Self-Check Questions

1. When governments run budget deficits, how do they make up the differences between tax revenue and spending?

2. When governments run budget surpluses, what is done with the extra funds?

3. Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio rise? Explain your answer.

4. Suppose that gifts were taxed at a rate of 10% for amounts up to $100,000 and 20% for anything over that amount. Would this tax be regressive or progressive?

5. If an individual owns a corporation for which he is the only employee, which different types of federal tax will he have to pay?

6. What taxes would an individual pay if he were self-employed and the business is not incorporated?

7. The social security tax is 6.2% on employees’ income earned below $113,000. Is this tax progressive, regressive or proportional?

8. Debt has a certain self-reinforcing quality to it. There is one category of government spending that automatically increases along with the federal debt. What is it?

9. True or False:

• Federal spending has grown substantially in recent decades.
• By world standards, the U.S. government controls a relatively large share of the U.S. economy.
• A majority of the federal government’s revenue is collected through personal income taxes.
• Education spending is slightly larger at the federal level than at the state and local level.
• State and local government spending has not risen much in recent decades.
• Defense spending is higher now than ever.
• The share of the economy going to federal taxes has increased substantially over time.
• Foreign aid is a large portion, although less than half, of federal spending.
• Federal deficits have been very large for the last two decades.
• The accumulated federal debt as a share of GDP is near an all-time high.

10. What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?

11. What is the main reason for employing expansionary fiscal policy during a recession?

12. In a recession, does the actual budget surplus or deficit fall above or below the standardized employment budget?

13. What is the main advantage of automatic stabilizers over discretionary fiscal policy?

14. Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy is producing more than potential GDP.

15. What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?

16. What would happen if contractionary fiscal policy were implemented during an economic boom but, due to lag, it did not take effect until the economy slipped into recession?

17. Do you think the typical time lag for fiscal policy is likely to be longer or shorter than the time lag for monetary policy? Explain your answer?

18. How would a balanced budget amendment affect a decision by Congress to grant a tax cut during a recession?

19. How would a balanced budget amendment change the effect of automatic stabilizer programs?

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