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CHAPTER 16

Economic Policy

MULTIPLE CHOICE QUESTIONS

Type: FactualAns: EPage: 459

1. One reason that politicians did not stop allowing a deficit was that

a. they did not agree with voters.b. they did not care.c. the Bill of Rights made deficit spending mandatory.d. the Constitution made deficit spending mandatory.e. they were split between those who thought the deficit could be

eliminated by cutting spending and those who thought it could be eliminated by raising taxes.

Type: FactualAns: APage: 460

2. The main reason the deficit went away in 1999 was because

a. the American economy grew so rapidly.b. the Congress raised taxes.c. the Congress cut spending.d. the Congress enacted legislation mandating a balanced budget.e. Democrats regained control of the presidency.

Type: FactualAns: CPage: 460

3. The Economic Growth and Tax Relief Reconciliation Act of 2001 did all of the following except

a. cut tax rates on all income groups.b. increase the tax credit for children.c. double the “marriage penalty.”d. phase out the tax on estates of deceased persons.e. make it easier to deduct expenses.

Type: FactualAns: BPage: 460


a. cut tax rates on all income groups.b. decrease the tax credit for children.c. eliminate the “marriage penalty.”d. phase out the tax on estates of deceased persons.e. make it easier to deduct expenses.



a. cut tax rates on some income groups.b. increase the tax credit for children.c. eliminate the “marriage penalty.”d. phase out the tax on estates of deceased persons.e. make it easier to deduct expenses.

Copyright © Houghton Mifflin Company. All rights reserved.

546 Chapter 16: Economic Policy


6. The text notes the Economic Growth and Tax Relief Reconciliation Act of 2001 was one of only ____ “large” federal tax cuts since the Second World War.

a. 2b. 3c. 6d. 8e. 10

Type: FactualAns: DPage: 460

7. Which of the following presidential administrations is associated with a large federal tax cut?

a. John F. Kennedy.b. Ronald Reagan.c. George W. Bush.d. All of these.e. B and C.

Type: ConceptualAns: APage: 460

8. The health of the American economy creates

a. majoritarian politics.b. interest group politics.c. client politics.d. entrepreneurial politics.e. egalitarian politics.


9. Many officials take economic policy positions based either on ideological grounds or on their

a. reading of public opinion.b. own personal finances.c. own occupational position.d. own view of the marketplace.e. advisor’s view of socio-economic status.


10. The pocketbook issue tends to preoccupy politicians most

a. early in a presidential term.b. toward the end of a session of Congress.c. when presidential popularity is at its peak.d. when the economy is doing poorly.e. just before elections.


11. As a group, low-income people tend to be most concerned with

a. inflation.b. education.c. economic drift.d. health.e. employment.


Chapter 16: Economic Policy 547


12. As a group, higher income people tend to be most concerned with

a. inflation.b. education.c. employment.d. health.e. economic drift.


13. Since lower-income people worry about unemployment, they tend to vote

a. Democratic.b. Republican.c. Independent.d. Socialist.e. Libertarian.


14. Since higher-income people worry about inflation, they tend to vote

a. Democratic.b. Republican.c. Independent.d. Socialist.e. Libertarian.

Type: ConceptualAns: EPage: 461

15. When voting behavior and economic conditions correlate at the national but not at the individual level, it can be said that the voters are

a. heliocentric or earth conscious.b. sociopathic or self-absorbed.c. homeopathic or group related.d. socialistic or ideology driven.e. sociotropic or other regarding.


16. An example of government use of money to influence elections in the nineteenth century was the practice of

a. giving government jobs to the party faithful.b. increasing the size of the military.c. levying an income tax.d. encouraging a policy of manifest destiny.e. decreasing the size of the Post Office.


17. An example of government use of money to influence elections in the twentieth century is

a. increasing the size of the military in election years.b. increasing foreign aid in election years.c. increasing Social Security benefits in election years.d. reducing subsidies for mortgage insurance in election years.e. mobilizing troops in election years.



Type: ConceptualAns: CPage: 462

18. Economic policies adopted by a president to reduce inflation are most likely to have the negative effect of

a. raising taxes.b. lowering interest rates.c. raising unemployment.d. raising the budget deficit.e. decreasing wages.


19. Party priorities generally dictate that

a. Democrats worry more about unemployment and Republicans about depressions.

b. Democrats worry more about war and Republicans about depressions.

c. Democrats worry more about inflation and Republicans about unemployment.

d. Democrats worry more about unemployment and Republicans about inflation.

e. Republicans worry more about war and Democrats worry more about depressions.


20. Policies aimed at improving the economy as a whole are examples of

a. majoritarian politics.b. interest group politics.c. client politics.d. entrepreneurial politics.e. reciprocal politics.


21. According to the monetarist theory, inflation occurs when

a. government holds down interest rates.b. there is too little money and interest rates are low.c. demand exceeds supply.d. the budget deficit exceeds the gross national product (GNP).e. government prints too much money.


22. An economist who believes that inflation means too much money chasing too few goods is basically subscribing to the ________ theory.

a. monetaristb. Keynesianc. planningd. supply-sidee. credit-based




23. Monetarists recommend that government increase the money supply at a rate equal to the

a. growth in credit.b. growth in unemployment.c. growth in productivity.d. drop in the rate of inflation.e. drop in wages.

Type: ConceptualAns: BPage: 464

24. An economist who believes that a healthy economy depends on what fraction of their incomes people save or spend is basically subscribing to the ________ theory.



25. An economist who believes that the government should help the market expand demand if production is too low is basically endorsing the ________ theory.



26. John Kenneth Galbraith urges, as a solution to inflation, that

a. government cut taxes.b. the private sector be allowed to adjust itself.c. the money supply be held in check.d. government control prices and wages.e. government restrictions be lifted and taxes increased.


27. An economist regards the free market as too undependable to ensure economic efficiency and suggests government control over it. The economist is recommending what type of economic policy?

a. monetaristb. supply-sidec. planningd. Keynesiane. credit-based




28. An economist who advocates wage-price controls is basically endorsing the ________ theory.



29. Some countries have been particularly successful in directing and planning investments so that certain key industries will benefit. This planning is part of their

a. industrial policy.b. supply-side approach to the economy.c. workshop economy.d. monetarist policy.e. credit-based policy.


30. To reinvigorate the steel industry, proponents of industrial policy would recommend that government

a. direct investment into the steel industry.b. help market forces increase the demand for steel.c. pump more money into the overall economy.d. suspend regulation of the steel industry.e. regulate wages and reduce taxes.


31. Supply-side economists advocate that government

a. control wages more than prices.b. control prices more than wages.c. control both prices and wages.d. all of these.e. interfere less in the economy.


32. The economic theory that runs most counter to planning theory is

a. monetarist theory.b. supply-side economics.c. Keynesian theory.d. wage-price-control economics.e. credit-based theory.



Type: ConceptualAns: DPage: 464

33. An economist proposes that the best remedy for declining productivity is to lower taxes, which would increase investment and ultimately increase productivity. This approach is called

a. Keynesian economics.b. monetarist economics.c. economic planning.d. supply-side economics.e. credit-based economics.


34. An economist proposes that the best remedy for declining productivity is to lower taxes. Why should this approach increase productivity?

a. because it would direct government investment toward those segments of the economy that generate the most revenues

b. because it would increase consumer confidence and lower demand for goods

c. because it would decrease demand, which in turn would reduce the budget deficit and lower inflation

d. because it would increase economic growth by reducing the amount of money chasing after a scarcity of goods

e. because it would increase investment, which would in turn increase productivity and tax revenues


35. Ideology plays a part in our selection of an economic theory. If we feel that individuals should not have to make economic decisions for themselves, then we would prefer the ________ theory.

a. monetaristb. Keynesianc. planningd. supply-sidee. credit based


36. Among President Reagan's economic priorities in his first term were all of the following except

a. reducing unemployment.b. reducing the size of the federal government.c. stimulating economic growth.d. increasing U.S. military strength.e. A and C.


37. Reagan's formula for reducing the size of government while stimulating economic growth included each of the following except

a. increased taxes.b. monetarism.c. supply-side tax cuts.d. domestic budget cutting.e. A and D.




38. The combination of monetarism, tax cuts, and domestic budget cutting characterized

a. the New Deal.b. the Great Society.c. the New Federalism.d. the Fair Deal.e. Reaganomics.


39. When the Reagan administration lowered taxes and increased spending, it

a. created large deficits and increased unemployment.b. stimulated the economy and created large deficits.c. lowered interest rates and stimulated the economy.d. created large deficits and lowered interest rates.e. increased unemployment and deflated the economy.


40. One consequence of Reaganomics was an increase in the budget deficit. Another was a(n)

a. increase in foreign trade.b. increase in the unemployment rate.c. decrease in Social Security payments.d. decrease in military spending.e. decrease in the unemployment rate.


41. Fiscal policy attempts to affect the economy through

a. money and bank deposits.b. the price of money (interest rate).c. taxes.d. expenditures.e. C and D.


42. Monetary policy attempts to affect the economy through

a. money and bank deposits.b. the price of money (interest rate).c. taxes.d. expenditures.e. A and B.


43. The fiscal year begins

a. September 1.b. October 1.c. November 1.d. January 1.e. June 1.




44. One consequence of Reaganomics was an increase in the budget deficit. Another was a(n)

a. increase in foreign trade.b. rise in interest rates.c. decrease in Social Security payments.d. decrease in military spending.e. increase in the unemployment rate.


45. The machinery for making economic policy decisions is

a. complex and not under the president's full control.b. simple but not under the president's full control.c. complex but fully controlled by the president.d. simple and fully controlled by the president.e. complex but fully controlled by the president and party leaders.


46. The president seldom can control economic policy because of conflicts over economic theories and because

a. public opinion is too volatile.b. labor and management are frequently at odds.c. policy making is highly fragmented.d. economists have too little influence over policy.e. economists frequently change their theories.


47. All of the following executive offices are important in making economic policy except

a. the comptroller general of the General Accounting Office (GAO).

b. the secretary of the treasury.c. the chairperson of the Council of Economic Advisers (CEA).d. the director of the Office of Management and Budget (OMB).e. A and B.


48. The executive agency in charge of economic forecasting and preparing the president's annual economic report to Congress is the

a. CEA.b. Treasury Department.c. OMB.d. Fed.e. NSA.


49. No matter what its makeup, the CEA tends to

a. be closely allied with the financial community.b. favor reliance on the market.c. encourage price controls.d. favor a tight money policy.e. reduce policy to a common denominator.




50. The OMB, in its present form and name, was founded in

a. 1981.b. 1970.c. 1939.d. 1921.e. 1876.


51. The Federal Reserve Board implements its monetary policy by

a. buying federal government securities bonds.b. selling federal government securities bonds.c. regulating the amount of money that a member bank must keep

in hand as reserves.d. changing the interest rates charged at banks.e. all of these.


52. The executive agency that ensures that other agencies' legislative proposals are compatible with the president's program is the

a. CEA.b. Treasury Department.c. OMB.d. Fed.e. NSA.


53. The OMB is partly a nonpartisan, expert agency that analyzes budget patterns and partly a(n)

a. partisan agency carrying out the president's wishes.b. detached organization that promotes the national interest.c. agency that supervises the Budget Reform Act.d. agency subordinate to the CEA.e. organization that checks presidential decision making.


54. The executive officer who provides estimates of government revenues and who recommends tax changes is the

a. chairperson of the CEA.b. secretary of the treasury.c. director of the OMB.d. chairperson of the Fed.e. deputy director of the OMB.


55. Typically, the economic adviser with the closest link to the financial community is the

a. chairperson of the CEA.b. secretary of the treasury.c. director of the OMB.d. chairperson of the Fed.e. deputy director of the OMB.




56. In economic policy deliberations, the secretary of the treasury is expected to argue the point of view of the

a. financial community.b. president.c. Treasury Department.d. country in general.e. industrial elite.


57. One study found ________ separate government bureaus engaged in making economic policy.

a. fewer than fiveb. fewer than tenc. approximately thirtyd. close to seventy-fivee. more than 100


58. Outside the troika of presidential economic advisers, the most important agency involved in making economic policy is the

a. General Accounting Office (GAO).b. Environmental Protection Agency (EPA).c. Federal Reserve Board (Fed).d. Office of Management and Budget (OMB).e. Council of Foreign Relations (CFR).


59. Which of the following statements concerning the Federal Reserve Board is incorrect?

a. Its members are confirmed by the Senate.b. It has 7 members.c. Members serve 4 year terms.d. No member has ever been removed for cause.e. The Chairman serves for 4 years.



a. Its members are confirmed by the Senate.b. It has 10 members.c. Members serve 14 year terms.d. No member has ever been removed for cause.e. The Chairman serves for 4 years.



a. Its members are confirmed by the Senate.b. It has 7 members.c. Members serve 14 year terms.d. No member has ever been removed for cause.e. The Chairman serves for life.




62. The text suggests that, in theory and in practice, the Fed is independent

a. of the president.b. of Congress.c. of both the president and Congress.d. of the president, but not Congress.e. of Congress, but not the president.


63. The text argues that the most important component of economic policy making machinery is the

a. Treasury.b. Congress.c. OMB.d. CEA.e. NSA.


64. Congress is important in economic policy making because it

a. must approve all taxes and most expenditures.b. determines the supply of money in the economy at any given

time.c. controls all appointees to the Federal Reserve Board (Fed).d. controls all appointees to the Council of Economic Advisers

(CEA).e. reviews annual reports and removes appointees at will.


65. When some portions of the economy begin to fare poorly, the nature of economic policy making is most likely to turn from

a. client to interest group politics.b. interest group to entrepreneurial politics.c. entrepreneurial to client politics.d. client to majoritarian politics.e. majoritarian to interest group politics.


66. An example of the influence of interest group politics on economic health and policy making is the debate over

a. Social Security.b. highway spending.c. personal income taxation.d. foreign imports.e. A and C.




67. Why should a U.S. shoe company be opposed to the elimination of trade restrictions on shoes?

a. because of its effect on the strength of the dollarb. because of competition from imported shoesc. because of its effect on the cost of imported raw materials

needed to make shoesd. because of pressure from stockholders to sell abroade. because trade restrictions increase the possibility of

competition and force stockholders to sell abroad


68. When it passed the North Atlantic Free trade Agreement, (NAFTA), Congress took what approach toward trade restrictions?

a. It put the need for free trade above protectionism.b. It put the need for protectionism above free trade.c. It moved away from both free trade and protectionism.d. It compromised between free trade and protectionism.e. It rendered protectionism irrelevant.


69. According to opinion polls, the public wants all of the following except

a. a balanced federal budget.b. lowered government spending.c. more spending on education and other programs.d. tight trade restrictions.e. A and B.


70. Politicians who follow public opinion are most likely to look for a way to

a. hold down government spending and still fund favorite programs.

b. reduce inflation and still maintain high interest rates on savings.

c. reduce unemployment and still allow importation of foreign goods.

d. support environmental- and consumer-protection issues and still keep the price of goods low.

e. reduce spending and increase taxes.




71. Politicians who follow public opinion are most likely to look for a way to

a. lower taxes, balance the budget, and still fund favorite programs.

b. reduce inflation, lower unemployment, and still maintain a high rate of investment.

c. reduce unemployment, encourage business activity, and still allow importation of foreign goods.

d. support environmental- and consumer-protection issues, support business activity, and still keep the price of goods low.

e. reduce spending and increase taxes.


72. Throughout its history the federal budget has typically

a. concentrated on income.b. concentrated on expenditures.c. balanced income and expenditures.d. ignored income and expenditures.e. balanced income and inflation.


73. From the 1930s to the 1970s, the federal budget was

a. whatever the military industrial complex insisted that it would be.

b. subject to a firm overall ceiling.c. generally whatever the president wanted it to be.d. what was recommended by the Congressional Budget Office.e. the sum of whatever congressional committees wanted to

spend.


74. Each May, Congress is required by the ________ to adopt a budget resolution.

a. General Accounting Officeb. Congressional Budget Officec. Congressional Budget Actd. Congressional Research Servicee. Administrative Review Board


75. Since 1974, the purpose of congressional budget resolutions passed annually in May has been to

a. add up all the expenditures agreed to.b. set a ceiling on total spending.c. get final authorization for all expenditures.d. compromise over the spending measures of the two houses.e. settle issues related to discrepancies in math.




76. Entitlements such as Social Security or Medicare payments, veterans' benefits, or Food Stamps constitute about ______ of the federal budget.

a. one-sixteenthb. one-tenthc. one-fourthd. one-halfe. two-thirds


77. The most obvious loophole in the Congressional Budget Act of 1974 is that

a. the projections on which spending is based are subjective.b. the president can increase spending ceilings by reallocating

other funds.c. there is nothing in the process that requires Congress to tighten

the government's financial belt.d. its key section has been declared unconstitutional.e. its key section and numerous applications have been declared

unconstitutional.


78. Reagan's strategy in the budget battle of 1981 was to

a. focus on specific controversial programs and leave remaining programs at current spending levels.

b. pass a May budget resolution that called for further cuts in most programs.

c. form a consensus of liberals and conservatives.d. get Congress to vote for a total package of cuts before it voted

for particular cuts.e. reduce party leaders to a subordinate role in the process by

insisting on particular cuts on the front end of the process.


79. In 1981, President Reagan was able to use the procedures of the Budget Reform Act to

a. gain chairmanships for his supporters.b. force the Federal Reserve Board (Fed) to cut interest rates.c. encourage Congress to pass a selective tax increase.d. increase the power of congressional caucuses.e. force committees to make cuts in their programs.


80. The 1981 budget passed Congress with the help of

a. Democratic majorities in both chambers.b. a Republican-controlled House and an alliance between

Republicans and conservative Democrats in the Senate.c. a Republican-controlled Senate and an alliance between

Republicans and conservative Democrats in the House.d. a Democrat-controlled Senate and an alliance between liberal

Republicans and Democrats in the House.e. Republican majorities in both chambers.




81. The passage of the first Reagan budget exemplified the close connection in Congress between

a. procedure and policy.b. party alignment and procedure.c. presidential leadership and party alignment.d. party alignment and procedure.e. caucuses and special interests.


82. After 1981, the budget procedures used in that year

a. were abandoned.b. did not work as well.c. continued to function in about the same way.d. were significantly improved.e. were institutionalized and improved.


83. The growing federal budget deficit that began in 1981 was the result of

a. a major tax cut.b. a 50 percent increase in federal spending.c. the Senate's refusal to enact the Gramm-Rudman Balanced

Budget Act.d. Reagan's veto of the Gramm-Rudman Balanced Budget Act.e. B and D.


84. The Gramm-Rudman Act was passed by Congress to

a. fine-tune the existing budget procedures.b. give more authority to the OMB.c. eliminate deficit spending.d. eliminate the balance of trade deficit.e. eliminate tax cuts.


85. Which of the following did the Gramm-Rudman Balanced Budget Act of 1985 call for?

a. Spending could not exceed 2.5 percent of the previous year's actual spending.

b. The budget would automatically be cut until the deficit was eliminated.

c. Spending could not exceed 2.5 percent of the previous year's budgeted spending.

d. All budget items would be indexed to the rate of inflation.e. All budget items would be decreased by 10 percent until they

returned to pre-1970 levels.




86. The term sequester refers to

a. those budget items, such as Social Security, that are largely uncontrollable.

b. the process of protecting certain items from budgetary review.c. freezing budget items at previous levels.d. a limit set on the percentage of uncontrollable expenses that the

budget can contain.e. automatic, across-the-board percentage cuts in the budget.


87. By 1990, despite the Gramm-Rudman Balanced Budget Act of 1985, the federal deficit had increased dramatically. In response, President Bush and Congress reached an agreement calling for all of the following except

a. new budgetary procedures that set limits on discretionary spending programs.

b. new budgetary procedures that set limits on entitlement programs.

c. an increase in the tax rate from 28 percent to 31 percent.d. an increase of ten cents a gallon in gasoline taxes.e. a major cut in several key domestic spending programs.


88. Did the Gramm-Rudman Balanced Budget Act of 1985 succeed in balancing the budget by 1991?

a. No, if fell far short of its goal.b. No, but it came close.c. Yes, just barely.d. Yes, by a good margin, but only because its goals were revised

downward in 1988.e. Yes, but only because its goals were revised downward in 1988

and 1992.


89. The Budget Enforcement Act of 1990 imposed a cap on

a. credits.b. entitlements.c. new taxes.d. sequesters.e. discretionary spending.


90. The Budget Enforcement Act of 1990 did not limit mandatory spending (that is, for entitlements), but it did impose

a. a tax cut.b. the process of sequestering.c. a "pay-as-you-go" approach.d. an audit.e. an audit and a tax cut.




91. Americans generally believe that a fair tax law should do all of the following except

a. keep the overall tax burden low.b. require everyone to pay something.c. keep expenditures in line with receipts.d. require the better-off to pay at a higher rate.e. B and D.


92. Keeping both the tax burden and tax evasion low would be an example of

a. client politics.b. entrepreneurial politics.c. interest group politics.d. majoritarian politics.e. reciprocal politics.


93. Loophole politics is an example of

a. majoritarian politics.b. interest group politics.c. entrepreneurial politics.d. client politics. e. reciprocal politics.

Type: FactualAns: CPage: 471(Fig. 16.4)

94. Of the following countries, the one that imposes the largest tax burden is

a. the United States.b. Germany.c. France.d. Canada.e. United Kingdom.


95. Which of the following countries imposes the smallest tax burden upon its citizens?

a. the United Statesb. Germanyc. Franced. Canadae. United Kingdom


96. Which of the following countries imposes a higher tax burden upon its citizens than the United States?

a. United Kingdomb. Germanyc. Franced. Canadae. All of these

Type: Factual97. Which of the following countries imposes a smaller tax burden on its



Ans: APage: 473

citizens that the United States?

a. Japanb. Italyc. Spaind. Portugale. Ireland


98. From the inauguration of income tax up to the 1950s, tax rates tended to rise and fall with

a. the cycles of public opinion.b. good and bad economic times.c. war and peace.d. Democratic and Republican administrations.e. critical or realigning elections.


99. The political compromise reached on taxation in the first half of this century included

a. high marginal tax rates and numerous loopholes.b. low marginal tax rates and numerous loopholes.c. high marginal tax rates and few loopholes.d. low marginal tax rates and few loopholes.e. None of these.


100. Democrats agreed to support loopholes that favored the rich in return for high marginal rates because they feared that a combination of no loopholes and high marginal rates would

a. hurt the middle class more than it would hurt the wealthy by denying them Schedule C deductions.

b. discourage foreign investment and raise the cost of raw materials.

c. encourage foreign investment in U.S. industry, thereby hurting the economy indirectly.

d. seriously affect productivity by raising the cost of raw materials and labor.

e. hurt the economy by discouraging people and businesses from saving and investing.


101. All of the following gave significant tax benefits to most taxpayers except

a. mortgage interest deductions.b. Schedule C deductions.c. state tax payments.d. interest on consumer loans.e. local tax payments.




102. Contributing to the success of loophole politics prior to passage of the 1986 tax bill was the

a. strong support of policy entrepreneurs such as Ralph Nader.b. existence of low marginal rates to offset revenues lost through

deductions.c. decentralized structure of Congress.d. existence of tariff revenues to offset revenues lost through

deductions.e. strong support of the conservative coalition and Ralph Nader.


103. The tax-reform bill of 1986 represented the return of

a. reciprocal politics.b. interest group politics.c. entrepreneurial politics.d. client politics.e. majoritarian politics.


104. The Tax Reform Act of 1986 was a triumph of entrepreneurial politics because

a. it made tax laws "fairer" and cut out tax "cheats."b. key Democratic legislators wanted lower taxes.c. key Republican legislators wanted higher taxes.d. Many Republican legislators wanted to overcome criticism of

favoring higher taxes.e. special interests had little or no impact on the development of

the Act.


105. In the years after Congress enacted the Tax Reform Act of 1986, all of the following have occurred except

a. Tax rates have been increased.b. New deductions were put back into tax laws.c. New exemptions were put back into tax laws.d. Tax returns have become less complicated.e. B and C.

TRUE/FALSE QUESTIONS

Ans: TruePage: 459

106. The federal government did not have a deficit in 1999 and 2000.

Ans: FalsePage: 459

107. The average American has always approved of deficit spending.

Ans: FalsePage: 459

108. Generally speaking, conservatives want to increase spending and liberals want to cut taxes.



Ans: FalsePage: 460

109. The main reason the deficit disappeared was that Congress adopted new restrictions on spending plans.

Ans: TruePage: 460

110. The growth in the American economy and personal income were primarily responsible for the disappearance of the deficit.

Ans: FalsePage: 460

111. When faced with the prospects of budget surpluses after 1999, Republicans wanted to use them to fund new programs.

Ans: FalsePage: 460

112. The standard position of the Democrats on budget surpluses was to return them to the people through tax cuts.

Ans: TruePage: 460

113. The Economic Growth and Tax Relief Reconciliation Act of 2001 cut tax rates on all income groups.

Ans: FalsePage: 460

114. There have been seven large federal tax cuts since the Second World War.

Ans: FalsePage: 460

115. The health of the American economy creates client politics.

Ans: FalsePage: 461

116. Low-income people are most likely today to vote Republican.

Ans: TruePage: 461

117. Most people see the connection between their own condition and the economic health of the nation.

Ans: FalsePage: 461

118. Those who find that their own personal finances are not suffering, but that the national economy is, are more likely to vote for the incumbent in presidential elections.

Ans: FalsePage: 461

119. Retired persons are more concerned with inflation than are younger adults.

Ans: TruePage: 462

120. Congress has demonstrated its willingness to use the government's economic power to influence elections.

Ans: FalsePage: 462

121. Unlike in the nineteenth century, today's members of Congress are unwilling to use the government's economic power to influence elections.

Ans: FalsePage: 462

122. Republicans prefer to cut unemployment rather than reduce inflation.



Ans: TruePage: 462

123. If Republicans have to choose between trying to reduce unemployment and trying to reduce inflation, they generally try to reduce inflation.

Ans: TruePage: 462

124. The findings of polls suggest Democrats and Republicans are about the same when it comes to worrying about inflation.

Ans: FalsePage: 462

125. Most voters who are concerned about unemployment vote for the incumbent.

Ans: TruePage: 462

126. Most voters who are concerned about unemployment vote Democratic.

Ans: TruePage: 462

127. Voters frequently endorse three inconsistent policies--lower taxes, less debt, and new programs.

Ans: TruePage: 462

128. Because cutting taxes to any meaningful extent is politically difficult, politicians have a strong tendency to get re-elected by spending public money on specific programs (for example, Social Security or building highways) that are popular.

Ans: TruePage: 463

129. In economic policy as in other majoritarian issues, the president takes the lead.

Ans: FalsePage: 463

130. Policies aimed at improving the economy as a whole are examples of client politics.

Ans: FalsePage: 464

131. A monetarist believes inflation is caused when there is too little money chasing too many goods.

Ans: FalsePage: 464

132. Monetarist economists tend to have confidence in government and encourage it to play a large role in the economy.

Ans: TruePage: 464

133. Monetarist economists generally advocate a reduction of the federal government's role in the economy.

Ans: FalsePage: 464

134. John Maynard Keynes believed that the market was its own best regulator.



Ans: TruePage: 464

135. A Keynesian believes that taxes should be increased when demand for products is too high.

Ans: FalsePage: 464

136. Wage-price controls are most likely to be advocated by supply-side economists.

Ans: TruePage: 464

137. Industrial policy is a form of planning economics.

Ans: TruePage: 464

138. Supply-side economics opposes the trend toward government planning for the economy.

Ans: FalsePage: 464

139. A supply-side economist would advocate higher taxes on businesses to generate higher government revenues for investment.

Ans: TruePage: 465

140. In general, one's economic theory tends to be consistent with one's political ideology.

Ans: TruePage: 465

141. Conservatives are more likely to find monetarism appealing.

Ans: FalsePage: 464

142. Supply-side tax cuts are particularly appealing to liberals.

Ans: TruePage: 464

143. Socialists are more likely to be attracted to economic planning.

Ans: FalsePage: 465

144. Individuals often hold economic theories and political philosophies that are distinct and contradictory.

Ans: TruePage: 465

145. Reaganomics was not based on any single economic theory.

Ans: TruePage: 465

146. The most important component of the Reagan economic package was sharp cuts in the federal income tax.

Ans: FalsePage: 465

147. The goal of Reaganomics was to lower both unemployment and inflation by creating government jobs for the unemployed.

Ans: FalsePage: 465

148. Reaganomics was characterized by increases in military spending and increased unemployment.



Ans: FalsePage: 465

149. Reaganomics was characterized by high budget deficits and decreased business activity.

Ans: FalsePage: 466

150. The president's troika of economic advisers includes the Fed, the Council of Economic Advisers, and the secretary of the treasury.

Ans: TruePage: 466

151. The executive office in charge of forecasting economic trends is the Council of Economic Advisers.

Ans: FalsePage: 466

152. The executive office in charge of overseeing the budgets of federal agencies is the Council of Economic Advisers.

Ans: TruePage: 466

153. The secretary of the treasury provides the president with estimates of tax revenues.

Ans: TruePage: 466

154. The secretary of the treasury is often drawn from the world of business and finance.

Ans: FalsePage: 467

155. A study found that about two dozen separate government bureaus engage in formulating economic policy.

Ans: FalsePage: 466

156. A president can count on having effective control of the economic agencies in the federal government.

Ans: TruePage: 466

157. A president's attempt to ensure a consistent economic policy is almost certainly doomed to failure because of the large number of agencies now in existence.

Ans: TruePage: 467

158. The responsibilities of the Federal Reserve Board lie in the area of fiscal rather than monetary policy.

Ans: FalsePage: 467

159. The Federal Reserve Board has the responsibility of developing fiscal policy for the president.

Ans: FalsePage: 467

160. The term members of the Federal Reserve Board serve is for life.

Ans: TruePage: 467

161. No member of the Federal Reserve Board has ever been removed since its founding in 1913.

Ans: False 162. Members of the Federal Reserve Board are elected by Congress.



Page: 467

Ans: TruePage: 468

163. President Clinton reappointed President Reagan’s choice for chairman of the Federal Reserve Board.

Ans: TruePage: 467

164. The Fed is more independent of executive control than is the troika of economic advisers.

Ans: TruePage: 468

165. The most important part of the economic policy-making machinery is Congress.

Ans: TruePage: 468

166. The debate in the 1980s over trade restriction was an example of interest group politics.

Ans: FalsePage: 469

167. If the only concern of economic policy were the economic health of the country, that policy would always be a matter of client politics.

Ans: TruePage: 469

168. Most voters believe that the federal government could cut spending significantly if it chose to do so.

Ans: FalsePage: 469

169. The federal budget has traditionally been based on a system of allocation of available revenues.

Ans: TruePage: 469

170. The federal government traditionally makes out its budget without regard for the amount of money it has to spend.

Ans: FalsePage: 469

171. Federal budgets, like household budgets, are arrived at by first determining the amount available to be spent and then allocating that amount to various spending programs.

Ans: TruePage: 470

172. Even after Congress has passed a budget resolution, it can still change the spending ceilings in the resolution.

Ans: TruePage: 470

173. The various appropriations passed by Congress can rarely make big differences in government spending since about two-thirds of what government spends is mandatory.

Ans: FalsePage: 470

174. About one-thirds of what government spends is in the form of entitlements.



Ans: FalsePage: 470

175. Once presidents began submitting unified budgets to Congress, Congress reacted to the budgets in a similarly unified way.

Ans: FalsePage: 471

176. The Gramm-Rudman Balanced Budget Act of 1985 called for an increase in taxes and sharp cuts in several specific federal spending programs.

Ans: TruePage: 471

177. A sequester is an automatic, across-the-board percentage budget cut.

Ans: TruePage: 471

178. One strategy that Congress adopted in 1990 to help eliminate the deficit was to raise taxes.

Ans: TruePage: 471

179. The Budget Enforcement Act of 1990 required Congress to either cut spending in some other programs or raise taxes if it increased mandatory (that is, entitlement) spending above the cap.

Ans: FalsePage: 471

180. The requirements in the Budget Enforcement Act of 1990 of spending caps and pay-as-you-go have not helped restrain federal spending.

Ans: FalsePage: 473

181. France and Italy are examples of nations that rely more on income taxes than on sales taxes.

Ans: TruePage: 473

182. An income tax is an invitation to the emergence of class politics.

Ans: TruePage: 473

183. The Sixteenth Amendment created the federal income tax.

Ans: TruePage: 473

184. Citizens of the United States have a lower tax burden than citizens in Canada, the United Kingdom, France or Germany.

Ans: FalsePage: 473

185. The citizens of the United States live under the highest tax burden found in any Western Democracy.

Ans: FalsePage: 473

186. A progressive tax is one that requires the better-off to pay more as a percentage of their income.

Ans: FalsePage: 473

187. Liberal Democrats have remained unswervingly opposed to large tax loopholes.



Ans: FalsePage: 473

188. Universities and insurance companies have generally been opposed to tax loopholes.

Ans: TruePage: 474

189. Loophole politics is client politics.

Ans: FalsePage: 474

190. Tax bills up to 1986 dealt more with tax rates than with tax deductions.

Ans: TruePage: 475

191. The Tax Reform Act of 1986 called for lower tax rates but smaller and fewer deductions.

Ans: TruePage: 475

192. The Tax Reform of 1986 was a triumph of entrepreneurial politics.

Ans: FalsePage: 475

193. In the wake of the Tax Reform Act of 1986, tax rates went up again with far more deductions to make it easy for affluent citizens to keep their rates low.

SHORT ANSWER QUESTIONS194. Discuss three problems that have complicated the debate over how budget surpluses should be spent.

Answer

a. the need to maintain Social Security

b. almost all of the 1999 budget surplus was in the Social Security Trust Fund

c. the questionable prediction that there will be big non-Social Security surpluses in future years

Page: 460-461

195. Explain how general economic policies are examples of majoritarian politics, whereas specific policies are examples of interest group and client politics. Does this distinction help to clarify the difficulties facing a president in the area of economic policy making?

Answer

a. Benefits and costs widely distributed (majoritarian) in general policies

b. However, disagreement will develop over policies such as education and health

c. Difficulty of defining loopholes

Page: 461-463

196. Explain Reaganomics and its effects.

Answer

a. No single theory but combination of supply-side tax cuts, monetarism, and domestic budget cutting

b. Policies inconsistent; economy stimulated but created large budget deficit



Page: 465

197. What is the Gramm-Rudman Balanced Budget Act of 1985 and how did it succeed?

Answer

a. Between 1986 and 1991, deficit could not exceed specified, sliding amount

b. If president and Congress cannot agree on spending plan within target, automatic across-the-board sequestration

c. Act failed in 1990 when Congress and president could not agree on cuts

Page: 471

198. Discuss the historical development in the process of making federal budgets from 1789 to the present.

Answer

a. 1789 to 1921: no real budget, but an addition of various expenditures

b. 1921 to 1970: Bureau of Budget prepares unified budget, considered by multiple congressional committees

c. 1970s: Bureau of Budget becomes OMB, Congress attempts to reorganize and rationalize its budgetary consideration

Page: 469-471

199. Outline and comment on the politics behind the passage of the Tax Reform Act of 1986.

Answer

a. Majoritarian politics of the passage of the original income tax had been replaced by interest group and client politics of loopholes.

b. The year 1986 saw reversal of this and the reemergence of majoritarian politics in favor of reform.

c. Democratic and Republican legislators favored cutting a lot of deductions supported by countless lobbyists.

d. Voters more interested in cutting the deficit than lowering taxes.

e. Result: tax laws "fairer" and cut out "tax cheats."

Page: 471-476

ESSAY QUESTIONS200. The text outlines four economic theories: monetarism, Keynesianism, planning, and supply side. Discuss

how each theory would identify the cause of inflation and how each would solve this problem.

Answer

a. Monetarism: cause—too much money chasing too few goods; solution—government should slow the growth of the money supply in line with the rate of productivity

b. Keynesianism: cause—the public is saving too little money and is spending too much money; solution—the government should raise taxes and cut its own spending level

c. Planning: cause—big corporations are raising prices due to the lack of competition, and union wage concessions are passed off to consumers; solution—government should impose wage and price controls

d. Supply side: cause—too much government interference has prevented the market from operating normally; solution—government should cut taxes to foster saving, work, and investment

Page: 464-465



201. Describe the actors in the executive branch who are involved in making economic policy. What are the procedures in Congress for budget making?

Answer

a. OMB (prepares president's budget on spending after compiling agency estimates); CEA (forecasts economic trends); Treasury (makes revenue projections); Federal Reserve Board (regulates money supply and price of money)

b. Congressional Budget Act of 1974: Budget committees formulate resolution in each house; Congress adopts resolution in May; appropriations determined during summer; second resolution adopted prior to October 1

Page: 466-469


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Documents

created large deficits

federal reserve board

lowered interest rates

high marginal rates

offset revenues lost

budget enforcement act

social security payments

tax reform act