Multiple Choice Tutorial Chapter 6 Government

1. Multiple Choice TutorialChapter 6Government

2. 1. Which of the following is a function of government? a. Make and enforce the rule of law. b. Provide public goods. c. Protect citizens against social costs. d. Encourage merit goods. e. All of the above E. The government has many functions. A free enterprise system can only function and prosper with a strong central government, but the question is – what role should the government play and how large should it be to promote the above while encouraging growth and preserving our freedom?

3. 2. The largest single item of expenditures in the federal budget is a. Social Security and Medicare. b. national defense. c. welfare. d. interest on the debt. A. Social Security, Medicare and Medicaid make up about 40% and interest on the debt about 20%.

4. 3. Federal spending in 2011 has been approximately what percent of GDP? a. 3%. b. 5%. c. 12%. d. 25%. D. The federal government spends about one quarter of all spending.

5. 4. The new fiscal year for the federal budget begins on the first day of a. January. b. April. c. July. d. October. D. The fiscal year used to begin on June 1, but to give Congress and the President more time to finalize the budget, the fiscal year was pushed forward to October 1. So the federal fiscal year begins October 1 to September 30.

6. 5. A continuing resolution is a. an annual determination on the part of Congress to improve the budget process. b. a decision to maintain a specific spending level ad infinitum. c. a temporary extension of spending authority into the new fiscal year. d. the official name for the entire budget package when it is finally enacted. C. When Congress and the President fail to finalize the budget by October 1, the government continues to operate based on the last years spending levels, this is called a continuing resolution.

7. 6. The problem of pollution can a. be solved if businesses had a social conscience. b. be solved with enough public awareness. c. can only be solved with effective laws. C. Any business with a social conscience and who invests in anti pollution devices will experience higher costs than competitors and therefore will not be able to compete, everything else being equal.

8. 7. Which of the following is an example of a third party law? a. Motorcycle drivers must wear a helmet. b. When in a moving vehicle seat belts must be worn. c. Cars must be inspected periodically. C. Laws requiring helmets and seat belts only protect the first person, not others. But laws requiring state inspections of cars can protect people in the car but also protects others not in the car.

9. 8. Which of the following is not an entitlement program? a. Social Security. b. Medicare. c. Aid to Families with Dependent Children. d. Federal research grants. D. Entitlement programs are guaranteed benefits for those who qualify under government transfer programs such as Social Security, Medicare, and Aid to Families with Dependent Children.

10. 9. One proposal for reforming and improving the budget process is to a. switch to a two-year or biennial budget process. b. remove the Council of Economic Advisors from the process. c. require more detail in the various line items of the budget. d. provide for automatic annual increases in all budget categories. A. A two year cycle would give legislatures more time to debate and finalize our federal budget.

11. 10. Since 1960 the federal government has experienced a budget deficit every year but a. one. b. two. c. three. d. four. A. Since the publication of your textbook, the budget was in surplus in 1998. So the book says that the answer is one, but the actual answer is two.

12. 11. An example of a capital expenditure in the present for which shifting the cost to future generations through deficit financing might be justified because those future generations will also share in its benefits is a. Social Security. b. interest on the debt. c. welfare. d. a highway. D. Only a highway is tangible and can thus be used by future generations, the other choices produce nothing tangible.

13. 12. According the the budget philosophy known as functional finance a. the budget should be balanced annually. b. surpluses should be run during periods of prosperity and deficits should be run during recessions. c. the government should not worry about whether the budget is balanced and worry instead about reaching the potential output level. C. Functional finance is a budget philosophy aiming fiscal policy at achieving potential GDP rather than balancing budgets either annually or over the business cycle.

14. 13. An annually balanced budget a. is the surest path to economic stability. b. is required by the U.S. Constitution. c. accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions. C. During certain recessions the problem is insufficient aggregate demand, so we would want the government to increase its spending. During expansions, the problem could be too much spending, so we would want the government to spend less. A mandated annually balance budget would hamper this process.

15. 14. Which of the following statements about the tax cut enacted in 1981 during the Reagan administration is correct? a. the tax cut caused the recession of 1982. b. the tax cut of 1981 and the recession of 1982 combined to produce one of the largest peace-time deficits up to that time. c. the tax cut stimulated a large increase in economic activity and led directly to the balanced budget of 1982. B. In the long run, a tax cut will increase economics growth and tax receipts. But, in the short run, the tax cut will lower government receipts. During recessions, government outlays grows while tax receipts diminish.

16. 15. The Budget Enforcement Act of 1990 a. was a package of spending cuts and tax increases designed to reduce the deficit. b. was proposed by President Clinton. c. immediately succeeded in balancing the budget. A. With concern about the deficit growing, Congress and President Bush agreed to the 1990 Budget Enforcement Act, a package of spending cuts and tax increases aimed at trimming the projected deficit. Afterward, Congress ignored its promise to cut spending and Bush lost the election largely because the tax increase he agreed to went against his “read my lips, no new taxes promise.”

17. 16. Automatic payroll deduction of tax payments became law in the U.S. for the first time in a. 1776. b. 1865. c. 1936. d. 1942. D. It was in 1942 that Beardsley Ruml introduced the idea of payroll deduction as an alternative to tax payers writing out checks once a year to pay their taxes.

18. 17. A big difference between states and the federal government is that states have to balance their budget each year whereas the federal government does not. • True • False A. True. Because 49 states require an annually balanced budget, they have not experienced the debt problems the way the federal government has.

19. 18. When the unemployment rate increases the federal deficit a. decreases. b. increases. c. is not affected. B. Recessions bring about an increase in deficits for two reasons, first government receipts go down because unemployed people do not pay taxes, second, government spending increases as benefits increase.

20. 19. When U.S. imports exceed exports, foreigners accumulate dollars which they partially invest in assets in the United States, thereby providing all of the following except a. an additional means of funding federal deficits. b. a source of capital investment in U.S. cities and towns. c. buyers for U.S. corporations and real estate. d. a supplement to the growing U.S. saving rate. D. With more money leaving the country than entering, U.S. savings rate will decrease.

21. 20. The national (or federal) debt is a. the same thing as the federal deficit. b. the accumulation of all past deficits and surpluses. c. less than it was in 1946 if adjusted for inflation. d. held entirely by U.S. firms and households. B. The deficit how much we borrow in a given year. The total of the deficits adds up to the national debt.

22. 21. Until 1980, most of the national debt was the result of a. wartime borrowing. b. inflation. c. bad monetary policy. d. wasteful Congressional spending. A. Historically most of government borrowing was the result of a war. Starting in the 1970’s, under Lyndon Johnson’s Great Society Programs, deficit spending increased year after year.

23. 22. The federal debt a. has increased about the same amount each year for at least the past 100 years. b. in this century has increased during World War I and World War II and has decreased in most other years. c. in 2010-2011 increased about 40%. C. The spending programs of 2010 and 2011 greatly increased government spending and the national debt.

24. 23. The federal debt will decline as a percentage of GDP only when a. GDP increases more slowly than the debt increases. b. prices are held constant. c. GDP and the debt increase at the same rate. d. GDP increases faster than the debt increases. D. Whether the debt is considered high or low depends on how big it is in relation to GDP. If GDP increases more than the debt increases, the debt will decline as a percent of GDP.

25. 24. Which of the following statements is correct? a. Only a small portion of the national debt comes due during one year. b. Interest payments on the national debt are about 35% of the budget. c. A one percentage point increase in the nominal interest rate increases the annual interest costs of the federal government C. With a total national debt of over $14 trillion, the interest paid on this increases every year. Thus, even a one percent increase in the interest rate the government has to pay translates into a lot of money.

26. 25. The question of who bears the burden of the debt is complicated by all of the following factors except a. how high the interest rate paid on government loans is. b. what the rate of unemployment in the future is. c. how much of the publicly held debt is held by foreigners. d. whether the borrowed funds purchase capital goods or not. B. An increase in the unemployment rate does not change the makeup of how much any particular group owes of their debt share.

27. 26. Of the national debt held by the public, foreigners now hold a. a lot of the total b. not much of the total. c. less and less as time goes on. A. The amount that foreigners owns of the U.S. government debt has increased in recent years and complicates our debt situation.

28. 27. Each time you buy a gallon of gas you pay a tax, this tax goes to building and maintaining roads. This is an example of a. the ability to pay principle of taxation. b. the benefits received principle of taxation. c. a progressive tax. A. Those people who drive the most end up paying more taxes than people who drive less.

29. 28. Social Security is the world’s largest Ponzi Scheme because a. the money collected is saved in the money markets to earn interest. b. it is a government program. c. the money paid out in day two was collected in day one. C. Because Social Security is a “pay as you go” type program, as the number of people who pay into the system declines relative to the number of people who receive benefits, the burden on those people who pay increases.

30. 29. Including the unfunded liabilities of government retirement programs like Social Security in the deficit would a. have little impact on the size of the deficit. b. have little impact on the size of the national debt. c. triple the size of the national debt. C. Social Security is unfunded because of the lack of savings by the program. Congress has replaced all savings by IOU’s that cannot be sold in the bond market, they are only redeemable by the federal government. Money owed to retirees is as much as a liability to the government as interest owed.

31. 30. The president of the U.S. has line item veto power. a. True b. False B. The line-item veto allows the President to veto certain lines of a budget bill. Only that portion that is not vetoed becomes law. Vetoed portions can be overridden by a 2/3 majority of the House of Representatives. The president does not have this authority.

32. 31. Which of the following is an alternative to line item veto power that is practiced in Virginia? a. A bill can only cover one topic and the name of that topic has to be in the title of the bill. b. The governor has unlimited power to balance the budget. c. Virginians have the right of referendum. A. The Commonwealth of Virginia has a provision at the state level that a bill can only cover one topic. This makes it easy to vote on a bill.

33. 32. All of the following are objections to the balanced budget amendment to the U.S. constitution except a. government spending could not be increased to offset a recession. b. taxes would have to be raised in periods of recession. c. a policy that puts too much power in the hands of the President. C. A balance budget amendment does not give the President too much power. He has less power with this amendment because he has less control over the national budget.

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