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15

Economics

15.1   The Government Budget: Some Facts and Figures

1) Subtracting government investment from government purchases gives us the amount of government

A) outlays.

B) primary expenditures.

C) secondary spending.

D) consumption expenditures.

 

 

2) The three main categories of government outlays are

A) net interest payments, government investment, and government consumption expenditures.

B) net government subsidies, the government deficit, and government purchases.

C) government purchases, transfer payments, and net interest payments.

D) government consumption expenditures, government investment, and transfer payments.

 

 

3) From the late 1960s to the late 1990s, the share of GDP devoted to government purchases

A) drifted gradually upward.

B) drifted gradually downward.

C) remained fairly steady.

D) increased, but only after the onset of a war or a military buildup.

 

 

4) From the 1950s to the 2010s, transfer payments' share of GDP

A) steadily increased.

B) steadily decreased.

C) remained fairly steady.

D) increased during Democratic administrations and decreased during Republican administrations.

 

 

 

5) Interest payments by the government as a share of GDP

A) have steadily increased from the 1940s to the 2010s.

B) remained fairly steady from the 1940s to the 2010s.

C) increased in the 2000s and 2010s, but were fairly steady before that.

D) increased sharply in the 1940s and 1980s.

 

 

6) Compared with other countries in the OECD, U.S. government spending relative to GDP is

A) among the highest.

B) about average.

C) slightly below average.

D) among the lowest.

 

 

7) Compared with other countries in the OECD, French government spending relative to GDP is

A) among the highest.

B) about average.

C) slightly below average.

D) among the lowest.

 

 

8) The largest source of tax receipts for the government is

A) personal taxes.

B) contributions for social insurance.

C) taxes on production and imports.

D) corporate taxes.

 

 

 

9) The type of tax receipts that has shown the largest growth since the end of World War II has been

A) personal taxes.

B) contributions for social insurance.

C) taxes on production and imports.

D) corporate taxes.

 

 

 

10) The type of tax receipts that has shown the slowest growth since World War II has been

A) personal taxes.

B) contributions for social insurance.

C) taxes on production and imports.

D) corporate taxes.

 

 

11) Net interest payments by the government are usually

A) small and sometimes negative for both the federal, and state and local governments.

B) small and sometimes negative for the federal government, but large and positive for state and local governments.

C) small and sometimes negative for state and local governments, but large and positive for the federal government.

D) large and positive for both the federal, and state and local governments.

 

 

12) State and local governments rely on ________ as their primary source of tax receipts.

A) personal taxes

B) contributions for social insurance

C) indirect business taxes

D) corporate taxes

 

 

 

13) The primary deficit is equal to

A) outlays - tax revenues.

B) government purchases + transfers + net interest - tax revenues.

C) outlays + net interest - tax revenues.

D) government purchases + transfers - tax revenues.

 

 

14) The primary deficit is equal to

A) the amount by which government purchases, transfers, and net interest exceed tax revenues.

B) the amount by which government purchases and transfers exceed tax revenues.

C) the deficit plus net interest payments.

D) total tax revenues minus net interest minus government expenditures.

 

 

 

15) The deficit is

A) the amount by which government purchases, transfers, and net interest exceed tax revenues.

B) the amount by which government purchases and transfers exceed tax revenues.

C) the primary deficit minus net interest payments.

D) total tax revenues minus net interest minus government expenditures.

 

 

16) The amount by which government purchases and transfers exceed tax revenues is known as the

A) primary surplus.

B) primary deficit.

C) primary current deficit.

D) government debt.

 

 

 

17) The current deficit is

A) the deficit minus government investment.

B) the deficit plus net interest payments.

C) the deficit minus current expenditures.

D) the deficit minus depreciation.

 

 

18) The current deficit is

A) the deficit plus net interest payments.

B) current expenditures minus tax revenues.

C) outlays minus tax revenues.

D) the deficit minus depreciation.

 

 

19) The primary current deficit is

A) current expenditures - tax revenues.

B) current expenditures + transfers + net interest - tax revenues.

C) current expenditures - net interest - tax revenues.

D) current expenditures + transfers - tax revenues.

 

 

 

20) The current deficit minus net interest is called the

A) primary deficit.

B) net current deficit.

C) current surplus.

D) primary current deficit.

 

 

15.2   Government Spending, Taxes, and the Macroeconomy

 

1) Classical economists think that lump-sum tax changes

A) should be used to smooth business cycles.

B) have a powerful effect on the economy.

C) affect aggregate demand after a lag.

D) have no effect because of Ricardian equivalence.

 

 

2) The political process by which fiscal policy is made

A) is relatively rapid, contributing to the effectiveness of fiscal policy.

B) requires only that the president approve changes to the budget, a decision that takes several months.

C) is efficient in reaching a decision within a year.

D) is slow and results in a long time lag for fiscal policy.

 

 

 

3) Provisions in the budget that cause government spending to rise or taxes to fall without legislation when GDP falls are known as

A) primary deficit enhancers.

B) expansionary fiscal stimulus.

C) non-political fiscal policy.

D) automatic stabilizers.

 

 

4) Which of the following would not act as an automatic stabilizer?

A) Unemployment insurance

B) Government purchases

C) Personal income taxes

D) Corporate income taxes

 

 

5) Because of automatic stabilizers, in recessions the government budget deficit ________, while in expansions the deficit ________.

A) falls; rises

B) falls; falls

C) rises; falls

D) rises; rises

 

 

6) An example of an automatic stabilizer is

A) consumer spending.

B) inflation.

C) unemployment insurance.

D) discretionary fiscal policy.

 

 

 

7) The amount the government budget deficit would be if the economy were at full employment is known as the

A) primary deficit.

B) full-employment deficit.

C) natural deficit.

D) current deficit.

 

 

 

8) Since 1960, the only period of several years when the full-employment government budget deficit was negative (that is, there was a full-employment surplus) was

A) from 2000 to 2005.

B) the late 1990s and early 2000s.

C) the mid-1980s.

D) the early 1970s.

 

 

9) Government capital consists of

A) money owned by the government.

B) securities owned by the government.

C) the buildings owned by the government in Washington, D.C.

D) long-lived physical assets owned by the government.

 

 

10) All of the following are government capital EXCEPT

A) roads.

B) schools.

C) Treasury securities.

D) mass-transit systems.

 

 

 

11) The total amount of taxes paid divided by before-tax income is the

A) median taxpayer rate.

B) rate of hysteresis.

C) average tax rate.

D) marginal tax rate.

 

 

12) The marginal tax rate is

A) the fraction of an additional dollar of income that must be paid in taxes.

B) the total amount of taxes paid divided by after-tax income.

C) the total amount of taxes paid divided by before-tax income.

D) the average amount of government spending that is financed by taxes.

 

 

 

13) An increase in the marginal tax rate, with the average tax rate held constant, will

A) increase the amount of labor supplied at any real wage.

B) not affect the amount of labor supplied at any real wage.

C) decrease the amount of labor supplied at any real wage.

D) increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate, but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

 

 

14) A decrease in the marginal tax rate, with the average tax rate held constant, will

A) increase the amount of labor supplied at any real wage.

B) not affect the amount of labor supplied at any real wage.

C) decrease the amount of labor supplied at any real wage.

D) increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate, but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

 

 

 

15) A decrease in the average tax rate, with the marginal tax rate held constant, will

A) increase the amount of labor supplied at any real wage.

B) not affect the amount of labor supplied at any real wage.

C) decrease the amount of labor supplied at any real wage.

D) increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate, but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

 

 

16) An increase in the average tax rate, with the marginal tax rate held constant, will

A) increase the amount of labor supplied at any real wage.

B) not affect the amount of labor supplied at any real wage.

C) decrease the amount of labor supplied at any real wage.

D) increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate, but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.

 

 

 

17) Suppose that all workers place a value on their leisure of 40 goods per day. The production function relating output per day Y to the number of people working per day N is

                        Y = 200NN2

and the marginal product of labor is

                        MPN = 200 - 2N.

A 20% tax is levied on wages. Output per day would be

A) 5,625.

B) 7,250.

C) 9,375.

D) 11,250.

 

 

 

18) Suppose that all workers place a value on their leisure of 40 goods per day. The production function relating output per day Y to the number of people working per day N is

                         Y = 200N - N2

and the marginal product of labor is

                         MPN = 200 - 2N.

A 20% tax is levied on wages. In terms of lost output, what is the cost of the distortion introduced by this tax?

A) 25

B) 75

C) 150

D) 225

 

 

19) Taxes distort economic behavior because they

A) change the composition of income and spending.

B) cause deviations in economic behavior from the efficient, free-market outcome.

C) change the balance between private and public expenditures.

D) change the composition of consumption, investment, government spending, and net exports.

 

 

 

20) Assume that the lost output due to tax distortions is proportional to the square of the tax rate. If the average cost of the distortion created by taxes is currently $1000, and the tax rate is increased from 40% to 50%, the average cost of the distortion created by taxes will increase to

A) $383.33.

B) $450.00.

C) $640.

D) $1562.50.

 

 

21) The average cost of the distortion created by taxes

A) increases proportionately with the tax rate.

B) is lower when the tax rate is constant than when it fluctuates.

C) is higher when the tax rate is constant than when it fluctuates.

D) equals the square root of the tax rate.

 

 

22) An example of tax smoothing is provided by evidence of

A) temporary changes in defense expenditures by the government.

B) reductions in tax rates prior to presidential elections.

C) Keynesian tax cuts designed to help the economy recover from a recession.

D) reliance on debt financing rather than taxation during World War II.

 

 

15.3   Government Deficits and Debt

 

1) The total value of government bonds outstanding at any particular time is called the

A) government debt.

B) government deficit.

C) seignorage revenue.

D) yield curve.

 

 

2) Increases in the debt-GDP ratio are primarily caused by

A) a high growth rate of GDP.

B) a high government deficit relative to GDP.

C) increases in government borrowing through bonds.

D) increases in interest rates.

 

 

 

3) If the deficit is 0.02 times GDP, the existing debt/GDP ratio is 0.5, and the growth rate of nominal GDP is 0.03, then the change in the debt-GDP ratio is

A) +0.05

B) +0.025.

C) 0.

D) -0.025.

 

 

4) If the deficit is 0.1 times GDP, the existing debt/GDP ratio is 0.5, and the growth rate of nominal GDP is 0.04, then the change in the debt-GDP ratio is

A) +0.08

B) +0.075.

C) 0.

D) -0.075.

 

 

 

5) If the deficit is 0.08 times GDP, the existing debt/GDP ratio is 0.8, and the growth rate of nominal GDP is 0.05, then the change in the debt-GDP ratio is

A) +0.08

B) +0.04.

C) 0.

D) -0.08.

 

 

6) A Social Security system in which payroll taxes that workers and their employers pay in go directly to retirees and other beneficiaries is known as

A) a pay-as-you-go system.

B) an individual-account system.

C) a primary-deficit system.

D) a social-lockbox system.

 

 

7) According to current projections, in about 2033, the Social Security trust fund will

A) own all the government bonds that have been issued.

B) own about half of all the stock issued on the New York Stock Exchange.

C) run out of assets.

D) start to run deficits.

 

 

 

8) Which of the following policies would not prevent the Social Security trust fund from running out of assets?

A) Reduce promised benefits

B) Reduce taxes

C) Increase taxes

D) Earn a higher rate of return

 

 

 

9) Social Security benefits could be reduced in each of the following ways EXCEPT

A) cutting the promised monthly benefit.

B) increasing the retirement age.

C) investing the trust fund in the stock market.

D) reducing the degree to which benefits are adjusted for inflation.

 

 

10) To earn a higher return on the assets in the Social Security trust fund, a suggestion has been made to allow the trust fund to

A) buy government bonds.

B) sell limited partnerships.

C) sell insurance.

D) invest in the stock market.

 

 

 

11) Recent proposals to allow the Social Security trust fund to invest in the stock market (instead of buying government bonds) are based on the premise that

A) the returns to stocks are higher than the returns to bonds.

B) the returns to stocks aren't as risky as the returns to bonds.

C) the transactions costs for investing in stocks are lower than the transactions costs for investing in bonds.

D) stocks are more liquid than bonds.

 

 

 

12) A decreased government deficit created by a lump-sum tax increase will increase national saving if

A) the value of government bonds outstanding grows slower than the public's wealth.

B) it causes consumption to fall.

C) the government runs a primary surplus as a result.

D) the real interest rate is less than the growth rate of real GNP.

 

 

 

13) According to the Ricardian equivalence proposition, current deficits

A) will not affect consumption or national saving.

B) will affect consumption but not national saving.

C) will affect national saving but not consumption.

D) will affect both consumption and national saving.

 

 

14) According to the Ricardian equivalence proposition, a government budget deficit created by a temporary tax cut

A) does not affect desired national saving.

B) does not affect expected future taxes.

C) reduces desired investment spending.

D) increases the real interest rate.

 

 

15) Deficits are a burden on future generations if they

A) cause higher rates of inflation to occur.

B) are not used for government capital formation.

C) cause national saving to fall.

D) are always a primary government deficit.

 

 

16) The stimulus package of 2009 had the effect of

A) causing higher rates of inflation to occur.

B) giving new foreign aid to help less developed countries.

C) significantly raising the debt to GDP ratio.

D) reducing the primary government deficit.

 

 

15.4   Deficits and Inflation

 

1) Seignorage is the revenue a government raises by

A) taxation.

B) printing money.

C) borrowing money.

D) charging fees for services.

 

 

2) The revenue that a government raises by printing money is called

A) seignorage.

B) monetary revenue.

C) currency credit.

D) currency inflation.

 

 

3) State governments in the United States can raise revenue by all the following means EXCEPT

A) increasing income taxes.

B) increasing taxes on corporate profits.

C) increasing sales taxes.

D) increasing the money supply.

 

 

4) The relationship between the government deficit and the change in the monetary base is

A) deficit equals change in government debt held by the public minus change in monetary base.

B) deficit equals change in government debt held by the public plus change in monetary base.

C) deficit equals change in government debt outstanding plus change in monetary base.

D) deficit equals change in government debt outstanding minus change in monetary base.

 

 

5) In which case would you be most likely to expect inflation to occur?

A) The government runs a sustained government deficit by lowering taxes.

B) The government runs a sustained government deficit by increasing purchases.

C) The government runs a sustained primary deficit by increasing purchases.

D) The government funds its sustained deficit by increasing the money supply.

 

 

6) In an all-currency economy in which real output and the real interest rate are fixed and the rates of money growth and inflation are constant, the inflation rate equals

A) the real interest rate.

B) the nominal interest rate.

C) the growth rate of the nominal money supply.

D) the level of real seignorage revenue.

 

 

7) The real seignorage collected by the government in an all-currency economy is the product of

A) the rate of inflation and the real supply of government bonds.

B) the rate of inflation and the real money supply.

C) the debt/GDP ratio and the real money supply.

D) the debt/GDP ratio and the rate of inflation.

 

 

 

8) The inflation tax is primarily a tax on

A) government bonds.

B) Social Security recipients.

C) money.

D) real income.

 

 

 

9) Assume that in an all-currency economy the real interest rate is 4%, the expected rate of inflation is 8%, and the nominal interest rate is 12%. The monetary base equals $50 billion. The real seignorage revenue collected by the government would equal

A) $4 billion.

B) $6 billion.

C) $8 billion.

D) $12 billion.

 

 

10) Real money demand in the economy is given by

                        L = 0.5Y - 2500i,

where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. At what rate of inflation is seignorage maximized?

A) 0.05

B) 0.075

C) 0.09

D) 0.10

 

 

 

11) Real money demand in the economy is given by

                        L = 0.5Y - 2500i,

where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. What is the maximum amount of seignorage revenue?

A) 11.11

B) 20.25

C) 22.25

D) 24.75

 

 

 

12) Consider an economy that has the following monetary data.

 

 

 

 

The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest. What is the cost to the public of the inflation tax?

A) $60

B) $140

C) $190

D) $200

 

 

 

13) Consider an economy that has the following monetary data.

 

 

 

 

The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest. What is the nominal value of seignorage over the year?

A) $10

B) $60

C) $70

D) $200

 

 

14) Whether real seignorage revenue increases when the rate of money growth increases depends on whether

A) the rise in real money holdings outweighs the decline in inflation.

B) the rise in inflation outweighs the decline in real money holdings.

C) the rise in inflation ratio outweighs the decline in the real supply of currency.

D) the rise in the real supply of currency outweighs the decline in inflation.

 

 

 

15) When did the United States suffer hyperinflation?

A) Revolutionary War

B) War of 1812

C) World War II

D) Korean War

 

 

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