Tutorial
Chapter 6
Government
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1. Which of the following is a function of government?
a. Make and enforce the rule of law.
b. Provide public goods.
c. Protect citizens against social costs.
d. Encourage merit goods.
e. All of the above
E. The government has many functions. A free
enterprise system can only function and prosper
with a strong central government, but the question
is – what role should the government play and how
large should it be to promote the above while
encouraging growth and preserving our freedom?
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2. The largest single item of expenditures
in the federal budget is
a. Social Security and Medicare.
b. national defense.
c. welfare.
d. interest on the debt.
A. Social Security, Medicare and
Medicaid make up about 40% and
interest on the debt about 20%.
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3. Federal spending is approximately
what percent of GDP?
a. 3%.
b. 5%.
c. 12%.
d. 25%.
D. The federal government spends
about one quarter of all spending.
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4. The new fiscal year for the federal
budget begins on the first day of
a. January.
b. April.
c. July.
d. October.
D. The fiscal year used to begin on June 1, but
to give Congress and the President more time
to finalize the budget, the fiscal year was
pushed forward to October 1. So the federal
fiscal year begins October 1 to September 30.
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5. A continuing resolution is
a. an annual determination on the part of
Congress to improve the budget process.
b. a decision to maintain a specific spending
level ad infinitum.
c. a temporary extension of spending
authority into the new fiscal year.
d. the official name for the entire budget
package when it is finally enacted.
C. When Congress and the President fail to finalize
the budget by October 1, the government continues
to operate based on the last years spending levels,
this is called a continuing resolution.
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6. The problem of pollution can
a. be solved if businesses had a social conscience.
b. be solved with enough public awareness.
c. can only be solved with effective laws.
C. Any business with a social conscience and who
invests in anti pollution devices will experience
higher costs than competitors and therefore will
not be able to compete, everything else being equal.
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7. Which of the following is an example of a third party law?
a. Motorcycle drivers must wear a helmet.
b. When in a moving vehicle seat belts must be worn.
c. Cars must be inspected periodically.
C. Laws requiring helmets and seat belts only protect
the first person, not others. But laws requiring
state inspections of cars can protect people in the
car but also protects others not in the car.
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8. Which of the following is not an entitlement program?
a. Social Security.
b. Medicare.
c. Aid to Families with Dependent Children.
d. Federal research grants.
D. Entitlement programs are guaranteed benefits
for those who qualify under government transfer
programs such as Social Security, Medicare, and
Aid to Families with Dependent Children.
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9. One proposal for reforming and
improving the budget process is to
a. switch to a two-year or biennial budget
process.
b. remove the Council of Economic
Advisors from the process.
c. require more detail in the various line
items of the budget.
d. provide for automatic annual increases
in all budget categories.
A. A two year cycle would give legislatures more
time to debate and finalize our federal budget.
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10. Since 1960 the federal government has
experienced a budget deficit every year but
a. one.
b. two.
c. three.
d. four.
B. The last year that the federal government
balanced the budget was 2001 .
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11. An example of a capital expenditure in the present for
which shifting the cost to future generations through
deficit financing might be justified because those
future generations will also share in its benefits is
a. Social Security.
b. interest on the debt.
c. welfare.
d. a highway.
D. Only a highway is tangible and can thus
be used by future generations, the other
choices produce nothing tangible.
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12. Automatic payroll deduction of tax
payments became law in the U.S. for the first
time in
a. 1776.
b. 1865.
c. 1936.
d. 1942.
D. It was in 1942 that Beardsley Ruml introduced the idea
of payroll deduction as an alternative to tax payers
writing out checks once a year to pay their taxes.
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13. When U.S. imports exceed exports, foreigners accumulate
dollars which they partially invest in assets in the United
States, thereby providing all of the following except
a. an additional means of funding federal deficits.
b. a source of capital investment in U.S. cities and towns.
c. buyers for U.S. corporations and real estate.
d. a supplement to the growing U.S. saving rate.
D. With more money leaving the country than
entering, U.S. savings rate will decrease.
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14. Until 1980, most of the national debt was the result of
a. wartime borrowing.
b. inflation.
c. bad monetary policy.
d. wasteful Congressional spending.
A. Historically most of government borrowing was
the result of a war. Starting in the 1970’s, under
Lyndon Johnson’s Great Society Programs,
deficit spending increased year after year.
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23. The federal debt will decline as a percentage of
GDP only when
a. GDP increases more slowly than the debt
increases.
b. prices are held constant.
c. GDP and the debt increase at the same rate.
d. GDP increases faster than the debt increases.
D. Whether the debt is considered high or low
depends on how big it is in relation to GDP. If
GDP increases more than the debt increases,
the debt will decline as a percent of GDP.
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24. Which of the following statements is correct?
a. Only a small portion of the national debt
comes due during one year.
b. Interest payments on the national debt are
about 35% of the budget.
c. A one percentage point increase in the
nominal interest rate increases the annual
interest costs of the federal government
C. With a total national debt of over $17 trillion, the
interest paid on this increases every year. Thus, even
a one percent increase in the interest rate the
government has to pay translates into a lot of money.
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25. The question of who bears the burden of the debt is
complicated by all of the following factors except
a. how high the interest rate paid on government
loans is.
b. what the rate of unemployment in the future is.
c. how much of the publicly held debt is held by
foreigners.
d. whether the borrowed funds purchase capital
goods or not.
B. An increase in the unemployment rate does
not change the makeup of how much any
particular group owes of their debt share.
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26. Of the national debt held by the
public, foreigners now hold
a. a lot of the total
b. not much of the total.
c. less and less as time goes on.
A. The amount that foreigners owns of the U.S.
government debt has increased in recent
years and complicates our debt situation.
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27. Each time you buy a gallon of gas you pay a
tax, this tax goes to building and maintaining
roads. This is an example of
a. the ability to pay principle of taxation.
b. the benefits received principle of taxation.
c. a progressive tax.
A. Those people who drive the most end up
paying more taxes than people who drive less.
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28. Social Security is the world’s largest
Ponzi Scheme because
a. the money collected is saved in the
money markets to earn interest.
b. it is a government program.
c. the money paid out in day two was
collected in day one.
C. Because Social Security is a “pay as you go”
type program, as the number of people who pay
into the system declines relative to the number
of people who receive benefits, the burden on
those people who pay increases.
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29. Including the unfunded liabilities of government
retirement programs like Social Security in the
deficit would
a. have little impact on the size of the deficit.
b. have little impact on the size of the national debt.
c. triple the size of the national debt.
C. Social Security is unfunded because of the lack of
savings by the program. Congress has replaced all
savings by IOU’s that cannot be sold in the bond
market, they are only redeemable by the federal
government. Money owed to retirees is as much as
a liability to the government as interest owed.
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30. The president of the U.S. has line item veto power.
a. True
b. False
B. The line-item veto allows the President to veto certain
lines of a budget bill. Only that portion that is not
vetoed becomes law. Vetoed portions can be overridden
by a 2/3 majority of the House of Representatives. The
president does not have this authority.
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31. Which of the following is an alternative to line
item veto power that is practiced in Virginia?
a. A bill can only cover one topic and the name
of that topic has to be in the title of the bill.
b. The governor has unlimited power to
balance the budget.
c. Virginians have the right of referendum.
A. The Commonwealth of Virginia has a provision
at the state level that a bill can only cover one
topic. This makes it easy to vote on a bill.
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32. All of the following are objections to
the balanced budget amendment to the
U.S. constitution except
a. government spending could not be
increased to offset a recession.
b. taxes would have to be raised in
periods of recession.
c. a policy that puts too much power in
the hands of the President.
C. A balance budget amendment does not give
the President too much power. He has less
power with this amendment because he has
less control over the national budget.
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END
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