Fiscal Policy

1) Prior to the Great Depression, the purpose of the federal budget was to ________.
A) stabilize the economy
B) finance the activities of the government
C) maintain low interest rates
D) decrease unemployment
Answer: B

2) The use of the U.S. federal budget to help stabilize the economy grew in reaction to the ________ and is known as ________.
A) stagflation of the 1970s; fiscal policy
B) Great Depression of the 1930s; fiscal policy
C) stagflation of the 1970s; government policy
D) Great Depression of the 1930s; monetary policy
Answer: B

3) Fiscal policy includes
A) only decisions related to government expenditure on goods and services.
B) only decisions related to government expenditure on goods and services and the value of transfer payments.
C) only decisions related to the value of transfer payments and tax revenue.
D) decisions related to government expenditure on goods and services, the value of transfer payments, and tax revenue.
Answer: D

4) Fiscal policy involves
A) the use of interest rates to influence the level of GDP.
B) the use of tax and spending policies by the government.
C) decreasing the role of the Federal Reserve in the everyday life of the economy.
D) the use of tax and money policies by government to influence the level of interest rates.
Answer: B

5) Fiscal policy
A) is enacted by the Federal Reserve.
B) involves changing interest rates.
C) involves changing taxes and government spending.
D) involves changing the money supply.
Answer: C

6) Fiscal policy attempts to achieve all of the following objectives EXCEPT ________.
A) a stable money supply
B) price level stability
C) full employment
D) sustained economic growth
Answer: A

7) Changes in which of the following is included as part of fiscal policy?
A) the quantity of money
B) the level of interest rates
C) monetary policy
D) tax rates
Answer: D

8) All of the following are part of fiscal policy EXCEPT
A) setting tax rates.
B) setting government spending.
C) choosing the size of the government deficit.
D) controlling the money supply.
Answer: D

9) The budget process includes the
A) President proposing and Congress passing the budget.
B) President passing the budget as proposed by Congress.
C) House of Representatives proposing and the Senate passing the budget.
D) Senate proposing and the House of Representatives passing the budget.
Answer: A

10) Which branches of the government play a role in the enacting the federal budget?
I. the President.
II. the House of Representatives.
III. the Senate.
A) I and II
B) II and III
C) I, II and III
D) I
Answer: C

11) Which of the following government bodies does NOT participate directly in formulating U.S.
fiscal policy?
A) the President and his cabinet
B) the Federal Reserve Board
C) the House of Representatives
D) the Senate
Answer: B

12) The purpose of the Employment Act of 1946 was to
A) establish goals for the federal government that would promote maximum employment,
purchasing power, and production.
B) establish an unemployment compensation system.
C) set up the Federal Reserve System.
D) set targets for the unemployment rate to be achieved by the president.
Answer: A

13) Which of the following is NOT a revenue source for the Federal government?
A) personal income taxes
B) indirect taxes
C) interest on corporate bond holdings
D) social security taxes
Answer: C

14) Expenditures such as Social Security benefits, farm subsidies and grants are considered
A) expenditures on goods and services
B) transfer payments
C) debt reduction
D) debt interest
Answer: B

15) Social Security benefits and expenditures on Medicare and Medicaid are classified as
A) debt interest.
B) purchases of goods and services.
C) production of goods and services.
D) transfer payments.
Answer: D

16) Which of the following is NOT a government outlay?
A) transfer payments
B) expenditure on goods and services
C) debt interest on the governmentʹs debt
D) purchases of foreign bonds
Answer: D

17) All of the following are government outlays EXCEPT
A) interest on the governmentʹs debt.
B) transfer payments.
C) purchases of corporate bonds.
D) expenditure on goods and services.
Answer: C

18) The table above has data for a country’s government budget. The country has government revenues of ________ billion.
A) $900
B) $1125
C) $725
D) $1700
Answer: B

19) The table above has data for a countryʹs government budget. Government outlays for the economy equal ________ billion.
A) $1200
B) $1275
C) $1500
D) $1425
Answer: C

20) The table above has data for a countryʹs government budget. The data show the government is running a ________ billion.
A) budget surplus of $300
B) budget deficit of $375
C) budget deficit of $550
D) budget surplus of $650
Answer: B

21) The largest source of revenue for the federal government is ________ and the largest outlay is for ________.
A) corporate taxes; Social Security
B) personal income taxes; Medicare
C) personal income taxes; interest on national debt
D) personal income taxes; transfer payments
Answer: D

22) The governmentʹs budget deficit or surplus equals the
A) change in outlays divided by change in revenue.
B) average outlay divided by average revenue.
C) change in revenue minus change in outlays.
D) total tax revenue minus total government outlays.
Answer: D

23) A budget surplus occurs when government
A) outlays exceeds tax revenues.
B) tax revenues exceeds outlays.
C) tax revenues equals outlays.
D) tax revenues equal social security expenditures.
Answer: B

24) Whenever the federal government spends more than it receives in tax revenue, then by
definition it
A) runs a budget surplus.
B) operates a balanced budget.
C) runs a budget deficit.
D) increases economic growth.
Answer: C

25) The budget deficit
A) is the total outstanding borrowing by the government.
B) is the difference between government outlays and tax revenues.
C) decreased during the Obama Administration.
D) reached its peak in the year 2000.
Answer: B

26) A government incurs a budget deficit when
A) taxes are greater than government outlays.
B) taxes are less than government outlays.
C) exports are greater than imports.
D) exports are less than imports.
Answer: B

27) If taxes exactly equaled government outlays the
A) federal government debt would be zero.
B) federal government debt would decrease.
C) budget deficit would not change.
D) budget deficit would be zero.
Answer: D

28) If the federal government’s tax revenues are greater than its outlays, then the federal budget has a
A) deficit.
B) surplus.
C) transfer payment.
D) balanced budget.
Answer: B

29) By definition, a government budget deficit is the situation that occurs when the
A) government outlays exceed what it receives in taxes.
B) government miscalculated how much it will receive in taxes.
C) government spends money on things which do not produce revenue, such as schools.
D) economy goes into a recession.
Answer: A

30) The U.S. governmentʹs budget
A) must be balanced each year.
B) has mostly been in surplus during the past 30 years.
C) has mostly been in deficit during the past 30 years.
D) has always been in deficit during the past 30 years.
Answer: C

31) When tax revenues exceed outlays, the government has a ________, and when outlays exceed tax revenues, the government has a ________.
A) budget surplus; budget debt
B) budget deficit; budget surplus
C) budget debt; budget surplus
D) budget surplus; budget deficit
Answer: D

32) A government that currently has a budget deficit can balance its budget by ________.
A) increasing tax revenues by more than it increases outlays
B) increasing both tax revenues and outlays by the same amount
C) decreasing tax revenues by more than it decreases outlays
D) decreasing tax revenues by more than it increases outlays
Answer: A

33) In 2011, the U.S. government budget had a deficit. By definition, then,
A) tax revenues were less than government outlays.
B) tax revenues were equal to government outlays.
C) tax revenues were greater than government outlays.
D) the government debt became negative.
Answer: A

34) Suppose the only revenue taken in by the government is in the form of income tax, and the tax
rate is 10 percent. If aggregate income is $800 billion, and government outlays are $100 billion then the government budget has
A) a deficit of $20 billion.
B) a surplus of $20 billion.
C) neither a surplus nor a deficit.
D) a deficit of $80 billion.
Answer: A

35) In 2011, the federal government of Happy Isle had tax revenues of $1 million, and spent $500,000 on transfer payments, $250,000 on goods and services and $300,000 on debt interest. In 2011, the government of Happy Isle had a ________.
A) balanced budget
B) budget deficit of $50,000
C) budget surplus of $50,000
D) budget deficit of $1,050,000
Answer: B

36) The federal government debt is equal to the
A) obligations of benefits from federal taxes and expenditures.
B) sum of all annual federal government outlays.
C) sum of past budget deficits minus the sum of past budget surpluses.
D) annual difference between federal government tax revenues and outlays.
Answer: C

37) The sum of past budget deficits minus the sum of past budget surpluses refers to
A) the national debt.
B) the cyclically unbalanced budget.
C) the structural national debt.
D) the federal government net worth.
Answer: A

38) If the government has a balanced budget, the total amount of government debt is
A) increasing.
B) decreasing.
C) constant.
D) zero.
Answer: C

39) If the government runs a surplus, the total amount of government debt is
A) increasing.
B) decreasing.
C) constant.
D) zero.
Answer: B

40) If the government runs a deficit, the total amount of government debt is
A) increasing.
B) decreasing.
C) constant.
D) zero.
Answer: A

41) An increase in the government ________ reduces the governmentʹs ________.
A) budget deficit; debt
B) budget surplus; debt
C) debt; budget deficit
D) None of the above answers is correct.
Answer: B

42) Suppose a country has been running a persistent government budget deficit. If the deficit is
reduced, but remains positive,
A) government debt will increase.
B) government debt will decrease.
C) the country will experience a budget surplus.
D) interest payments on the debt immediately will decrease.
Answer: A

43) If tax revenue equal $1.5 billion and government outlays equal $1.6 billion, then the
A) government budget has a deficit of $0.1 billion.
B) government budget has a surplus of $0.1 billion.
C) government debt is equal to $0.1 billion.
D) government debt declines by $0.1 billion.
Answer: A

44) A country has been in existence for only two years. In the first year, tax revenues were $1.0 million and outlays were $1.5 million. In the second year, tax revenues were $1.5 million and outlays were $2.0 million. At the end of the second year, the total government debt was________.
A) $0.5 million
B) $1 million
C) $2.5 million
D) $3.5 million
Answer: B

45) What is the amount of the surplus or deficit incurred in year 1 by the government shown in the above table?
A) $0
B) $25 billion deficit
C) $25 billion surplus
D) $240 billion surplus
Answer: A

46) What is the amount of the surplus or deficit incurred in year 2 by the government shown in the above table?
A) $0
B) $5 billion surplus
C) $5 billion deficit
D) $250 billion surplus
Answer: B

47) What is the amount of the surplus or deficit incurred in year 3 by the government shown in the above table?
A) $0
B) $5 billion surplus
C) $5 billion deficit
D) $260 billion surplus
Answer: B

48) What is the amount of the surplus or deficit incurred in year 4 by the government shown in the above table?
A) $20 billion deficit
B) $35 billion surplus
C) $5 billion surplus
D) $320 billion surplus
Answer: A

49) What is the amount of the surplus or deficit incurred in year 5 by the government shown in the above table?
A) $15 billion deficit
B) $35 billion surplus
C) $5 billion surplus
D) $325 billion surplus
Answer: A

50) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 1?
A) $0
B) $25 billion
C) $240 billion
D) Not enough information is provided to answer the question.
Answer: B

51) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 2?
A) $245 billion
B) $5 billion
C) $250 billion
D) $20 billion
Answer: D

52) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 3?
A) $15 billion
B) $5 billion
C) $20 billion
D) $260 billion
Answer: A

53) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 4?
A) -$20 billion (The government has net saving rather than debt.)
B) $35 billion
C) $5 billion
D) $320 billion
Answer: B

54) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 5?
A) -$20 billion (The government has net saving rather than debt.)
B) $35 billion
C) $50 billion
D) $325 billion
Answer: C