Question

Government transfer payments act as automatic stabilizers because as labor income decreases, transfer payments

	a.	decrease as well.
	b.	increase.
	c.	to the government increase.
	d.	remain constant.

For liberals, the United States has a(n)

	a.	public sector that is too small.
	b.	private sector that is too small.
	c.	public sector that is too large.
	d.	economy that is too heavily regulated.

Ronald Reagan's presidency could be characterized as a period of

	a.	passive monetary policy.
	b.	active regulatory policy.
	c.	passive fiscal policy.
	d.	active fiscal policy.

The reason that the multiplier is smaller if there are variable taxes is that

	a.	tax increases shift the expenditure line upward.
	b.	taxes add to government spending, which increases income.
	c.	people get angry about taxes and decide to work less.
	d.	part of an increase in income is taken away in taxes.

Answer 1

1. Option b is the answer.

• Increase.
• Government transfer payments act as automatic stabilisers because as labour income decreases transfer payments increase. Transfer payments are redistribution of income. When the labour income is decreasing, the government transfer payment will help in increase the income through transfer payments.

2. Option a is the answer.

• Public sector that is too small.
• For Liberals, United state has public sector that is too small. Liberals want the government to abolish social differences existing in the society by intervening accordingly. They support regulations for maintaining equality and for avoiding pollution and other economic problems.

3. Option d is the answer.

• Ronald Reagan's presidency could be characterised as a period of active fiscal policy.
• Ronald Reagan's reaganomics made changes in taxation and other government spending in the economy. The socio-economic changes witnessed in that period were all associated with these policies. So Ronald Reagan's policies can be considered as active fiscal policy.

4. Option d is the answer.

• Part of the increase in income is taken away in taxes.
• The reason that the multiplier is smaller if there are variable taxes is that part of the increase in income is taken away in taxes. Apart from fixed taxes, when variable taxes are in practice, then any kind of variation in the income will be affected by the taxes. Even if the income rises, the amount of tax also increases, thus the multiplier will become smaller.