetary policy, b) fiscal incentives, c) supply-side
economics, d) demand management manipulation.
17. Control over the money supply rests with: a) the president, b) Congress, c) the Federal
Reserve System, d) the Treasury Department.
18. The Panic of 1907 resulted from a drop in the stock market spooking depositors, who then
rushed to withdraw their bank savings. The following stepped in to avert a banking catastrophe:
a) the Federal Government, b) the Treasury, c) state governments, d) wealthy financiers.
19. The 7 governors (except for the chair and vice-chair who serve 4 year terms) who comprise
the board of the Fed, serve terms of: a) 4 years, b) 8 years, c) 14 years, d) no limit.
20. How does the federal government pay its debts when it is running a budget deficit, referred to
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as monetizing the debt? a) It simply has the Treasury print more money, b) It directly pays those
parties it owes with IOUs, c) it directs the Federal Reserve to sell treasury bonds in the open
market to private investors, d) it requests loans from the World Bank.
21. An increase in the average level of prices of goods and services: a) inflation, b) stagflation, c)
deflation, d) recession.
22. How high did interest rates rise on business and home loans in the late 1970s due to
inflation? a) 5%, b) 12%, c) 15%, d) 19%
23. To fight inflation, the Fed should: a) decrease interest rates on both corporations and
individuals, b) decrease the reserve rate that member banks must maintain, c) expand the money
supply, d) raise interest rates and sell more government securities.
24. The buying of financial assets by the Fed strictly for the purpose of injecting more money
into the economy and paying for them through the simple act of printing more money: a)
calculated adjustment, b) quantitative easing, c) moral stimulus, d) structural injection.
25. How much money was dispersed by the Fed, buying up bad assets after other policies had not
succeeded in dealing with the 2008 economic meltdown? a) $800 billion, b) $1 trillion, c) $2.5
trillion, d) $3 trillion..
26. What is the key advantage that monetary policy has over fiscal policy according to Patterson?
a) monetary policy is less complex than fiscal policy, b) monetary policy can be implemented
more quickly, c) members of the Fed are independent of the public and powerful interest groups,
d) the Fed has the ability to affect taxes.
27. The government’s efforts to maintain a thriving economy occur in part through its taxing and
spending decisions which together are referred to as: a) fiscal policy, b) comparative advantage,
c) classical easing, d) moral hazard.
Fill-in Questions
1. According to John Maynard Keynes, when there is a downturn in the economy,
a) the government should ___________ for the slowdown in private spending by
___________ its own spending level.
b) In doing so, the government ______ ______ into the economy,
c) which stimulates _________ _________,
d) which in turn stimulates _________ ___________ and
e) and creates _____,
f) thereby __________ the _________ recovery.
2. When it comes to federal taxes, why are most of the “losers” (states that pay more taxes to the
federal government than they receive) in the northeastern section of the country?
a) States in the northeast are generally __________ than most other states.
b) Because of this, they also get _____ ________ assistance for programs designed to
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help ______-_______ people and other areas.
c) Finally, most federal ______ and _________ installations—sources of federal
money—lie outside the Northeast.
3. Why do Republicans typically resist large spending increases by the federal government?
a) because government has to _______ the money, which
b) creates _______ pressure on _________ rates,
c) including the rates that _________ ______ have to pay for ______.
4. The following are principles embraced by monetarists when dealing with the economy:
a) Too much money in circulation contributes to __________ because:
b) too many ________ are chasing too few ______, which drives up prices.
c) Too little money in circulation results in slowing the economy and rising
____________,
d) because __________ lack the ready cash and easy credit required to maintain spending
levels.
5. How does the Fed affect the money supply?
a) it can raise or lower the percent of ______ that member banks are required to _____.
b) The reserve rate is the ___________ of a bank’s funds that it must keep on hand.
c) By raising or lowering _________ ______ that member banks pay when they _______
money from the Federal Reserve.
d) By buying and selling of government ___________ by the Fed’s Open Market
Committee.
Answers
True or False Questions
1. False
3. True
5. True
7. True
9. True
11. False
13. True
15. True
17. False
Multiple Choice Questions
1. b
3. c
5. d
7. b
9. a
11. b
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13. b
15. b
17. c
19. c
21. a
23. d
25. d
27. a
Fill-in Questions
1. a) compensate, increasing, b) pumps money, c) consumer spending, d) business production, e)
jobs, f) hastening, economic
3. a) borrow, b) upward, interest, c) business firms, loans
5.a) funds, hold, b) proportion, c) interest rates, borrow, d) securities
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