Chapter 30 Government Budgets

Ch30 Government Budgets Multiple Choice Questions 1. If South Dakota's governor reports a budget surplus in 2011, that state government likely: A. received more in taxes than it spent in that year. B. increased the proportional tax level. C. equalized spending and taxes in that year. D. increased the corporate income tax rate. Answer: A Reference: Explanation: Type: Multiple Choice 2. If the state of Washington's government collects $75 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be a: A. budget deficit. B. budget surplus. C. decrease in payroll tax. D. decrease in proportional taxes. Answer: B Reference: Explanation: Type: Multiple Choice 3. If the government for the state of Washington collects $65.8 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be: A. an increase in payroll tax. B. an increase in excise tax. C. a budget surplus. D. a budget deficit. Answer: D Reference: Explanation: Type: Multiple Choice 4. A ______________________ is created each time the federal government spends more than it collects in taxes in a given year. A. budget deficit B. budget surplus C. corporate tax D. regressive tax Answer: A Reference: Explanation: Type: Multiple Choice 5. A ______________________ means that government spending and taxes are equal. A. fiscal budget B. balanced budget C. contractionary fiscal policy D. discretionary fiscal policy Answer: B Reference: Explanation: Type: Multiple Choice 6. A __________________________ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes. A. proportional tax B. regressive tax C. progressive tax D. excise tax Answer: C Reference: Explanation: Type: Multiple Choice 7. A ________________________________ is calculated as a flat percentage of income earned, regardless of level of income. A. progressive tax B. regressive tax C. proportional tax D. estate and gift tax Answer: C Reference: Explanation: Type: Multiple Choice 8. When the share of individual income tax collected by the government from people with higher incomes is smaller than the share of tax collected from people with lower incomes, then the tax is ____________________. A. optional B. proportional C. progressive D. regressive Answer: D Reference: Explanation: Type: Multiple Choice 9. In 2010, Microsoft will pay corporate income tax to the federal government based on the company's __________________. A. proportional tax rate B. corporate profits C. optional tax rate D. excise profits Answer: B Reference: Explanation: Type: Multiple Choice 10. What do goods like gasoline, tobacco, and alcohol typically share in common? A. A progressive tax is imposed on each of them. B. A regressive tax is imposed on each of them. C. They are all subject to government excise taxes. D. They are all subject to government fiscal taxes. Answer: C Reference: Explanation: Type: Multiple Choice 11. The federal government levies _____________________________ on people who pass assets ____________________________, either after death or during life. A. an estate and gift tax; to the next generation B. a regressive tax; to non-family members C. an excise tax; to their children D. a progressive tax; to non-family members Answer: A Reference: Explanation: Type: Multiple Choice 12. If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is: A. optional. B. progressive. C. proportional. D. regressive. Answer: D Reference: Explanation: Type: Multiple Choice 13. If government tax policy requires Jane to pay $25,000 in taxes on annual income of $200,000 and Mary to pay $10,000 in tax on annual income of $100,000, then the tax policy is: A. regressive. B. progressive. C. proportional. D. optional. Answer: B Reference: Explanation: Type: Multiple Choice 14. If government tax policy requires Bill to pay $20,000 in taxes on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is: A. regressive. B. progressive. C. proportional. D. optional. Answer: C Reference: Explanation: Type: Multiple Choice 15. By June, 2010, the U.S. government owed $13.6 trillion dollars ________________ that, over time, has remained unpaid. A. from decreases in excise tax B. from decreases in income tax C. in accumulated government debt D. from decreases in corporate tax Answer: C Reference: Explanation: Type: Multiple Choice 16. The government can use _____________ in the form of ____________________ to increase the level of aggregate demand in the economy. A. an expansionary fiscal policy; an increase in government spending B. a contractionary fiscal policy; a reduction in taxes C. a contractionary fiscal policy; an increase in taxes D. an expansionary fiscal policy; an increase in corporate taxes Answer: A Reference: Explanation: Type: Multiple Choice 17. If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used? A. discretionary B. contractionary C. standardized D. expansionary Answer: D Reference: Explanation: Type: Multiple Choice 18. A typical ____________________________ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes. A. expansionary B. contractionary C. discretionary D. standardized Answer: B Reference: Explanation: Type: Multiple Choice 19. Which of the following terms is used to describe the set of policies that relate to government spending, taxation, and borrowing? A. financial policies B. monetary policies C. fiscal policies D. economic policies Answer: C Reference: Explanation: Type: Multiple Choice 20. A government collects $70 billion quarterly in tax revenue. Each year it allocates $15 billion to the justice system and $29 billion for the administrative costs. What percentage of its total annual tax revenue is left for allocation to the remaining categories of government spending? A. 84.29% B. 15.71% C. 62.85% D. 37.15% Answer: A Reference: Explanation: **This question has a higher degree of difÏculty because students must calculate total annual revenue based on tax revenue collected quarterly prior to calculating the remaining percentage. Type: Multiple Choice 21. A government annually allocates $5 billion of its total tax revenue to weather related disaster relief, $21 billion to healthcare and $11 billion to education. If the government's quarterly tax revenue is $33 billion, what percentage of its budget is allocated annually to healthcare? A. 17.50% B. 63.63% C. 25.00% D. 15.90% Answer: D Reference: Explanation: **This question has a higher degree of difÏculty because students must calculate total annual revenue based on tax revenue collected quarterly prior to calculating the percentage annually allocated to healthcare. Type: Multiple Choice 22. A government collects $700 billion annually in tax revenue. Each year it allocates $70 billion to the justice system and $130 billion for its own administrative costs. What percentage of annual tax revenue is allocated to these two categories of government spending? A. 37.15% B. 28.57% C. 17.51% D. 27.58% Answer: B Reference: Explanation: Type: Multiple Choice 23. A government annually collects $230 billion in tax revenue and allocates $70 billion to military spending. What percentage of this government's budget is spent on its military? A. 27.50% B. 36.63% C. 30.43% D. 41.90% Answer: C Reference: Explanation: Type: Multiple Choice 24. A government annually collects $320 billion in tax revenue and allocates $42 billion to education spending. What percentage of this government's budget is spent on education? A. 24.50% B. 12.31% C. 30.13% D. 13.12% Answer: D Reference: Explanation: Type: Multiple Choice 25. A government annually collects $230 billion in tax revenue and allocates $29 billion to its universal healthcare spending. What percentage of this government's budget is spent on healthcare? A. 12.60% B. 26.63% C. 16.43% D. 21.90% Answer: A Reference: Explanation: Type: Multiple Choice 26. A government collects $600 billion annually in tax revenue. Each year it allocates $35 billion to healthcare and $50 billion for education. What percentage of annual tax revenue is allocated to these two categories of government spending? A. 21.37% B. 14.16% C. 17.51% D. 26.41% Answer: B Reference: Explanation: Type: Multiple Choice 27. A government collects $700 billion annually in tax revenue. Each year it allocates $130 billion to interest payments that it must pay on its accumulated debt. What percentage of annual tax revenue is allocated to make these interest payments? A. 17.15% B. 28.75% C. 18.57% D. 27.58% Answer: C Reference: Explanation: Type: Multiple Choice 28. When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting: A. discretionary fiscal policy. B. progressive fiscal policy. C. regressive fiscal policy. D. fiscal policy. Answer: A Reference: Explanation: Type: Multiple Choice 29. _____________________ are a form of tax and spending rules that can affect aggregate demand in the economy without any additional change in legislation. A. Standardized employment budgets B. Discretionary fiscal policies C. Automatic stabilizers D. Budget expenditures Answer: C Reference: Explanation: Type: Multiple Choice 30. In 2009, the U.S. government spent $1.4 trillion more than it collected in taxes. This deficit was about: A. 22% of the size of the U.S. GDP in 2009. B. 26% of the size of the U.S. GDP in 2009. C. 18 % of the size of the U.S. GDP in 2009. D. 10% of the size of the U.S. GDP in 2009. Answer: D Reference: Explanation: Type: Multiple Choice 31. Which of the following is the percentage of annual US government spending allocated to foreign aid? A. 21% B. 10% C. 1% D. 17% Answer: C Reference: Explanation: Type: Multiple Choice 32. At the beginning of 2009, a government had a total debt of $540 billion dollars. It ended 2009 with a $6 billion dollar budget surplus. In 2010, its budget surplus reached $8 billion dollars. What is the total debt of the government equal to at the end of 2010? A. $554 billion B. $540 billion C. $0 D. $14 billion Answer: B Reference: Explanation: Type: Multiple Choice 33. At the beginning 2010, the government of Norway had no debt and held $180 billion dollars in its sovereign fund. To stimulate its economy during 2011, Norway's government plans to spend $35 billion more than it will collect in tax revenue and in 2012, its spending will exceed tax revenues by $25 billion. What will the total government debt equal at the end of 2012? A. $60 billion B. $0 C. $120 billion D. $180 billion Answer: B Reference: Explanation: Type: Multiple Choice 34. If a country’s GDP increases, but its debt also increases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes. A. decrease because GDP increased B. increase because its debt increased C. increase D. increase or decrease Answer: D Reference: Explanation: Type: Multiple Choice 35. If a country’s GDP increases, but its debt decreases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes. A. increase or decrease B. decrease because its debt decreased C. increase because GDP increased D. decrease Answer: A Reference: Explanation: Type: Multiple Choice 36. If a country’s GDP decreases, but its debt increases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes. A. decrease B. increase or decrease C. increase D. decrease because GDP decreased Answer: C Reference: Explanation: Type: Multiple Choice 37. During a recession, if a government uses an expansionary fiscal policy to increase GDP, the: A. aggregate supply curve will shift to the right. B. aggregate supply curve will shift to the left. C. aggregate demand curve will shift to the left. D. aggregate demand curve will shift to the right. Answer: D Reference: Explanation: Type: Multiple Choice 38. When inflation begins to climb to unacceptable levels in the economy, the government should: A. use contractionary fiscal policy to shift aggregate demand to the right. B. use contractionary fiscal policy to shift aggregate demand to the left. C. use expansionary fiscal policy to shift aggregate demand to the right. D. use expansionary fiscal policy to shift aggregate demand to the left. Answer: A Reference: Explanation: Type: Multiple Choice 39. When increasing oil prices cause aggregate supply to shift to the left, then: A. unemployment and inflation decrease. B. unemployment decreases and inflation increases. C. unemployment and inflation increase. D. unemployment increases and inflation decreases. Answer: C Reference: Explanation: Type: Multiple Choice 40. If an economy moves into a recession, causing that country to produce less than potential GDP, then: A. automatic stabilizers will cause tax revenue to decrease and government spending to increase. B. automatic stabilizers will cause tax revenue to increase and government spending to decrease. C. tax revenue and government spending will be higher because of automatic stabilizers. D. tax revenue and government spending will be lower because of automatic stabilizers. Answer: A Reference: Explanation: Type: Multiple Choice 41. If Canada's economy moves into an expansion while its economy is producing more than potential GDP, then: A. government spending and tax revenue will increase because of automatic stabilizers. B. government spending and tax revenue will decrease because of automatic stabilizers. C. automatic stabilizers will increase government spending and decrease tax revenue. D. automatic stabilizers will decrease government spending and increase tax revenue. Answer: D Reference: Explanation: Type: Multiple Choice 42. If individual income tax accounts for more total revenue than the payroll tax in the U.S., why would over half the households in the country pay more in payroll taxes than in income taxes? A. income tax is a proportional tax B. income tax is a progressive tax C. payroll tax is a regressive tax D. payroll tax is a progressive tax Answer: B Reference: Explanation: Type: Multiple Choice 43. If the economy is producing less than its potential GDP, _____________________ will show a larger deficit than the actual budget. A. discretionary fiscal policy B. the automatic stabilizers C. the standardized employment budget D. expansionary fiscal policy Answer: C Reference: Explanation: Type: Multiple Choice 44. When a country's economy is producing at a level that exceeds its potential GDP, the standardized employment budget will show a __________________ than the actual budget. A. smaller surplus B. smaller deficit C. larger deficit D. surplus Answer: B Reference: Explanation: Type: Multiple Choice 45. Assume that laws have been passed that require the federal government to run a balanced budget. During a recession, the government will want to implement _____________________, but may be unable to do so because such a policy would ____________________________. A. contractionary fiscal policy; lead to a budget deficit B. discretionary fiscal policy; lead to a budget surplus C. contractionary fiscal policy; lead to a budget surplus D. expansionary fiscal policy; lead to a budget deficit Answer: D Reference: Explanation: Type: Multiple Choice 46. The time lag for monetary policy is typically ________________ the time lag for fiscal policy. A. longer than B. shorter than C. about the same as D. the same as Answer: B Reference: Explanation: Type: Multiple Choice 47. Currently, the US government accumulated debt to GDP ratio: A. is lower than its historical high point. B. is higher than it has ever been. C. is lower than it has ever been. D. has remained relatively steady for the past decade. Answer: A Reference: Explanation: Type: Multiple Choice 48. The current level of US government accumulated debt, when measured in nominal dollars: A. has reached higher levels in the past. B. is higher than it has ever been. C. is lower than it has ever been. D. has remained steady for the past decade. Answer: B Reference: Explanation: Type: Multiple Choice 49. A consensus estimate based on a number of studies suggests that if there is an increase in budget deficits (or a fall in budget surplus) by 1% of GDP, it will most likely cause which of the following? A. an increase of 0.5–1.0% in the long-term interest rate B. long and variable time lags in enacting the fiscal policy C. smaller impact due to temporary fiscal policy D. output above the potential GDP output level Answer: A Reference: Explanation: Type: Multiple Choice Essay Questions 1. Briefly discuss the effects of time lags in relation to fiscal policy, including: a comparison to monetary policy, what the level of fiscal policy will be, and its effect on fiscal policy during recession. Monetary policy can be changed several times each year, but fiscal policy is much slower to be enacted. Many fiscal policy bills about spending or taxes propose changes that start in the next budget year or would be phased in gradually over time. Moreover, the exact level of fiscal policy to be implemented is never completely clear. After a recession has started, it can take many months or even more than a year to begin an expansionary fiscal policy, and even then, uncertainty will remain over exactly how much to expand or contract taxes and spending. Reference: Explanation: 2. Define fiscal policies. Fiscal policies are the set of policies relating to government spending, taxation, and borrowing. Reference: Explanation: 3. Briefly explain how a budget deficit arises and what corresponding action is typically by taken by a government in this type of circumstance. When the federal government spends more than it collects in taxes in a given year, it runs a budget deficit. The government borrows funds to cover its budget deficits by issuing Treasury bonds, thus borrowing from the public and promising to repay with interest in the future. Reference: Explanation: 4. List the major categories that the U.S. government spends its tax revenue on and indicate what percentage of tax revenue is spent on these categories on an annual basis. About 70% of government spending goes to four major areas: national defense, Social Security, health care, and interest payments on past borrowing. Reference: Explanation: 5. Identify and briefly describe all the sources of federal taxes. The primary sources of federal taxes are individual income taxes and the payroll taxes that finance Social Security and Medicare. Corporation income taxes, excise taxes, and other taxes provide smaller shares of revenue. The government also imposes an estate and gift tax on people who pass large amounts of assets to the next generation—either after death or during life in the form of gifts. Other federal taxes, which are also relatively small in magnitude, include tariffs collected on imported goods, and charges for inspections of goods entering the country. Reference: Explanation: 6. Briefly explain the purpose served by payroll taxes and how they are collected. Describe any comment that economists point out with regard to payroll taxes. The payroll taxes collect revenues to fund Social Security and Medicare. In both cases, the taxes are technically collected half from employee paychecks and half from employers. However, as economists are quick to point out, the employer’s half of the taxes is probably passed along to the employees in the form of lower wages. Reference: Explanation: 7. Identify the category of tax that applies to payroll taxes and contrast the Medicare payroll tax with the Social Security payroll tax. The Medicare payroll tax is a proportional tax; that is, a flat percentage of all income earned. The Social Security payroll tax is proportional up to the earnings limit, but above that level of income it becomes a regressive tax, meaning that people with higher incomes pay a smaller share of their income in tax. Reference: Explanation: 8. Contrast government debt with budget deficit or surplus. Government debt refers to the total amount that the government has borrowed over time; in contrast, the budget deficit or the budget surplus refers to how much has been borrowed in one particular year. Reference: Explanation: 9. Briefly describe what the "baby boom" affect will be in relation to payroll taxes and indicate what options the government could use to address this issue. The current level of the payroll taxes that support Social Security and Medicare will fall well short of the projected expenses of these programs; thus, the forecast is for large budget deficits. The current payroll tax levied on workers, which support all of Social Security and the hospitalization insurance part of Medicare, won’t be enough to cover the expected costs. Taxes could be raised to fund these programs. Or the government could run very large budget deficits and borrow the money to finance these programs. Reference: Explanation: 10. Identify and briefly describe some practical difÏculties of discretionary fiscal policy. Discretionary fiscal policy faces some practical difÏculties: (a) expansionary fiscal policy can raise interest rates, which tends to reduce the expansionary impact of the policy; (b) there are long and variable time lags in enacting fiscal policy and waiting for it to have an effect; (c) the impact of temporary fiscal policy is smaller than the impact of permanent fiscal policy; (d) fiscal policy cannot push economic output above the potential GDP level of output; (e) it may be hard to persuade politicians of the merits of countercyclical fiscal policy. Reference: Explanation: