Question 1

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1real GDP).What is the real GDP when the government has a balanced budget?

Accepted Answer

A balanced budget occurs when outlays are equal to taxes.

Let's set up the equation:

Outlays = $100 billion

Taxes = $25 billion + 0.1real GDP

When the budget is balanced:

Outlays = Taxes

$100 billion = $25 billion + 0.1real GDP

Solving for real GDP:

0.1real GDP = $75 billion

real GDP = $750 billion

Question 2

Suppose that in China, investment is ¥400 billion, saving is ¥400 billion, tax revenues are ¥500 billion, exports are ¥300 billion, and imports are ¥200 billion._______ in government expenditure or _______ in taxes will further increase China's budget _______, increase investment and speed economic growth.

Accepted Answer

A decrease in government expenditure or an increase in taxes will increase the budget surplus (since both actions would lead to less spending or more revenue for the government, respectively), which can then be used to increase investment and speed up economic growth.

Question 3

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1real GDP).What are autonomous taxes in Ricardia?

Accepted Answer

Autonomous taxes are the taxes that are not related to changes in real GDP. In this case, the equation given shows that taxes increase by $0.1 for every $1 increase in real GDP, which means that taxes are not fixed and are dependent on changes in real GDP. However, the constant term in the equation, which is $25 billion, represents the autonomous taxes, as it is not related to changes in real GDP. Therefore, the correct answer is D, $25 billion.

Question 4

The cyclical deficit

Accepted Answer

The cyclical deficit arises because real GDP does not equal potential GDP, reflecting the difference between the actual economic output and the potential output of an economy.

Question 5

A tax on labour income

Accepted Answer

A tax on labour income does not affect the demand for labour directly; it primarily affects the supply side by influencing workers' decisions to work more or less, depending on the substitution and income effects. The demand for labour is determined by employers based on productivity and the cost of labour relative to other inputs, not directly by the tax on labour income.

Question 6

If the economy is in an expansion, and the federal government is running a deficit, then a recession would automatically

Accepted Answer

During a recession, government outlays typically increase due to higher spending on unemployment benefits and other social safety nets, while tax revenues decrease due to lower incomes and corporate profits. This combination leads to an increase in the deficit.

Question 7

If the economy is in a recession, and the government has a budget deficit, then there

Accepted Answer

A structural surplus or deficit refers to the budget balance that would exist if the economy were at its potential level of output. During a recession, the actual budget deficit may be larger than the structural deficit due to cyclical factors, such as lower tax revenues and higher welfare payments. However, whether there is a structural surplus or deficit depends on the underlying fiscal policy, independent of the economic cycle.

Question 8

The structural deficit is the deficit

Accepted Answer

The structural deficit is the deficit that would occur at potential GDP, meaning it is the deficit that remains even when the economy is operating at its full capacity. This is different from deficits that are caused by the business cycle (such as cyclical deficits) which vary depending on the stage of the economy.

Question 9

Increasing taxes on business and investment _______ short- run aggregate supply and _______ potential GDP.

Accepted Answer

Increasing taxes on business and investment reduces the amount of money in circulation and makes businesses less willing to invest. This results in a decrease in short-run aggregate supply and potential GDP.

Question 10

Lowering taxes on employment _______ , which _______ the equilibrium quantity of labour.

Accepted Answer

Lowering taxes on employment increases the supply of labour, as workers are now able to keep more of their earnings. This in turn increases the equilibrium quantity of labour.

Question 11

If the economy is in a recession and the federal government is running a deficit, then an expansion would

Accepted Answer

During a recession, an economic expansion typically increases tax revenues and decreases spending on unemployment benefits and other social services, which can automatically reduce the deficit.

Question 12

A tax on interest income

Accepted Answer

The answer of A tax on interest income
...

Question 13

Suppose that in China, investment is ¥400 billion, saving is ¥400 billion, tax revenues are ¥500 billion, exports are ¥300 billion, and imports are ¥200 billion.The government budget _______ the supply of loanable funds, which _______ the real interest rate and _______ investment.

Accepted Answer

The government has a budget surplus because tax revenues (¥500 billion) exceed its investment (¥400 billion), which increases the supply of loanable funds. This increased supply lowers the real interest rate, encouraging more investment.

Question 14

Everything else remaining the same, as the economy enters a recession,

Accepted Answer

During a recession, there is typically a decrease in economic activity, causing a decrease in tax revenues for the government. However, at the same time, there may be an increase in government spending on things like unemployment benefits and other social welfare programs. This leads to a situation where government outlays rise while tax revenues fall.

Question 15

The government is proposing to increase the tax rate on labour income and asks you to report on the supply- side effects of such an action.According to the research of Edward C.Prescott, cross- country evidence for Canada, the United States, the United Kingdom, and France shows all of the following except

Accepted Answer

The research of Edward C. Prescott shows that potential GDP per person in Canada is 12 percent below that of the United States, but this difference is due to different productivities. It also shows that the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP. Additionally, potential GDP per person in the United Kingdom is 28 percent below that of the United States, and about a third of the difference arises from the different tax wedges. However, it does not show that the country with the smallest tax wedge has the smallest potential GDP. In fact, the statement contradicts Prescott's findings.

Question 16

Everything else remaining the same, as the economy enters an expansion,

Accepted Answer

As the economy enters into an expansion, individuals and businesses earn higher incomes, leading to higher tax revenues for the government. At the same time, as the economy grows and creates jobs, fewer individuals need to rely on government transfer payments such as unemployment insurance and welfare, leading to a decrease in transfer payments. Therefore, tax revenues rise and transfer payments fall during an economic expansion.

Question 17

Norland has the budget deficit of $15 billion.According to the government economists, Norland has a structural deficit of $3 billion.What is a cyclical deficit in Norland?

Accepted Answer

The answer of Norland has the budget deficit of $15...

Question 18

The government increases the tax rate on labour income.At the equilibrium level of employment, the before- tax wage rate _______ and the after- tax wage rate _______.

Accepted Answer

When the government increases the tax rate on labour income, the after-tax wage rate will decrease. This is because workers will require a higher before-tax wage in order to maintain their desired after-tax wage. As a result, employers will only be willing to employ workers at a higher before-tax wage, leading to an increase in the wage rate. However, since the tax rate has increased, the after-tax wage rate will ultimately be lower than before, resulting in a rise in the before-tax wage rate and a fall in the after-tax wage rate. At the equilibrium level of employment, this will result in a rise in the before-tax wage rate and a fall in the after-tax wage rate. Therefore, choice B, rises; falls is the correct answer.

Question 19

Expenditure on alternative energy and the nation's infrastructure _______ short- run aggregate supply and _______ potential GDP.

Accepted Answer

Expenditure on alternative energy and the nation's infrastructure will increase short-run aggregate supply by improving productivity and efficiency in these sectors. This increase in short-run aggregate supply will shift the aggregate supply curve to the right, leading to a potential increase in potential GDP if the economy operates at full employment.

Question 20

A decrease in the tax on capital income _______ the real interest rate and _______ investment and economic growth.

Accepted Answer

A decrease in the tax on capital income would lower the cost of capital to producers, leading to an increase in the supply of loanable funds at every interest rate. With a greater supply of loanable funds, the equilibrium quantity of capital (investment) would rise, which would lower the real interest rate and increase investment and economic growth.

Quiz 13: Fiscal Policy

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1real GDP) .What is the real GDP when the government has a balanced budget?

Suppose that in China, investment is ¥400 billion, saving is ¥400 billion, tax revenues are ¥500 billion, exports are ¥300 billion, and imports are ¥200 billion.___ in government expenditure or _ in taxes will further increase China's budget _____, increase investment and speed economic growth.

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1real GDP) .What are autonomous taxes in Ricardia?

The cyclical deficit

A tax on labour income

If the economy is in an expansion, and the federal government is running a deficit, then a recession would automatically

If the economy is in a recession, and the government has a budget deficit, then there

The structural deficit is the deficit

Increasing taxes on business and investment _ short- run aggregate supply and _ potential GDP.

Lowering taxes on employment _ , which _ the equilibrium quantity of labour.

If the economy is in a recession and the federal government is running a deficit, then an expansion would

A tax on interest income

Suppose that in China, investment is ¥400 billion, saving is ¥400 billion, tax revenues are ¥500 billion, exports are ¥300 billion, and imports are ¥200 billion.The government budget ___ the supply of loanable funds, which _ the real interest rate and _____ investment.

Everything else remaining the same, as the economy enters a recession,

Everything else remaining the same, as the economy enters an expansion,

Norland has the budget deficit of $15 billion.According to the government economists, Norland has a structural deficit of $3 billion.What is a cyclical deficit in Norland?

The government increases the tax rate on labour income.At the equilibrium level of employment, the before- tax wage rate _ and the after- tax wage rate _.

Expenditure on alternative energy and the nation's infrastructure _ short- run aggregate supply and _ potential GDP.

A decrease in the tax on capital income _ the real interest rate and _ investment and economic growth.