ECON UNIT-6 GOVERNMENT AND THE ECONOMY

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Multiple Choice
Identify the choice that best completes the statement or answers the question.

The Constitution places which two limits on the government’s power to tax?

a.	Federal taxes must increase as income increases, and sales taxes do not have to be applied evenly in all states.
b.	Federal taxes must be for the common defense and general welfare, and they must be the same in every state.
c.	Federal taxes must be evenly applied throughout all states, and they cannot be used for defense.
d.	Federal taxes should be used for individual interests and not for business interests.

To what category do a person’s earnings, the dollar value of a good or service, the value of a property, and the value of a company’s profits belong?

a.	proportional tax bases	c.	tax bases
b.	taxable income	d.	tax brackets

What kind of tax is represented in the federal income tax rates graph, and what are the qualities of this kind of tax?

a.	It is a regressive tax because the percentage of income paid in taxes decreases as income increases.
b.	It is a progressive tax because the tax rate rises with the amount of taxable income.
c.	It is a split tax because married people and single people pay different rates.
d.	It is a flat tax because the percentage of income paid in taxes is the same for all income levels.

What are the differences between the entitlement programs Medicaid and Medicare?

a.	Medicaid benefits only the elderly in institutional care facilities, and Medicare provides health care for children.
b.	Medicare is based on need as a result of low income, and Medicaid provides health care for people with disabilities.
c.	Medicaid provides health care for people over 65, and Medicare offers benefits for low-income families and individuals.
d.	Medicare provides health care for people over 65, and Medicaid offers benefits for low-income families and individuals.

Entitlement programs such as Social Security fall into what type of federal spending category?

a.	discretionary spending programs	c.	mandatory spending programs
b.	variable spending programs	d.	progressive spending programs

Which two types of taxes provide the largest amount of revenue to states?

a.	sales taxes and individual income taxes
b.	property taxes and individual income taxes
c.	sales taxes and corporate income taxes
d.	individual income taxes and corporate income taxes

What is the role of the Congressional Budget Office (CBO) in the federal budgetary process?

a.	The CBO is responsible for preparing and managing the federal government’s budget.
b.	The CBO is responsible for preparing and managing Congress’s version of the federal government’s fiscal year budget.
c.	The CBO works jointly with the President and Congress to implement spending decisions for each fiscal budget.
d.	The CBO gives Congress independent economic data to help members fully understand and make decisions about the President’s proposed budget.

According to the graph, how do expansionary fiscal policies affect the economy?

a.	The government decreases spending to save more money.
b.	The government increases spending to raise output of goods and services and create jobs in the short term.
c.	The government decreases demand to reduce the growth of economic output.
d.	The government increases supplies to increase inflation and raise prices.

What is one important distinction between classical economics and Keynesian economics?

a.	Keynesian economics teaches that economic disasters like the Great Depression should never happen, and classical economics argues that these disasters are inevitable.
b.	Classical economics advocates government regulation in every aspect of the economy, and Keynesian economics removes all government involvement in the economy.
c.	Classical economics teaches that free markets regulate themselves, and Keynesian economics teaches that government action affects the economy.
d.	Keynesian economics describes how free markets regulate themselves, and classical economics teaches economists and politicians how to regulate the economy.

10.

How did economic events during World War II demonstrate the principles of Keynesian economics?

a.	As government spending increased, America came out of the Great Depression and moved toward higher productivity.
b.	As government spending decreased, the spending of American citizens increased.
c.	Government spending proved that there was no connection between spending and the economy.
d.	As government spending increased, the country moved deeper into the Great Depression.

11.

How does the “crowding-out effect” influence businesses?

a.	The federal government makes it harder for private businesses to borrow.
b.	Private businesses suffer because caps are set on the amount the government can loan a new business enterprise.
c.	The increased revenue associated with bond investments increases business investment.
d.	The federal government reduces interest rates for new businesses to jump-start the economy.

12.

In the mid-1980s, Congress passed the Gramm-Rudman-Hollings Act. What was the effect of this legislation?

a.	It spread the deficit into other nonmilitary areas of the federal government.
b.	It transferred the responsibilities of funding entitlement programs to the states.
c.	It created automatic cuts in some federal expenditures if the deficit exceeded certain amounts.
d.	It did away with expenditures that appeared to be costly and unnecessary.

13.

How did the Federal Reserve System hold up during the Great Depression?

a.	The banks in the Federal Reserve System coordinated their actions, so the country was able to avoid total economic chaos.
b.	The members of the Federal Reserve System created a central bank to fund and manage government spending, which further hurt the economy.
c.	The Federal Reserve System did not work well because the twelve regional banks each acted independently.
d.	The Federal Reserve System revised its monetary policy so that only the President could set the national discount rate, providing relief to banks.

14.

What role does the Federal Reserve play in regulating the banking system?

a.	A member from the Federal Reserve works at the headquarters of each national bank.
b.	The Federal Reserve coordinates all regulatory activities and examines banks periodically.
c.	The Federal Reserve must approve every major transaction of a bank.
d.	The Federal Reserve becomes involved only when there is a major problem in a bank.

15.

How do changes in interest rates affect the money supply?

a.	As interest rates fall, people generally hold more cash, restricting the money supply.
b.	As interest rates rise, people generally keep their wealth in assets that pay returns, expanding the money supply.
c.	As interest rates level off, people charge more and hold more cash, expanding the money supply.
d.	As interest rates rise, people generally keep their wealth in assets that pay returns, restricting the money supply.

16.

The money multiplier formula shows the effects of

a.	a cash deposit into the banking system on the money supply.
b.	low interest rates on creditors over a long period.
c.	Federal Reserve discount rate reductions on the bond markets.
d.	the required reserve ratio on excess reserves.

17.

How would an increase in the required reserve ratio affect borrowers?

a.	It would force banks to lower their interest rates, which would benefit many borrowers.
b.	It would force banks to raise their monthly charges, which would hurt many borrowers.
c.	It would force banks to recall a significant number of loans, which would hurt many borrowers.
d.	It would prompt banks to lend more money, which would benefit many borrowers.

18.

What is the primary difference between inside and outside policy lags?

a.	Inside lags are delays in the implementation of policy, and outside lags indicate the time it takes a new policy to become effective.
b.	Inside lags are changes within the structure of a company, and outside lags refer to external policy changes.
c.	Inside lags indicate the time it takes to implement a new policy, and outside lags are delays in the implementation of new policy.
d.	Inside lags occur within the Federal Reserve System, and outside lags occur in the independent regional banks.