The national debt equals the sum of all past budget deficits minus all past budget surpluses.
Correct Answer
True
True. The deficit or surplus measures borrowing in a single year, while the debt is the running total built up over many years. Each deficit adds to the debt and each surplus reduces it.
Category: Deficits and Debt
Question 2
The individual income tax is the largest single source of federal tax revenue in the United States.
Correct Answer
True
True. The individual income tax brings in more federal revenue than any other tax, with the payroll tax second and the corporate income tax third.
Category: Taxation
Question 3
Monetary policy can usually be changed more quickly and more often than discretionary fiscal policy.
Correct Answer
True
True. A central bank can adjust interest rates several times a year, while a fiscal change must pass through recognition, legislative, and implementation lags that can take many months or more than a year. This is one reason fiscal policy is often called a blunt instrument.
Category: Limits of Fiscal Policy
Question 4
Under a progressive tax, tax rates rise as income rises, so high earners pay a larger share of their income in tax.
Correct Answer
True
True. A progressive tax takes a higher percentage of income from people with higher incomes. The federal individual income tax, with higher rates on higher brackets of income, is the main U.S. example.
Category: Taxation
Question 5
Expansionary fiscal policy tends to work better when the central bank keeps interest rates low rather than letting them rise.
Correct Answer
True
True. Government borrowing can push interest rates up and discourage private investment and consumption. If monetary policy holds rates down, less of the fiscal stimulus is offset, which is why the two policies need to be coordinated.
Category: Limits of Fiscal Policy
Question 6
The AD/AS model shows that aggregate demand must shift right to close a recession, but the model itself does not determine whether tax cuts or spending increases should be used.
Correct Answer
True
True. Both tax cuts and spending increases shift aggregate demand to the right, so the model only says that demand must rise. Choosing between the tools is largely a political decision about the size and role of government.
Category: Fiscal Policy and AD/AS
Question 7
Independent contractors, such as many gig workers, pay both the employee and the employer shares of payroll taxes on their earnings.
Correct Answer
True
True. Regular employees have half of the payroll tax withheld while the employer pays the other half. Self-employed independent contractors have no employer to split it with, so they pay both halves themselves.
Category: Taxation
Question 8
Most U.S. states are legally required to balance their budgets, unlike the federal government.
Correct Answer
True
True. Nearly every state has a balanced budget requirement, so a shortfall must be closed with higher taxes, lower spending, or past savings. The federal government has no such rule and can borrow to cover deficits.
Category: Balanced Budget Debate
Question 9
Historically, automatic stabilizers have offset only a modest part of an initial change in output, softening economic swings rather than eliminating them.
Correct Answer
True
True. Automatic stabilizers act quickly, but estimates suggest they offset only around a tenth of an initial change in output. Like shock absorbers on a car, they reduce the bumps without removing them.
Category: Automatic Stabilizers
Question 10
Steady economic growth with low inflation occurs when aggregate demand and aggregate supply both shift to the right at a similar pace over time.
Correct Answer
True
True. When both curves move right together, output rises while the price level increases only slightly. If demand grows much faster than supply the result is inflation, and if it grows much slower the result can be deflation.
Category: Fiscal Policy and AD/AS
Question 11
The Social Security payroll tax applies to all wage income, with no upper limit on taxable earnings.
Correct Answer
False
False. The Social Security portion of the payroll tax applies only to wages up to an annual ceiling, so earnings above that limit are not taxed for Social Security. Because of this cap, high earners pay a smaller share of their total income, which makes the tax regressive above the limit.
Category: Taxation
Question 12
In a recession, automatic stabilizers cause tax revenue to rise and spending on unemployment benefits to fall.
Correct Answer
False
False. In a recession, falling incomes and profits make tax revenue drop, and rising unemployment makes benefit spending increase. Both effects support aggregate demand without any new law.
Category: Automatic Stabilizers
Question 13
The recognition lag is the time it takes Congress to debate, pass, and sign a fiscal policy bill.
Correct Answer
False
False. That description is the legislative lag. The recognition lag is the time needed to determine that a recession has actually begun, since early data can be unclear.
Category: Limits of Fiscal Policy
Question 14
Comparing government spending in nominal dollars across several decades gives a more accurate picture of its size than comparing it as a share of GDP.
Correct Answer
False
False. Nominal dollars are not adjusted for inflation or for growth in population and the economy, so they overstate how much spending has really grown. Expressing spending as a share of GDP gives a fairer comparison over time.
Category: Government Spending
Question 15
Automatic stabilizers are weaker today than in 1929 because federal spending is now a much smaller share of GDP.
Correct Answer
False
False. Federal spending was only about 4% of GDP in 1929 and is now around 20% of GDP or more, so automatic stabilizers are much stronger today. Larger tax and transfer systems respond more powerfully when the economy changes.
Category: Automatic Stabilizers
Question 16
The corporate income tax collects a larger share of GDP today than it did in the 1960s.
Correct Answer
False
False. Corporate income tax revenue was about 4% of GDP in the 1960s and has been closer to 1% to 2% of GDP over the past several decades. It remains the third-largest federal revenue source, behind the individual income tax and the payroll tax.
Category: Taxation
Question 17
Crowding out occurs when government borrowing lowers interest rates and so encourages more private investment.
Correct Answer
False
False. Crowding out is the reverse: heavy government borrowing raises the demand for financial capital, which pushes interest rates up. Higher rates then discourage business investment and household borrowing, offsetting part of the fiscal stimulus.
Category: Limits of Fiscal Policy
Question 18
Education in the United States is primarily a federal responsibility, and most public education spending comes from the federal government.
Correct Answer
False
False. Education is primarily a state and local responsibility, and it is the largest category of state and local spending, about one-third of the total. Federal spending on education is small by comparison.
Category: Government Spending
Question 19
The federal government's most recent budget surpluses occurred during the 1960s.
Correct Answer
False
False. The federal government ran deficits in almost every year from the 1960s through 1997. Its most recent surpluses came from 1998 to 2001, after which deficits returned.
Category: Deficits and Debt
Question 20
Large government budget deficits increase national saving.
Correct Answer
False
False. Government borrowing is negative public saving, so large deficits reduce national saving. Lower national saving can slow economic growth by leaving less financial capital for private investment.
Category: Deficits and Debt