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ECO 372T Wk 3 – Practice: Public Finance and Aggregate Demand and Supply Quiz
Which of the following transactions best represents the government playing the role of provider of a good or service?
The state government imposes a tax on cigarette purchases to discourage smoking.
The local government purchases office furniture for renovations to its Department of Parks and Recreation.
The federal government provides Social Security checks to those citizens who qualify for the payment.
The state government pays for police to patrol the state and federal roadways.
Which of the following transactions best represents the government making a transfer payment to a household or business?
The federal government’s Supplemental Nutritional Assistance Program assists low-income families with purchasing food.
The state government’s Office of Motor Vehicles imposes an annual licensing fee for all in-state vehicles.
The federal government’s Internal Revenue Service hires extra accountants during the tax season to audit tax returns.
The local government’s Department of Parks and Recreation operates a local pool for residents in the summer.
The Social Security tax is regressive because
Multiple Choice
as income increases, the Social Security tax rate increases at a decreasing rate.
each individual must pay a set percentage of his or her income in Social Security taxes.
the Social Security tax rate applied does not rise with the salary level.
no Social Security tax is collected for incomes in excess of a “cap” income level.
How is the public debt calculated?
Multiple Choice
By subtracting the government’s total liabilities from its total assets
By summing the annual difference between tax revenues and government spending over the years
By subtracting current government spending from current government tax revenues
By summing the annual government purchases over time
A federal budget deficit exists when federal government
Multiple Choice
spending is increasing in a given year.
spending exceeds tax revenues in a given year.
taxation is decreasing in a given year.
assets are less than liabilities in a given year.
Which of the following is the largest expenditure item of state governments?
Multiple Choice
Education
Public welfare
Health and hospitals
Highways
Which of the following is the largest expenditure item of local governments?
Multiple Choice
Public safety
Education
Welfare
Highways
Many states in the U.S. acquire significant amounts of funds from the following, except
Multiple Choice
personal income taxes.
state-run lotteries.
property taxes.
grants from the Federal government.
A public debt that is owed to foreigners can be burdensome because
Multiple Choice
foreign interest rates are persistently higher than domestic interest rates.
the payment of interest will conflict with a nation’s foreign aid programs.
the payment of interest reduces the volume of goods and services available for domestic uses.
the payment of interest will necessarily have a deflationary effect on prices in the paying nation.
Which of the following is not a significant source of revenue for the U.S. federal government?
Multiple Choice
Corporate income taxes
Property taxes
Payroll taxes
Personal income taxes
Which one of the following is not an excise tax of the federal government?
Multiple Choice
Tobacco tax
General sales tax
Alcoholic beverage tax
Gasoline tax
Social Security contributions are part of
Multiple Choice
excise taxes.
payroll taxes.
indirect taxes.
reverse taxes.
Public finance is the subdiscipline of economics that studies the various ways in which
Multiple Choice
firms in the financial sector provide services to households and firms.
governments may regulate and promote the stability of the financial sector.
governments raise and expend money.
the general public acquires financing for their purchases.
Which of the following is not a government activity that is involved in public finance?
Multiple Choice
Providing public goods and services such as national defense and education.
Regulating the activities of firms in the financial sector of the economy.
Running government-owned enterprises such as hospitals, utilities, and lotteries.
Redistributing income through various taxes and income-transfer payments.
The largest proportion of the U.S. public debt is held by
Multiple Choice
the Federal Reserve System.
the U.S. public (individuals, businesses, financial institutions, and government).
foreign individuals and institutions.
U.S. government agencies.
Which of the following statements about payroll taxes is false?
Multiple Choice
They are lump-sum taxes not based on wages/salaries.
They include Medicare taxes.
They provide funds for Social Security.
Both employers and employees pay these taxes.
A budget surplus means that
Multiple Choice
a nation’s imports are greater than its exports.
government expenditures are greater than revenues in a given year.
government revenues are greater than expenditures in a given year.
a nation’s exports are greater than its imports.
One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has
Multiple Choice
a strong military to protect it from creditors.
the capacity to pay off its outstanding debt with gold.
the ability to decrease interest rates and increase investment spending.
the power to print money to finance the debt.
Which is the most important source of tax revenue for local governments?
Multiple Choice
Property taxes
Personal income taxes
Corporate income taxes
Sales and excise taxes
The two largest sources of tax revenue for the U.S. federal government are
Multiple Choice
payroll taxes and excise taxes.
personal income taxes and payroll taxes.
excise taxes and customs duties.
personal income taxes and corporate income taxes.
For each of the following scenarios, determine the effect on aggregate supply.
- There is an unexpected decrease in oil prices. This causes:
a movement along the aggregate supply curve to the right, indicating an increase in the quantity of real GDP supplied.
an increase in aggregate supply, shifting the aggregate supply curve to the right.
a movement along the aggregate supply curve to the left, indicating a decrease in the quantity of real GDP supplied.
a decrease in aggregate supply, shifting the aggregate supply curve to the left.
- The government increases the amount that all producers are required to contribute to health insurance coverage. This causes:
a movement along the aggregate supply curve to the left, indicating a decrease in the quantity of real GDP supplied.
a decrease in aggregate supply, shifting the aggregate supply curve to the left.
an increase in aggregate supply, shifting the aggregate supply curve to the right.
a movement along the aggregate supply curve to the right, indicating an increase in the quantity of real GDP supplied.
For each of the following scenarios, determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign-purchases effect.
- As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars.
Real-balances effect
Interest-rate effect
Foreign-purchases effect
- When the price level decreases, restaurants become busier as more people purchase restaurant meals.
Foreign-purchases effect
Interest-rate effect
Real-balances effect
Aggregate demand is best described as the relationship between the:
quantity demanded in a market and the market price.
quantity demanded of a good or service and the price of the good or service.
quantity demanded and the price.
quantity of real GDP demanded in the economy and the price level.
Use the graph of Remi’s economy to complete the following statements.
- Point B is referred to as a trough .
- The movement from point A to point E is called a business cycle .
- Point D is referred to as a peak .
- The movement from point B to point D is called an expansion .
Determine the effect on aggregate demand for each of the scenarios described below.
- All European countries experience an economic expansion, raising incomes in each of the European countries. This causes:
a decrease in aggregate demand, shifting the aggregate demand curve to the left.
a movement along the aggregate demand curve to the left, indicating a decrease in the quantity of real GDP demanded.
an increase in aggregate demand, shifting the aggregate demand curve to the right.
a movement along the aggregate demand curve to the right, indicating an increase in the quantity of real GDP demanded.
- The government decides to decrease the amount it spends on the military. This causes:
a movement along the aggregate demand curve to the left, indicating a decrease in the quantity of real GDP demanded.
an increase in aggregate demand, shifting the aggregate demand curve to the right.
a decrease in aggregate demand, shifting the aggregate demand curve to the left.
a movement along the aggregate demand curve to the right, indicating an increase in the quantity of real GDP demanded.
Complete the following statements:
- In the short run, when the price level increases, the quantity of real GDP supplied will increase and
the aggregate supply curve will not shift .
- In the short run, some input prices are said to be sticky. This means that:
some firms will not be able to change the prices they charge.
some input prices will remain constant even as the price level changes.
all prices will remain constant in the economy.
Which of the following events would most likely reduce aggregate demand?
Multiple Choice
A reduction in business and personal tax rates.
A reduction in the amount of existing capital stock.
An increase in real interest rates.
An increase in expected returns on investment.
Which of the following factors does not explain the inverse relationship between the price level and the total demand for output?
Multiple Choice
A foreign-purchases effect
A real-balances effect
A substitution effect
An interest-rate effect
The long-run aggregate supply curve is _____.
Multiple Choice
upward-sloping and becomes steeper at output levels above the full-employment output
vertical
upward-sloping and becomes flatter at output levels above the full-employment output
horizontal
The aggregate demand curve or schedule shows the relationship between the total demand for output and the _____.
Multiple Choice
price level
income level
interest rate
real GDP
The short-run version of aggregate supply assumes that product prices are _____.
Multiple Choice
fixed while resource prices are flexible
flexible while resource prices are fixed
both input and product prices are flexible
both input and product prices are fixed
Use the following graph to answer the next question.
A shift from AD2 shifts to AD1 would be consistent with what economic event in U.S. history?
Multiple Choice
demand-pull inflation in the late 1960s
cost-push inflation in the mid-1970s
Great Recession of 2007-2009
World War II in the 1940s
Use the following graph to answer the next question.
If current output is Q1 and full-employment output is Q3, then in the long run the short aggregate supply schedule is _____.
Multiple Choice
AD
AS3
AS1
AS2
The labels for the axes of an aggregate supply curve should be _____.
Multiple Choice
real domestic output for the horizontal axis and price level for the vertical axis
aggregate demand for the vertical axis and real national output for the horizontal axis
real domestic output for the vertical axis and price level for the horizontal axis
real employment for the vertical axis and price level for the horizontal axis
Use the following graph to answer the next question.
If AD1 shifts to AD2, then the equilibrium output increases from _____.
Multiple Choice
Q1 to Q3 while the price level falls from P2 to P1
Q1 to Q2 while the price level falls from P2 to P1
Q1 to Q2 while the price level rises from P1 to P2
Q1 to Q3 while the price level rises from P1 to P2
The labels for the axes of the aggregate demand graph should be _____.
Multiple Choice
real domestic output on the horizontal axis and the price level on the vertical axis
real domestic output on the vertical axis and the price level on the horizontal axis
quantity of a product on the vertical axis and the price of a product on the horizontal axis
price of a product on the vertical axis and quantity of a product on the horizontal axis
Use the following graph to answer the next question.
Which of the following factors does NOT explain a movement along the AD curve?
Multiple Choice
The foreign purchases effect
The real-balances effect
The interest-rate effect
The expenditure multiplier effect
An aggregate supply curve represents the relationship between the _____.
Multiple Choice
price level and the buying of real domestic output
real domestic output bought and the real domestic output sold
price level and the production of real domestic output
price level that producers are willing to accept and the price level buyers are willing to pay
The upward slope of the short-run aggregate supply curve is based on the assumption that _____.
Multiple Choice
wages and other resource prices do respond to price level changes
prices of inputs are flexible while prices of outputs are fixed
wages and other resource prices do not respond to price level changes
prices of output do not respond to price level changes
A decrease in expected returns on investment will most likely shift the AD curve to the _____.
Multiple Choice
left because C will decrease
left because Ig will decrease
right because C will increase
right because Ig will increase
Use the following graph to answer the next question.
The short-run equilibrium for this economy is at _____.
Multiple Choice
point e
point g
none of these points
point f
Use the following graph to answer the next question.
If aggregate supply shifts from AS1 to AS2, then the price level will _____.
Multiple Choice
increase and real domestic output will decrease
increase and real domestic output will increase
decrease and real domestic output will decrease
decrease and real domestic output will increase
Use the following graph, which shows an aggregate demand curve, to answer the next question,
If the price level decreases from 200 to 100, the real output demanded will _____.
Multiple Choice
increase by $200 billion
increase by $800 billion
decrease by $600 billion
decrease by $200 billion
Which of the following effects best explains the downward slope of the aggregate demand curve?
Multiple Choice
A multiplier effect
An expectations effect
A substitution effect
An interest-rate effect
Which would most likely shift the aggregate supply curve? A change in the prices of _____.
Multiple Choice
foreign products
financial assets
domestic products
resources
In the aggregate demand-aggregate supply model, the economy’s price level is assumed to be _____.
Multiple Choice
variable, just like in the aggregate expenditures model
constant, unlike in the aggregate expenditures model
variable, unlike in the aggregate expenditures model
constant, just like in the aggregate expenditures model
An increase in personal income taxes will cause a(n) _____.
Multiple Choice
decrease (or shift left) in aggregate demand
decrease in the quantity of real output demanded (or movement up along AD)
increase (or shift right) in aggregate demand
increase in the quantity of real output demanded (or movement down along AD)
The economy’s long-run AS curve assumes that wages and other resource prices _____.
Multiple Choice
are relatively inflexible both upward and downward
rise and fall more rapidly than the price level
are flexible upward but inflexible downward
eventually rise and fall to match upward or downward changes in the price level
The long-run aggregate supply analysis assumes that _____.
Multiple Choice
both input and product prices are variable
both input and product prices are fixed
input prices are fixed while product prices are variable
input prices are variable while product prices are fixed
Which of the following would not shift the aggregate demand curve?
Multiple Choice
Income tax rates
Foreign-exchange rates
Real interest rates
Productivity rates