Unit 5 Evaluation Economics BUSH 035 060 This evaluation will cover the lessons in this unit. It is open book, meaning you can use your textbook, syllabus, and other course materials. To submit the evaluation, follow the directions provided. Multiple-Choice Select the response that best completes the statement or answers the question. _____ 1. What happens to the percentage of income that is taxed when income rises, and the tax is a proportional one? a. b. c. d. _____ 2. What gives the United States government the right to collect taxes? a. b. c. d. _____ Declaration of Independence state laws United States Constitution executive order 3. Who pays unemployment taxes? a. b. c. d. _____ The percentage of tax falls. The percentage of tax rises. The percentage rises and then falls. The percentage of tax stays the same. unemployed people the federal government employers employees 4. What is the difference between an estate tax and a gift tax? a. Estate tax is paid on all inherited money; gift tax is only paid on amounts over $5,000. b. Estate tax is paid only on property; gift tax is paid only on money. c. Estate tax is paid by heirs of an estate; gift tax is paid by both parties of the gift. d. Estate tax is paid on the money and property of someone who died; gift tax is paid on money or property given by one living person to another. Unit 5 Evaluation BUSH 035 _____ 5. Which of the following is a discretionary spending program? a. b. c. d. _____ 6. What are two reasons Medicare costs are rising? a. b. c. d. _____ People are living longer and retiring earlier. Fewer workers are paying Medicare taxes, and benefits are going up. People are living longer, and medical technology is more expensive. Eligibility age has been lowered, and technology is expensive. 7. What are the main sources of revenue for local governments? a. b. c. d. _____ national defense unemployment compensation interest on debt Social Security state grants federal grants income tax property taxes 8. For which expense do state governments provide financial help to their local governments? a. b. c. d. _____ parks and recreation trash and garbage collection election supervision public school systems 9. Why does the federal government collect income taxes throughout the year as people earn wages? a. b. c. d. so that people do not realize exactly how much tax they are paying so that the money can be put aside until it is needed so that the government can pay bills as they come due so that taxpayers can qualify for refunds of excess taxes _____ 10. Your receipt from a department store says that you paid a 5 percent sales tax on sports equipment. This sales tax is an example of a(n) a. b. c. d. Unit 5 Evaluation regressive tax. income tax. proportional tax. progressive tax. BUSH 035 _____ 11. Your pay stub from your job deducts money for FICA. What does this mean? a. b. c. d. Money is being withheld to fund Social Security and Medicare. Money is being withheld for federal, state, and city taxes. Money is being withheld for personal exemptions and deductions. Money is being withheld for excise and estate taxes. _____ 12. The Big Wig Company is one of the largest manufacturers in the country, yet it paid very little in corporate income taxes last year. This is probably because a. b. c. d. corporate taxes only apply to small companies. it claimed many deductions, which reduced its taxable income. the company opted to pay higher property taxes instead. the company mainly exports goods, which are not taxable. _____ 13. Chad’s family lives below the poverty line. Both of his parents work at low-income jobs that do not provide health insurance. Which entitlement program offers healthcare for Chad? a. b. c. d. Medicaid Medicare Social Security FICA _____ 14. What is the main source of funding for most local public schools? a. b. c. d. state sales taxes local property taxes payroll taxes federal income taxes _____ 15. What tax did the government create to keep people from giving away their money before they die? a. b. c. d. excise tax estate tax gift tax import tax _____ 16. Refer to Figure 14.4 on page 375 in your textbook. What percentage of American government spending in 2006 went for Homeland Security? a. b. c. d. Unit 5 Evaluation 19 percent 32 percent 8 percent 3 percent BUSH 035 _____ 17. It is difficult for the federal government to increase or decrease spending because a. b. c. d. most government officials are reluctant to authorize any changes in spending. more than half of all government spending is on entitlements. tax cuts must be approved by three-fourths of the states. different states may have different goals and may not agree with the changes. _____ 18. What is one action Congress can take if the President vetoes the budget? a. b. c. d. override the veto by a majority vote pass appropriation bills anyway ask the Supreme Court to decide override the veto by a two-thirds majority vote _____ 19. What has reduced the severity of changes to real GDP in the United States economy since World War II? a. b. c. d. automatic stabilizers federal payments to states Internal Revenue Service aids income stabilizers _____ 20. What is one of the major problems caused by a large national debt? a. b. c. d. It does not allow small investments by private individuals. It makes it hard for the government to carry on activities. It makes it difficult for the country to operate internationally. It decreases the amount of money available to be borrowed by businesses. _____ 21. What is a major argument against a constitutional amendment requiring a balanced budget? a. b. c. d. It would be hard to monitor. It would be too unpopular. It would be too inflexible. It would be difficult to obey. _____ 22. An example of expansionary fiscal policy would be cutting a. b. c. d. income taxes. government spending. production of consumers’ goods. workers’ wages. _____ 23. The main job of the Office of Management and Budget is to a. b. c. d. Unit 5 Evaluation prepare Congressional appropriations bills. create the federal budget based on the needs of various agencies. coordinate the work of Congressional committees in order to create a budget bill. approve or disapprove the federal budget proposed by Congress. BUSH 035 _____ 24. How were the fiscal policies of Democrats John F. Kennedy and Lyndon B. Johnson similar to those of Republican Ronald Reagan? a. b. c. d. They all supported supply-side economic theories. They all supported tax cuts to boost the economy. They all supported Keynesian budget planning. They all supported tax increases on wealthier Americans. _____ 25. Robin buys newly issued Treasury bonds that will not mature for thirty years. How is Robin affecting efforts to balance the current federal budget? a. Her actions have no effect on the current budget, as the government will not be able to use the funds for thirty years. b. Robin is helping to create a budget surplus thanks to the extra taxes she will have to pay on her investment in the Treasury bonds. c. Robin is contributing to a budget deficit because the government will have to repay the full value of her loan plus interest. d. The money Robin pays for the bonds serves as a loan to the government that can be used to balance the current budget. _____ 26. Which of the following best describes the relationship between a budget deficit and the national debt? a. b. c. d. Every year with a budget deficit adds to the national debt. A deficit decreases the debt because deficit funds do not have to be repaid. Ongoing debt increases the deficit in each year’s budget. They are the same thing. _____ 27. Which factors contributed to the federal government’s return to deficit spending in the early twenty-first century? a. b. c. d. tax cuts and the end of a stock market boom tax increases and increased military spending decreased spending on entitlement programs elimination of the balanced budget amendment _____ 28. An income tax credit on more fuel-efficient vehicles is an example of a. b. c. d. a sin tax. discretionary spending. a tax incentive. a tax deduction. _____ 29. Which statement best describes fiscal policy during the 1980s? a. b. c. d. Unit 5 Evaluation Income tax rates were reduced, but spending was increased. Income tax rates and spending were both reduced. Income tax rates were increased, but spending was reduced. Income tax rates and spending were both increased. BUSH 035 _____ 30. What is a major reason that the federal government does not reduce the budget deficit by creating more money? a. b. c. d. The Constitution forbids the government from doing so. Creating more money to cover a deficit can lead to hyperinflation. Having too much money in circulation leads to deflation. Creditors would not accept the money at face value. _____ 31. How did the Gramm-Rudman-Hollings Act try to prevent budget deficits? a. b. c. d. It allowed Congress greater flexibility to cut federal spending. It required Congress to raise more money to cover all direct spending. It created automatic spending cuts if the deficit was greater than a certain amount. It reduced payments for entitlements if the federal budget was not balanced. _____ 32. What is the purpose of PAYGO? a. to write the federal budget, which Congress and the President must approve b. to decrease deficits by requiring Congress to raise enough money to pay for spending increases c. to require the federal government to balance the budget or face automatic spending cuts d. to help families with dependent children by paying them cash _____ 33. Why do some people want to amend the Constitution to require a balanced budget? a. They believe an amendment would force the government to be careful about spending. b. They believe an amendment would make it harder to deal with rapid changes in the economy. c. They believe the national debt is not a big problem. d. They believe in the power of government spending. _____ 34. What banks must join the Federal Reserve System? a. b. c. d. all nationally chartered banks all state-charted banks all banks of any kind Membership is voluntary. _____ 35. Why did Congress change the structure of the Fed in 1935? a. b. c. d. Unit 5 Evaluation to decentralize the banking system to encourage regional banks to work together consistently to prevent a President from appointing all Fed Governors to respond to banking problems caused by the Panic of 1907 BUSH 035 _____ 36. What is the function of a bank examiner? a. b. c. d. to make sure banks are obeying laws and regulations to respond to banks about their daily reports to the Fed to carry on day-to-day functions within the bank to oversee decisions about major loans by each bank _____ 37. Which is the Federal Reserve’s biggest customer? a. b. c. d. its member banks individuals and small businesses the federal government its twelve district banks _____ 38. Which of the following activities creates money? a. b. c. d. putting money into a safe depositing money into a demand deposit account paying off a loan to a friend withdrawing money from a demand deposit account _____ 39. What can the Federal Open Market Committee do to increase the money supply? a. b. c. d. buy government securities sell government securities raise the discount rate lower reserve requirements _____ 40. What is likely to be the best approach to a recession that is expected to turn into an expansion in a short time? a. b. c. d. Use monetary policy to lower interest. Do nothing and let the economy fix itself. Use fiscal policy to lower interest. Use monetary policy to raise interest. _____ 41. Why do low interest rates encourage business investment? a. b. c. d. It is cheaper to borrow money when interest rates are low. Inflation is lower when interest rates are low. Lower interest rates cause the money supply to expand. Lower interest rates cause the money supply to decrease. _____ 42. Why is the Federal Reserve called a “lender of last resort?” a. b. c. d. Unit 5 Evaluation The Fed decides to whom a bank can lend money. The Fed will make loans to businesses and individuals when other banks will not. The Fed can decide how much money a bank can loan out. The Fed makes loans that allow banks to maintain required reserves. BUSH 035 _____ 43. What is the relationship between interest rates and demand for money? a. b. c. d. As Interest rates decrease, demand for cash decreases. Interest rates are determined by demand for cash. As interest rates increase, demand for cash decreases. As interest rates increase, the money supply increases. _____ 44. If the required reserve ratio (RRR) is 25 percent, the money multiplier is a. b. c. d. 2. 4. 5. 50. _____ 45. The Federal Reserve usually does not conduct monetary policy by changing the reserve requirements because a. changing reserve requirements has no effect on monetary policy. b. even a small increase would limit the ability of banks to make loans. c. the Fed is not allowed to change the reserve requirements without the consent of all member banks. d. increasing reserve requirements would lead to inflation. _____ 46. What monetary policy tool does the Fed use to stabilize the money supply when interest rates increase and investment spending declines? a. b. c. d. raising the discount rate easy money policy open market operations money creation _____ 47. Prior to the passage of the Federal Reserve Act of 1913, reserve requirements were a. b. c. d. difficult to enforce and difficult for banks to maintain on their own. excessively high, while discouraged banks from making loans. observed by national banks, but ignored by local banks. too low to prevent bank runs from occurring. _____ 48. What are Federal Reserve Districts? a. the committee that makes the key monetary policy decisions about interest rates and money supply b. the twelve regional banks that monitor and report on banking conditions in specific geographic areas c. the cities with the largest financial institutions across the United States d. the geographic areas into which the Federal Reserve Act divided the United States Unit 5 Evaluation BUSH 035 _____ 49. What is one result of a high money supply? a. b. c. d. contraction in the economy contraction in demand low interest rates low investment spending _____ 50. Why is it difficult for the Fed to prevent recessions by lowering interest rates? a. b. c. d. The Fed can change the rate only once a year. It can take years for local banks to change their rates. The Fed’s rate does not affect business loans. It can take businesses years to make large investment plans. Carefully check your answers on this evaluation and make any corrections you feel are necessary. When you are satisfied that you have answered the questions to the best of your ability, transfer your answers to an answer sheet. Please refer to the information sheet that came with your course materials. Unit 5 Evaluation BUSH 035 BLANK PAGE
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