Economics Ch. 9-13

question

sin tax
answer

a relatively high tax designed to raise revenue while reducing consumption of a socially undesirable product
question

example of sin tax
answer

tax on liquor or tobacco
question

What can happen to factors of production when prices go up as an end result of taxation?
answer

the cost of production goes up which causes prices to rise and causes people to buy less which then causes companies to cut back on the factors of production (land, capital, labor, etc.)
question

incidence of a tax
answer

final burden of a tax
question

What situation must exist to make it easier to shift the incidence of a tax to the consumer?
answer

demand must be inelastic
question

What effect might taxes have on productivity and economic activity?
answer

it changes the incentives to save, invest, and work
question

What are the 3 criterion for effective taxes?
answer

1. Equity 2. Simplicity 3. Efficiency
question

tax loophole
answer

exception/oversight in the tax law allowing a taxpayer to avoid paying certain taxes
question

What criteria is generally recognized as making taxes fairer?
answer

if taxes have fewer exceptions, deductions, and exemptions, then taxes are viewed as being fairer
question

What makes taxes tolerable to many people?
answer

when the tax laws are simple and easy to understand
question

individual income tax
answer

federal tax levied on the wages, salaries, and other income of individuals
question

sales tax
answer

general tax levied on most consumer purchases
question

What are the two criteria for making a tax efficient?
answer

1. tax should be easy to administer 2. tax should generate enough worthwhile revenue that doesn’t harm the economy
question

tax return
answer

annual report by a taxpayer filed with the local, state, or federal gov’t detailing income earned and taxes owed
question

benefit principle of taxation
answer

belief that taxes should be paid according to benefits received regardless of income
question

ability-to-pay principle
answer

belief that taxes should be paid according to level of income, regardless of benefits received
question

What two factors is the ability-to-pay principle based on?
answer

1. the benefits received from the gov’t can’t always be measured 2. people with higher income suffer less discomfort than people with lower income
question

3 general types of taxes in the U.S.
answer

1. proportional tax 2. progressive tax 3. regressive tax
question

proportional tax
answer

percentage of income paid in tax is the *same* regardless of the level of income
question

progressive tax
answer

percentage of income paid in tax *rises* as the level of income rises (people with higher income pay more tax than lower income people)
question

regressive tax
answer

percentage of income paid in tax goes *down* as income rises (people with lower incomes pay more taxes than people with higher incomes)
question

average tax rate
answer

total taxes paid divided by the total taxable income
question

Medicare
answer

federal health-care program for senior citizens
question

marginal tax rate
answer

tax rate that applies to the next dollar of taxable income
question

Gasoline taxes are a good example of the ___________ principle of taxation.
answer

benefit
question

Paying $1,000 tax on $10,000 of taxable income, $4,000 on $20,000 of taxable income, and $20,000 on $60,000 of taxable income is an example of a tax system that is ___________________.
answer

Progressive
question

pork
answer

a line-item budget expenditure that circumvents normal budget procedures and benefits a small number of people or business
question

public sector
answer

that part of the economy made up of local, state, and federal gov’ts
question

What are the two main causes for the growth in gov’t spending since the 1930s?
answer

1. a major change in public opinion gave the gov’t a larger role in everyday economic affairs (FDR’s New Deal) 2. massive gov’t spending funded the U.S. involvement in WW2
question

private sector
answer

that part of the economy made up of private individuals and businesses
question

2 types of gov’t spending
answer

1. the gov’t pays to hire workers, maintain utilities, and give supplies. (tanks, office buildings, etc.) 2. transfer payments such as Social security, welfare, unemployment compensation, and aid for people with disabilities
question

transfer payment
answer

payment for which the gov’t receives neither goods nor services in return
question

grant-in-aid
answer

transfer payment from one level of the gov’t to another that doesn’t involve compensation
question

subsidy
answer

gov’t payment to encourage or protect a certain economic activity
question

distribution of income
answer

way in which the nation’s income is divided among families, individuals, or other designated groups
question

deficit spending
answer

annual gov’t spending in excess of taxes and other revenues
question

What factors affect the accuracy of the deficit projection?
answer

the state of the economy, the changes in the economy, and the way expenditures are reported
question

national debt
answer

total amount borrowed from investors to finance the government’s deficit spending
question

balanced budget
answer

annual budget in which expenditures equal revenues
question

What is the only way the annual budget can lower the federal debt?
answer

If the federal budget runs a surplus, then the debt goes down.
question

trust fund
answer

special account used to hold revenues designated for a specific expenditure such as Social Security, Medicare, or highways
question

Why do most economists tend to disregard trust fund balances?
answer

Because trust fund balances represent money the gov’t owes to itself
question

per capita
answer

per person basis; total divided by population
question

crowding-out effect
answer

higher-than-normal interest rates caused by heavy gov’t borrowing
question

What happens to the purchasing powers of individuals as a consequence of national debt?
answer

It causes a transfer of purchasing power from the private sector to the public sector
question

pay-as-you-go provision
answer

requirement that new spending proposals or tax cuts must be offset by reductions elsewhere
question

What was the 1990 Budget Enforcement Act’s main feature?
answer

pay-as-you-go provision
question

line-item veto
answer

power to cancel specific budget items without rejecting the entire budget
question

spending cap
answer

limits on annual discretionary spending
question

entitlements
answer

program/benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals
question

What is the connection between entitlements and mandatory spending in the federal budget?
answer

entitlements are classified as mandatory spending in the federal budget
question

What are the two broad categories of gov’t spending?
answer

public and private
question

Since 1983, spending by all levels of gov’t as a percentage of GDP has ________________. A. remained fairly constant B. has decreased slightly C. has increased dramatically D. has increased
answer

A. remained fairly constant
question

Social Security is an example of a ___________________. A. pork expenditure B. private sector expenditure C. subsidy D. transfer payment
answer

D. transfer payment
question

What directly and indirectly affects how resources are allocated?
answer

Public sector spending
question

In what way is the national debt different from private debt? A. Most of the national debt is owed to others. B. Private debt doesn’t have to be repaid by a specific date. C. The national debt doesn’t have to be repaid by a specific date. D. The gov’t gives up purchasing power when it repays the national debt.
answer

C. The national debt doesn’t have to be repaid by a specific date.
question

Describe the relationship of the federal deficit to the national debt.
answer

The federal deficit leads to borrowing, which adds to the national debt.
question

Which of the following is an example of entitlement payment? A. federal money given to a contractor in exchange for military uniforms B. federal money given to a senior citizen as a Social Security payment C. federal money spent to pay interest on the national debt D. federal money spent to build a new public highway
answer

B. federal money given to a senior citizen as a Social Security payment
question

Which of the following normally decreases the federal deficit? A. an increase in taxes B. an increase in spending C. entitlement programs D. low economic activity
answer

A. an increase in taxes
question

savings
answer

the dollars that become available when people abstain from consumption
question

financial system
answer

network of savers, investors, and financial institutions that work together to transfer savings to investors
question

financial assets
answer

claims on the property and the income of the borrower
question

pension
answer

regular payment intended to provide income security to someone who has worked a certain number of years or reached a certain age
question

risk
answer

degree to which the outcome is uncertain but a probable outcome can be estimated
question

saving
answer

absence of spending that frees resources for use in other activities or investments
question

certificate of deposit
answer

document showing that an investor has made an interest-bearing loan to a financial institution
question

financial intermediary
answer

institution that channels savings to investors
question

examples of financial intermediaries
answer

1. banks 2. credit unions 3. life insurance companies 4. pension funds 5. savings & loan associations 6. mutual savings banks 7. mutual funds 8. savings banks 9. finance
question

nonbank financial institution
answer

non-depository institution that channels savings to investors
question

examples of nonbank financial institution
answer

1. finance companies 2. insurance companies 3. pension funds
question

finance company
answer

firm that makes loans directly to consumers and specializes in buying installment contracts from merchants who sell on credit
question

premium
answer

price paid at regular intervals for an insurance policy
question

pension fund
answer

fund that collects & invests income until payments are made to eligible recipients
question

Capital formation depends on _______________________. A. saving alone B. borrowing alone C. both saving & borrowing D. neither saving nor borrowing
answer

C. both saving & borrowing
question

The financial institutions that bring together funds that savers provide and then lend those funds to others are called financial __________________.
answer

intermediaries
question

What sector(s) of the economy provide(s) the most savings?
answer

households and businesses
question

beneficiary
answer

someone who inherits the ownership of a financial asset if the purchaser dies
question

coupon rate
answer

stated interest on a corporate, municipal, or government bond
question

junk bonds
answer

exceptionally risky bonds
question

municipal bonds
answer

bonds issued by the state & local governments
question

IRAs
answer

long-term, tax sheltered time deposits that can be set up as a part of an individual retirement plan
question

bond
answer

contract to repay borrowed money and interest on the borrowed money at regular future intervals
question

maturity
answer

life of a bond or length of time funds are borrowed
question

par value
answer

principle of a bond or total amount borrowed
question

current yield
answer

bond’s annual coupon interest rate divided by purchase price; measure of a bond’s return
question

3 main components of a bond
answer

1. coupon rate 2. maturity 3. par value
question

tax-exempt
answer

not subject to tax by federal or state gov’ts
question

savings bond
answer

low denomination, non-transferable bond issued by the federal gov’t
question

treasury note
answer

U.S. gov’t obligation with a maturity of 2 to 10 years
question

treasury bond
answer

U.S. gov’t bond with a maturity of 30 yrs.
question

treasury bill
answer

short-term U.S. gov’t obligation w/a maturity of one year or less in denominations of $100
question

capital market
answer

market in which financial capital is loaned and/or borrowed for *more than one year*
question

money market
answer

market in which financial capital is loaned and/or borrowed for *one year or less*
question

primary market
answer

market in which only the original issuer can sell/repurchase a financial asset
question

secondary market
answer

market in which financial assets can be sold to someone other than the original issuer
question

High return, _________ risk.
answer

high
question

What kind of bonds are generally tax-exempt?
answer

municipal bonds
question

equities
answer

stocks that represent ownership shares in corporations
question

securities/stock exchange
answer

place where buyers & sellers meet to exchange stocks
question

over-the-counter market
answer

electronic marketplace for securities that aren’t traded on an organized change
question

bear market
answer

period during which stock market prices move *down* for several months or years in a row
question

bull market
answer

period during which stock market prices move *up* for several months or years in a row
question

stockbroker
answer

person who buys or sells securities for investors
question

efficient market hypothesis
answer

argument that stocks are always priced about right because they are closely watched
question

portfolio diversification
answer

strategy of holding different investments to protect against risk
question

mutual fund
answer

company that sells stock in itself and uses the proceeds to buy stocks and bonds issued by other companies
question

net asset value
answer

the market value of a mutual fund share found by dividing the net value of the fund by the number of shares issued
question

401(k) plan
answer

tax deferred investment and savings plan that acts as a personal pension fund for employees
question

Dow Jones Industrial Average
answer

measure of stock market performance based on 30 representative stocks
question

Standard & Poor’s 500
answer

measure of stock market performance based on 500 stocks traded on several markets
question

spot market
answer

market in which a transaction is made immediately at the prevailing price
question

futures contract
answer

an agreement to buy/sell at a specific date in the future at a predetermined price
question

option
answer

futures contract giving a buyer the right to cancel the ocntract
question

call option
answer

futures contract giving a buyer the right to cancel a contract to *buy* something
question

put option
answer

futures contract giving a buyer the right to cancel a contract to *sell* something
question

the most popular and widely measure of stock market performance?
answer

Dow Jones Industrial Average
question

oldest, largest, and most prestigious organized stock exchange in the U.S.?
answer

New York Stock Exchange
question

business cycles
answer

regular increases and decreases in real GDP
question

business fluctuations
answer

irregular increases and decreases in real GDP
question

recession
answer

decline in real GDP lasting at least two quarters
question

peak
answer

point in the business cycle when real GDP stops expanding
question

trough
answer

point in the business cycle when real GDP stops declining
question

expansion
answer

period of uninterrupted growth of real GDP
question

trend line
answer

growth path the economy would follow if it were not interrupted alternating periods of recession and recovery
question

depression
answer

state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship
question

depression scrip
answer

currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s
question

leading economic indicator
answer

statistical series that turns down before the economy turns down, or up before the economy turns up
question

composite index of leading economic indicators
answer

statistical series used to predict turning points in the business cycle
question

econometric model
answer

mathematical expression used to describe how the economy is expected to perform in the future
question

inflation
answer

increase in the general level of prices of goods and services
question

deflation
answer

decrease in the general level of prices for goods and services
question

price index
answer

statistical series used to measure changes in price level over time
question

consumer price index
answer

series used to measure price changes for a representative sample of frequently used consumer items
question

market basket
answer

representative selection of goods and services used to compile a price index
question

base year
answer

year serving as a point of comparison for other years in the price index
question

How is the dollar cost of a market basket converted to an index value?
answer

dividing the cost of every market basket by the base-year market basket cost
question

creeping inflation
answer

low rate of inflation at 1-3% annually
question

hyperinflation
answer

inflation in excess of 500% per year
question

stagflation
answer

period of slow economic growth coupled w/inflation
question

producer price index
answer

index used to measure prices received by domestic producers
question

implicit GDP price deflator
answer

index used to measure price changes in GDP
question

demand-pull inflation
answer

prices rice b/c all sectors of the economy try to buy more good and services than the economy can produce
question

cost-push inflation
answer

rising input costs drive up prices of products
question

creditor
answer

person/institution to whom money is owed
question

debtor
answer

person who borrows and owes money
question

labor force
answer

people 16 or older either working or looking for a job
question

unemployment rate
answer

number of unemployed persons divided by civilian force; percentage of people unemployed
question

frictional unemployment
answer

workers that are in between jobs
question

structural unemployment
answer

caused by change in economy that reduced demand for workers
question

outsourcing
answer

hiring outside firms to perform non-core operation to lower operating costs
question

technological unemployment
answer

caused by technological advances that makes workers’ skills obsolete
question

cyclical unemployment
answer

related to swings in the business cycles
question

seasonal unemployment
answer

caused by changes in weather or other conditions that reduce demand for jobs
question

wage-price spiral
answer

doesn’t blame any group for rising prices
question

GDP gap
answer

difference b/t what economy can and does produce
question

misery/discomfort index
answer

unofficial statistic that is the sum of the monthly inflation and unemployment rates
question

how to calculate rate of inflation?
answer

divide CPI by the beginning value of CPI
question

According to the excessive monetary growth theory of inflation, any extra money in the economy is spent, leading to a _________ ___________ effect.
answer

demand-pull
question

T/F Reduced purchasing power is a consequence of inflation.
answer

True

Get instant access to
all materials

Become a Member