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Government Tax Rate – Macroeconomics

This exam is about government tax rate – macroeconomics.

Classical economists believe that government intervention in the economy is unnecessary because

supply is less important than demand in determining economic output.

prices are sticky and will not prevent the economy from adjusting to full employment.

prices are flexible and, therefore, the economy will adjust back to full employment on its own.

savings is a drain on output and must be limited.

the short run is more important than the long run, and economic policy only works in the short run.

The Great Depression is characterized by a decrease in aggregate demand. Of the following factors, which would have caused aggregate demand to decrease?

an advancement in technology

an increase in the labor supply

a decrease in expected future income

an increase in the money supply

an increase in government spending

With regard to the Great Depression, the movement from point A to point B demonstrates what?

stagflation accompanied by a decrease in real gross domestic product (GDP)

inflation accompanied by an increase in real gross domestic product (GDP)

inflation accompanied by a decrease in real gross domestic product (GDP)

deflation accompanied by a decrease in real gross domestic product (GDP)

deflation accompanied by an increase in real gross domestic product (GDP)

During the Great Recession, a major financial crisis followed the collapse of housing prices, which led to

an increase in income tax rates to shrink the federal budget deficit.

the decline in the health of many large financial firms and banks.

an increase in expected income.

skyrocketing oil prices.

a decrease in the money supply by the Federal Reserve.

aggregate supply. Government Tax Rate - Macroeconomics

Lines Y1 and Y2 represent

an aggregate demand adjustment.

short-run aggregate supply (SRAS).

short-run aggregate demand (SRAD).

long-run aggregate demand (LRAD).

long-run aggregate supply (LRAS).


During the Great Recession, real gross domestic product (GDP) decreased, yet the aggregate price level remained largely unchanged, as depicted in the graph. Unemployment increased to above-normal levels. Which of following best explains why this happened?

A stock market crash, large numbers of bank failures, an increase in tax rates, and a tight money supply caused a recession.

A significant decline in military spending following the end of a war led to a recession.

A sudden increase in oil prices caused inflation and a deep recession.

A sharp recession followed the United States abandoning the gold standard.

A decline in housing prices and stock prices, plus a financial crisis, caused a recession.

During the Great Recession, the unemployment rate climbed as high as ________ and remained around 8 percent ________ year(s) after the recession began.

35 percent; eight

15 percent; seven

20 percent; one

10 percent; five

25 percent; eight

The Great Depression ended in

June 2009.

May 1937.

August 1929.

August 2004.

June 1938.

Price level. Government Tax Rate - Macroeconomics

As a result of aggregate demand and long-run aggregate supply decreasing, we can see that the price level ________ and real gross domestic product (GDP) ________.

decreased; remained unchanged

remained unchanged; decreased

increased; decreased

remained unchanged; increased

increased; increased

During the Great Depression, a major financial crisis followed the collapse of the stock market, which led to

a decrease in tax rates and increase in the money supply.

the failure of many banks.

a decrease in barriers to international trade.

an increase in consumer sentiment and spending.

an increase in oil and gas prices.

Over the next 20 years, the number of workers per Social Security beneficiary is predicted to be

less than 1.

less than 2 but more than 1.

less than 5 but more than 3.

more than 5.

less than 3 but more than 2.

Why does the federal debt tend to increase during periods of recession?

Economic activity decreases, which decreases revenues and increases outlays.

Economic activity decreases, which decreases revenues and decreases outlays.

Economic activity increases, which increases revenues and decreases outlays.

Economic activity increases, which decreases revenues and increases outlays.

Economic activity increases, which increases revenues and increases outlays.

Suppose you are offered a job with Amazon upon graduation. Your starting salary will be $70,000, which will put you in the 25 percent federal income tax bracket. The total amount of income taxes you pay is $13,530. Your average tax rate is approximately

37.5 percent.

12.5 percent.

25.0 percent.

19.3 percent.

31.3 percent.

The failure to make required payments on a debt is known as






Should we be concerned about a growing federal debt?

No, because federal debt, unlike private debt, does not have to be repaid.

No, because budget deficits are more important to worry about than the federal debt.

Yes, because a large federal debt may slow the rate of economic growth in the future.

Yes, because it is likely that the government will confiscate the savings of individuals to pay for the debt.

Yes, because if the debt grows too large, we will have to receive bailouts from other countries, which means they will be able to control our policy and economy.

Assuming all of the following are in your personal monthly budget, your ________ payment is considered a discretionary outlay.

mortgage (or rent, if you do not own a home)

electric bill

car loan

boat loan

student loan

The largest source of tax revenue for the government is ________ taxes.

social insurance



corporate income

individual income

When Social Security was first instituted by President Franklin Roosevelt in 1935, the payroll tax rate on wages used to fund the program was

4 percent.

5 percent.

2 percent.

1 percent.

3 percent.

Excise taxes are levied on


property that is gifted to others.

corporate income.

individual income.

specific goods or commodities.

Mandatory outlays are different than discretionary outlays because

discretionary outlays can be changed during the annual budget process, whereas mandatory outlays cannot.

mandatory outlays have been decreasing as a percentage of the federal budget, whereas discretionary outlays have been increasing as a percentage of the federal budget.

discretionary outlays comprise the vast majority of the total budget, whereas mandatory outlays make up only a minor fraction.

mandatory outlays usually change during the budget process, whereas discretionary outlays do not.

discretionary outlays include entitlement programs (such as Social Security and Medicare), whereas mandatory outlays include important government programs (such as defense).

An initial increase in government spending of $100 billion can create more than $100 billion through what economists call a(n) ________ effect.



interest rate

aggregate supply


If an initial increase in government spending of $100 billion leads to a total increase of $400 billion in income, the marginal propensity to consume in the economy is






Progressive tax rates, taxes on corporate profits, unemployment compensation, and welfare programs are all examples of

pro-cyclical fiscal policies.

automatic stabilizers.

monetary policies.

automatic balancers.

discretionary fiscal policies.

Time lags, crowding-out, and savings shifts are all

examples of countercyclical fiscal policy.

examples of automatic stabilizers.

arguments in favor of fiscal policy.

types of governmental policy.

issues that arise in the application of activist fiscal policy.

Which of the following fiscal policy initiatives focuses on the supply side of the economy?

personal tax refunds

higher marginal tax rates

building roads and bridges

increased pay for government employees

lower marginal income tax rates

Crowding-out occurs when

consumption increases when government spending increases.

time lags crowd out the effects of fiscal policy.

private spending falls in response to increases in government spending.

increases in government spending and decreases in taxes are offset by increases in savings.

supply-side fiscal policy does not increase total output.

The new classical critique of fiscal policy asserts that

increases in government spending and decreases in taxes are largely offset by increases in savings.

recognition lags make it difficult to time fiscal policy.

decreases in government spending and increases in taxes are largely offset by increases in savings.

implementation lags make it hard to get fiscal-policy proposals through the government.

impact lags make it difficult to know how much the spending multiplier will impact the total income in an economy.

Which of the following figures illustrates what happens when the government enters the loanable funds market in order to borrow?

loanable funds. Government Tax Rate - Macroeconomics
loanable funds.

Research and development (R&D) tax credits

are examples of automatic stabilizers.

will shift the aggregate demand curve to the right.

are not examples of supply-side fiscal policy initiatives.

allow firms to spend resources to develop new technology, which in turn can lead to future production.

will shift the long-run aggregate supply curve to the left.

Country Y is in the midst of an expansion. If the government wants output to again equal potential output, then it should pursue ________ fiscal policy and shift the ________ curve.

contractionary; long-run aggregate supply (LRAS)

expansionary; aggregate demand (AD)

contractionary; short-run aggregate supply (SRAS)

contractionary; aggregate demand (AD)

expansionary; short-run aggregate supply (SRAS)

What function of money is highlighted when Sally pays her cell phone bill with cash?

commodity money

medium of exchange

fiat money

store of value

unit of account

Money does NOT function as a(n)

store of value.

item to barter.

unit of account.

medium of exchange.

means to buy goods and services.

Checkable deposits$800,500,000
Traveler’s checks$10,000,000
Money market mutual funds$78,000,000
Small time deposits$15,000,000
Savings deposits$252,000,000

What is the value of M2 that is not part of M1?






Checkable deposits$800,500,000
Traveler’s checks$10,000,000
Money market mutual funds$78,000,000
Small time deposits$15,000,000
Savings deposits$252,000,000

What is the value of M2?






Which of the following is NOT a characteristic of fiat money?

serves as a unit of account

always backed by something of high intrinsic value

provides a way to store wealth over time

generally acceptable as a medium of exchange

changes in value over time as the amount of fiat money changes

Tom Goldman deposits $1,000 in newly printed birthday cash into his checking account at the bank. How would this be recorded on the bank’s balance sheet?

There will be no initial change to assets and liabilities.

Assets and liabilities will both rise by $1,000.

Assets will fall by $1,000 and liabilities will rise by $1,000.

Assets will rise by $1,000 and liabilities will fall by $1,000.

Assets and liabilities will both fall by $1,000.

The Federal Reserve System was created in






If a bank has a required reserve ratio of 25 percent and there is $10,000 in deposits, what is the maximum possible change to the money supply?






Checkable deposits$12,500,000
Traveler’s checks$1,000,000
Money market mutual funds$10,000,000
Small time deposits$7,000,000
Savings deposits$500,000

What is the value of M1?






If a bank has a required reserve ratio of 15 percent and has required reserves of $225,000,000, how much does the bank hold in deposits?

There is not enough information to solve this problem.





Which two famous economists hypothesized that people would adapt their expectations about inflation to something consistent with their prior experiences?

John Maynard Keynes and F. A. Hayek

Ben Bernanke and Alan Greenspan

Adam Smith and David Ricardo

Irving Fisher and Adam Smith

Milton Friedman and Edmund Phelps


play a role in fiscal policy but not in monetary policy.

are easily studied in economics.

have no effect on monetary policy.

have no effect on consumers’ spending habits.

can dampen the effects of monetary policy.

When the Fed buys bonds from financial institutions, new money moves directly

out of the hands of consumers.

into short-run aggregate supply.

out of the loanable funds market.

into the hands of consumers.

into the loanable funds market.

Which two economic conditions challenged assumptions of activist monetary policy in the 1970s?

declining real gross domestic product (GDP) and high unemployment

increased aggregate demand and decreased short-run aggregate supply

low inflation and low unemployment

high inflation and high unemployment

low inflation and high unemployment

With adjusting expectations, the equilibrium at the natural rate of unemployment is obtained by

rational expectations theory.

movement along the short-run Phillips curve.

a fixed short-run Phillips curve.

fixed prices.

shifts in the short-run Phillips curve.

Monetary neutrality is

the short-run inverse relationship between inflation and unemployment rates.

the idea that the money supply does not affect real economic variables.

when a central bank acts to increase the money supply.

the combination of high unemployment and high inflation.

when a central bank acts to decrease the money supply.

Federal Reserve chairman Ben Bernanke’s move toward greater openness in the 2010s reflected which view of macroeconomics?

Monetary policy should be passive.

Only rational expectations matter.

Expectations matter, whether adaptive or rational.

Monetary policy should be active.

Expectations do not matter.

By shifting aggregate demand, monetary policy can affect ________ and ________.

money supply; real gross domestic product (GDP)

money supply; unemployment

real gross domestic product (GDP); interest rates

interest rates; unemployment

real gross domestic product (GDP); unemployment

Unexpected inflation harms workers and other resource suppliers who have ________ prices in the ________ run.

fixed; short

fixed; long

flexible; medium

flexible; short

flexible; short

________ policy is when a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.

Expansionary monetary

Countercyclical monetary

Contractionary fiscal

Contractionary monetary – correct

Expansionary fiscal