US Federal Budget and Economic Policies
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Questions and Answers

In 2016, the U.S. government had to borrow an additional amount to cover its spending. What was the estimated value of this additional borrowing?

  • $19 trillion
  • $22 trillion
  • $118,500
  • $400 billion (correct)

    • What is the primary difference between the two main political parties regarding balancing the budget?

  • Republicans favor a balanced budget, while Democrats favor a deficit.
  • Democrats favor a balanced budget, while Republicans favor a deficit.
  • Democrats favor tax cuts, while Republicans favor spending cuts.
  • Republicans favor tax cuts, while Democrats favor spending cuts. (correct)

    • Which type of spending program would be targeted by Congress if they were to balance the budget solely through discretionary spending?

  • Social Security and Medicare
  • Defense, higher education, and agriculture (correct)
  • Capital gains and sales taxes
  • Payroll taxes for Social Security

    • What is the common way governments raise revenue to operate?

    <p>Taxation of residents and their activities (B)</p> Signup and view all the answers

    What is a potential drawback associated with raising revenue through taxation?

    <p>It discourages residents from spending and investing. (A)</p> Signup and view all the answers

    What is the key difference between Keynesian and supply-side economic perspectives on tax policy?

    <p>Keynesians favor progressive taxes, while supply-siders favor regressive taxes. (D)</p> Signup and view all the answers

    In a progressive tax system, what happens to the effective tax rate as the taxpayer's income increases?

    <p>It increases. (A)</p> Signup and view all the answers

    What is the name of the U.S. legislation that established the Federal Reserve System?

    <p>The Federal Reserve Act (C)</p> Signup and view all the answers

    What are the three primary goals of the Federal Reserve?

    <p>Maximum employment, stable prices, and moderate long-term interest rates. (A)</p> Signup and view all the answers

    What is the primary function of the Federal Reserve Board?

    <p>To oversee and regulate banks. (C)</p> Signup and view all the answers

    What is the main purpose of 'sin taxes'?

    <p>All of the above (D)</p> Signup and view all the answers

    What is a characteristic of a regressive tax system?

    <p>Lower earners pay a higher percentage of their income in taxes. (C)</p> Signup and view all the answers

    What is an example of a regressive tax paid by most U.S. workers?

    <p>Payroll taxes for Social Security (C)</p> Signup and view all the answers

    What is a financial panic?

    <p>A mass withdrawal of funds from banks. (B)</p> Signup and view all the answers

    What was the primary reason for the establishment of the Federal Reserve System?

    <p>To prevent financial panics. (D)</p> Signup and view all the answers

    What is the primary argument made by proponents of laissez-faire economics?

    <p>Private markets are more efficient than government intervention and should be allowed to operate freely. (A)</p> Signup and view all the answers

    Which of the following is NOT a characteristic of laissez-faire economics?

    <p>Support for government-imposed quality controls and health standards. (A)</p> Signup and view all the answers

    How do policymakers strive to protect long-term priorities from short-term fluctuations?

    <p>By removing certain policymaking functions from the reach of Congress. (A)</p> Signup and view all the answers

    What event directly challenged the validity of laissez-faire economic principles?

    <p>The Great Depression. (C)</p> Signup and view all the answers

    Why did proponents of laissez-faire economics believe that economic recessions would eventually correct themselves?

    <p>They felt that natural market forces would adjust and stimulate growth. (D)</p> Signup and view all the answers

    The text states that policymakers face challenges as a result of past decisions. What is the likely reason for this challenge?

    <p>Past decisions may have created economic or social problems that must be addressed. (C)</p> Signup and view all the answers

    What is the main purpose of mentioning the $6.55 trillion federal budget for 2020?

    <p>To provide a specific example of how American values shape government spending. (B)</p> Signup and view all the answers

    How long is the term for a governor on the Federal Reserve Board?

    <p>14 years (C)</p> Signup and view all the answers

    What is one of the primary roles of the chair of the Federal Reserve?

    <p>Set monetary policy (D)</p> Signup and view all the answers

    Which of the following individuals served as chair of the Federal Reserve?

    <p>All of the above (D)</p> Signup and view all the answers

    What dual mandate does the Federal Reserve aim to achieve?

    <p>Keep inflation under 2 percent and unemployment below 5 percent (B)</p> Signup and view all the answers

    Who succeeded Ben Bernanke as chair of the Federal Reserve?

    <p>Janet Yellen (A)</p> Signup and view all the answers

    Which event did Alan Greenspan respond to by lowering interest rates in 1987?

    <p>The stock market crash (D)</p> Signup and view all the answers

    What can be a consequence of the Fed's efforts to meet its dual mandate?

    <p>Contradictory monetary policies (A)</p> Signup and view all the answers

    Who is the current chair of the Federal Reserve as of 2021?

    <p>Jerome Powell (D)</p> Signup and view all the answers

    What major economic issue did Paul Volcker tackle when he became chair?

    <p>Double-digit inflation (B)</p> Signup and view all the answers

    How many regional Federal Reserve Banks are there?

    <p>12 (C)</p> Signup and view all the answers

    Why does Keynesian economics suggest increasing government spending during periods of high unemployment?

    <p>To stimulate consumption by providing income to those who are most likely to spend it. (B)</p> Signup and view all the answers

    What was a key criticism of Keynesian economics that emerged in the 1970s?

    <p>It caused inflation by overstimulating the economy. (A)</p> Signup and view all the answers

    What is the main argument of supply-side economics?

    <p>Economic growth is primarily determined by a country's productive capacity. (B)</p> Signup and view all the answers

    What is the difference between mandatory and discretionary spending in the federal budget?

    <p>Mandatory spending is determined by existing laws and formulas, while discretionary spending requires annual Congressional approval. (C)</p> Signup and view all the answers

    Which of the following is NOT an example of mandatory spending?

    <p>Education spending (A)</p> Signup and view all the answers

    What is the main argument for maintaining a minimal level of aggregate demand, as supported by Keynesians?

    <p>To prevent recessions from turning into depressions, which are more severe downturns. (A)</p> Signup and view all the answers

    What are the two largest components of the federal budget?

    <p>Defense spending and mandatory spending (D)</p> Signup and view all the answers

    What is the primary reason for the difficulty in reforming entitlement programs such as Social Security?

    <p>There is a lack of political will to reform the programs. (B)</p> Signup and view all the answers

    What is the difference between a recession and a depression?

    <p>A recession is a short-term economic downturn, while a depression is a long-term economic downturn. (C)</p> Signup and view all the answers

    What role did Keynesianism play in U.S. fiscal policy during the period from the 1930s to the 1970s?

    <p>It dominated U.S. fiscal policy during this time period. (B)</p> Signup and view all the answers

    Supply-siders argue that reducing taxes and regulations will spur economic growth. What is the main reason for this argument?

    <p>Lower taxes will encourage investment and production. (C)</p> Signup and view all the answers

    What is a deficit in the federal budget?

    <p>When the government spends more money than it takes in through revenue. (B)</p> Signup and view all the answers

    Why does mandatory spending often increase during periods of economic slowdown?

    <p>Because more people qualify for entitlement programs during economic downturns. (A)</p> Signup and view all the answers

    What is the difference between fiscal policy and monetary policy?

    <p>Fiscal policy deals with taxes and spending, while monetary policy deals with interest rates and the money supply. (B)</p> Signup and view all the answers

    What is the main argument against supply-side economics?

    <p>It can lead to excessive government debt. (A)</p> Signup and view all the answers

    What is the main argument in favor of Keynesian economics?

    <p>It is the only way to prevent recessions from becoming depressions. (C)</p> Signup and view all the answers

    Study Notes

    US Federal Budget and Economic Policies

    • The 2020 federal budget was $6.55 trillion.
    • Policymakers prioritize long-term goals over short-term political pressures.
    • Decisions to regulate the economy reflect economic philosophies.

    Laissez-Faire Economics

    • Before the 1930s, policymakers favored a hands-off approach (laissez-faire).
    • They believed private markets were superior to government intervention in economic growth.
    • They opposed government quality controls and safety standards.
    • They thought economic cycles naturally corrected themselves.

    Keynesian Economics

    • The Great Depression challenged laissez-faire, leading to Keynesianism.
    • Keynesian economics argues recessions can go deep, and government intervention is needed.
    • Economic growth depends on consumption.
    • High unemployment means low consumption, even if investments are high.
    • Government spending (e.g., unemployment benefits, tax incentives) stimulates consumption, in turn fostering economic growth.

    Supply-Side Economics

    • Supply-side economics emerged due to high inflation in the 1970s.
    • It argues that economic growth results from a country's production capacity.
    • Supply-siders advocate reduced taxes and regulations to increase investment.

    Types of Federal Spending

    • Mandatory spending (approx. 71% of 2020 budget) comprises entitlement programs (Medicare, Medicaid, Social Security, unemployment insurance, SNAP).
      • Costs, especially for age-related programs, are relatively predictable and correlate with population aging.
      • Costs related to income and disability are harder to predict but often increase during economic downturns.
    • Discretionary spending (approx. 29% of 2020 budget) includes government operations, science/technology.
      • Military spending counts as a large portion of this, only second to Social security
      • Congress must authorize these spending each year.

    US Budget Deficit and Debt

    • The US budget deficit (the gap between spending and revenues) has fluctuated.
    • The US experienced significant borrowing, even after the 2007-2009 recession.
    • US debt has been in excess of $22 trillion.

    Balancing the Budget

    • Both Republicans and Democrats aim for a balanced budget
    • Possible methods include reduced discretionary spending or increased revenue.
    • Reducing discretionary spending greatly impacts popular programs like defense.
    • Increasing taxes faces challenges of disincentivizing spending and investment.
    • Progressive vs. regressive taxes are debated.

    Progressive Tax System

    • Progressive taxes increase the effective tax rate as income rises.
    • This places a larger burden of income tax on higher earners.

    Regressive Tax System

    • Regressive taxes reduce the overall tax rate as income increases.
    • This may still benefit higher earners overall due to differing consumption patterns, for example purchasing more gasoline.

    Federal Reserve

    • The Federal Reserve (Fed) is the US central bank, established in 1913.
    • The Fed's three original goals—maximum employment—stable prices, and moderate long-term interest rates—stabilize the economy.
    • The Fed has expanded roles to control the money supply, regulate banks and provide financial services.

    Federal Reserve Chair

    • The Fed chair's role carries immense economic responsibility.
    • Activities like raising and lowering interest rates control inflation and stimulate economic growth.
    • Past chairs (e.g., Janet Yellen, Alan Greenspan, Ben Bernanke) have significantly impacted the US economy.

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    Description

    Explore the key concepts and historical perspectives on US federal budget and economic policies. This quiz covers the transition from laissez-faire economics to Keynesian economic principles and the impact of government intervention on economic cycles. Test your understanding of these significant economic philosophies.

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