Econ. 202: chapter 10 questions

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What are the two tools of fiscal policy that
governments can use to stabilize an economy?
A) government spending and technology
improvements
B) government spending and taxation
C) taxation and controlling imports
D) taxation and controlling exports

government spending and taxation

Contractionary policies are policies designed to:
A) reduce the level of real GDP.
B) increase the level of real GDP.
C) increase government spending.
D) increase the federal deficit.

reduce the level of real GDP

In order to ________, a government must
decrease spending and increase taxation.
A) increase aggregate demand
B) decrease aggregate demand
C) increase aggregate supply
D) decrease aggregate supply

decrease aggregate demand

Due to the ________ effect, the final shift in aggregate demand is larger than the initial shift in aggregate demand.
A) income
B) crowding-out
C) substitution
D) multiplier

multiplier

What is the reason that stabilization policies do not have an immediate effect on an economy?
A) Consumers are slow to catch up on spending.
B) There is a time lag for policies to take effect.
C) Imports come into the country too fast.
D) Exports often are not shipped fast enough.

there is a time lag for policies to take effect

Which of the following is an example of
government discretionary spending?
A) Social Security retirement payments
B) Medicare benefits for the elderly
C) defense spending
D) net interest paid on government debt held
by the public

defense spending

What is the largest component of the federal budget?
A) discretionary spending
B) entitlements and mandatory spending
C) net interest
D) defense spending

entitlements and mandatory spending

Special taxes levied on earnings for Social Security and Medicare are called:
A) social insurance tax
B) withholding tax on wages
C) unfair tax on low-income families.
D) an exception tax for corporations.

social insurance tax

One school of thought that emphasizes the role that taxes play in an economy's supply of
output is known as:
A) demand-pull economics.
B) classical economics.
C) tax-and-spend economics.
D) supply-side economics.

supply-side economics

The Laffer curve illustrates that
A) high tax rates could lead to lower tax revenues if economic activity is severely discouraged.
B) lowering tax rates will always increase tax revenues.
C) high tax rates would increase tax revenue and increase the labor supply as people work harder to maintain their standard of living.
D) lowering tax rates will always decrease tax revenues.

high tax rates could lead to lower tax revenues if econ. activity is severely discouraged

A federal budget ________ occurs when the government spends less than it collects in taxes.
A) surplus
B) deficit
C) equilibrium
D) floor

surplus

During a recession, tax revenues ________ while government transfer payments ________, thereby mitigating part of the adverse effects of a recession and stabilizing the economy.
A) fall; increase
B) fall; decrease
C) rise; increase
D) rise; decrease

fall, increase

Suppose an economy has a balanced federal budget, and a large increase in oil prices plunges the economy into a recession. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________.
A) fall; increase; deficit
B) increase; increase; surplus
C) fall; fall; deficit
D) increase; fall; surplus

fall, increase, deficit

In the United States during the 1930s, politicians:
A) relied on government spending and taxation to pull the economy out of the depression.
B) did not believe in using government spending and taxation because they feared the consequences of budget deficits.
C) knew that the depression would eventually subside because of automatic stabilizers.
D) deliberately relied on government spending and taxation even though they knew the depression would continue.

did not believe in using government spending and taxation because they feared the consequences of budged deficits

Huge increases in government spending and record low levels of unemployment during the Vietnam War era in the late 1960s led policy makers to fear that:
A) the economy was growing too fast, which would increase unemployment.
B) the economy was growing too fast, which would increase inflation.
C) the economy was slipping into a recession, which would increase unemployment.
D) the economy was slipping into a recession, which would increase inflation.

the economy was growing too fast, which would increase inflation

The Clinton administration inherited a budget deficit from its predecessor. President Clinton instituted major tax increases that:
A) increased the budget deficit during his entire term.
B) brought the budget into balance and eventually into a surplus.
C) reduced the budget deficit but increased the federal debt.
D) reduced the size of the deficit but could not eliminate it.

brought the budget into balance and eventually a surplus

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