Question 1

Supply-side economists argue that

Accepted Answer

Supply-side economists believe that lower tax rates create greater incentives for investment and work, which in turn can stimulate economic growth and potentially increase tax revenues. However, the extent to which this occurs is disputed, and it may not hold true in all circumstances.

Question 2

One part of the supply-side argument is that

Accepted Answer

Supporters of the supply-side economics argument argue that reducing marginal tax rates can increase economic growth and, in turn, total tax revenues. This argument is based on the idea that lower taxes provide an incentive for individuals and businesses to work harder and be more innovative, leading to a larger economy and a higher tax base. However, there is some debate over whether or not this effect is large enough to offset the revenue lost from lower tax rates.

Question 3

By definition, a direct expenditure offset will occur whenever

Accepted Answer

A direct expenditure offset occurs when government spending in a particular area competes with the private sector, causing private investment to decrease. This can happen, for example, when the government puts a lot of money into infrastructure projects, which draws resources away from private sector investments. Increased government military spending or changes in interest rates do not necessarily lead to direct expenditure offsets.

Question 4

The crowding-out effect is

Accepted Answer

The crowding-out effect occurs when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, leads to a decrease in planned investment or planned consumption in the private sector. This happens because the increased government borrowing to finance the policy crowds out private investment, as there is less money available for private businesses and consumers to borrow. Therefore, choice C is the correct answer.

Question 5

Supply-side economics focuses on tax cuts to stimulate

Accepted Answer

Supply-side economics focuses on policies that aim to increase aggregate supply, or the production of goods and services. This is often achieved through tax cuts, which provide businesses with more money to invest in productivity-enhancing measures such as research and development, hiring new workers, and buying new equipment. By increasing the availability of goods and services, supply-side policies can help to stimulate economic growth and reduce inflation.

Question 6

The Ricardian equivalence theorem states that

Accepted Answer

The Ricardian equivalence theorem states that when the government cuts taxes and increases the budget deficit, households may realize that the tax cut is only temporary and therefore, they may save the extra income to pay for future tax increases. As a result, the increase in the budget deficit has no effect on aggregate demand as the increase in consumption caused by the tax cut is offset by the increase in private saving. Therefore, the correct choice is C, which says that an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand.

Question 7

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

Accepted Answer

The answer of The government wants to increase its spending...

Question 8

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

Accepted Answer

According to supply-side economics, changes in marginal tax rates affect the incentives to work, save, and invest. With lower tax rates, individuals and firms have more resources to invest and compete with each other, leading to economic growth and increased productivity. This in turn creates more job opportunities and higher wages, leading to a stronger economy overall.

Question 9

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve

Accepted Answer

The Laffer curve illustrates the relationship between tax rates and tax revenue, suggesting that there is an optimal tax rate that maximizes revenue. At tax rates higher than this optimal point, reducing tax rates can actually increase tax revenues by encouraging more economic activity and thus expanding the tax base.

Question 10

The crowding-out effect is

Accepted Answer

The crowding-out effect occurs when expansionary fiscal policy, such as an increase in government spending, leads to a decrease in planned real investment or planned real consumption in the private sector. This happens because the increase in government spending can lead to higher interest rates, which in turn can discourage private sector investment and consumption. The crowding-out effect is not limited to situations with an inflationary gap and is not related to the upward slope of the SRAS. The government being more powerful in the markets is not a relevant factor in the crowding-out effect.

Question 11

If the government increases spending and there is a complete direct expenditure offset, then

Accepted Answer

If there is a complete direct expenditure offset, it means that private spending decreases by the same amount as the government spending increases. As a result, there is no net increase in total spending or aggregate demand, which means real Gross Domestic Product (GDP) will remain the same.

Question 12

If the government increases spending but does not raise taxes

Accepted Answer

When the government increases spending but does not raise taxes, it will result in borrowing by the government to finance the increased spending. The government could borrow from individuals or institutions by issuing bonds or through other means. This borrowing can lead to an increase in the government debt and interest payments, which can have long-term implications for the economy.

Question 13

The Laffer curve shows a relationship between

Accepted Answer

The Laffer curve shows the relationship between tax rates and tax revenues. It suggests that as tax rates increase, at some point tax revenues will begin to decrease due to the disincentive effect on work and investment. The curve is named after economist Arthur Laffer, who popularized the idea in the 1980s.

Question 14

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates

Accepted Answer

Supply-side policies aim to increase the economy's capacity to produce goods and services. Hence, they lead to an increase in aggregate supply. With an increase in the productive capacity of the economy, equilibrium real GDP can increase, without causing inflation as long as aggregate demand grows at the same rate as aggregate supply. Therefore, the reason for the increase in equilibrium real GDP is an increase in aggregate supply. Choices A, C, and D are not accurate as they do not align with the objective of supply-side policies or the impact they have on the economy.

Question 15

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the

Accepted Answer

The crowding-out effect is the concept that increased government spending will lead to a decrease in investment and consumer spending because of the competition for resources such as money, labor, and equipment. This can happen because higher government spending leads to higher interest rates, reducing the incentives for private investment, and increasing the costs of borrowing for consumers. This concept is based on Keynesian economics, which suggests that government intervention can stimulate economic growth during a recession, but there are limits to how much the government can spend before it starts to have negative effects.

Question 16

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because

Accepted Answer

Supply-side economists believe that lower tax rates incentivize individuals to work and invest more, leading to economic growth and an expanding tax base. This increase in overall economic activity offsets the revenue lost from lower tax rates, resulting in no decrease (or even an increase) in tax revenues.

Question 17

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

Accepted Answer

Providing free textbooks would result in a direct expenditure offset, as the government would have to spend money to produce or acquire these textbooks. This would not necessarily lead to an increase in real Gross Domestic Product (GDP), a Ricardian dilemma, or a reduction of the government deficit.

Question 18

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

Accepted Answer

The crowding-out effect occurs when government spending increases, which leads to an increase in interest rates, causing a reduction in planned investment spending by the private sector. This happens because higher interest rates make borrowing more expensive, making it harder for businesses to fund their investment projects.

Question 19

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

Accepted Answer

Supply-side economists believe that tax increases can discourage work effort, entrepreneurship, and investment, resulting in a smaller tax base and, ultimately, less tax revenue than predicted by simple static analysis. Therefore, they argue that the actual revenue raised will be less than $100 billion because some people will respond by working less.

Question 20

If the government increases spending while holding taxes constant, we expect

Accepted Answer

When the government increases spending while holding taxes constant, it typically finances this additional spending by borrowing more. This increased demand for loanable funds tends to push interest rates up, as there is now more competition for those funds. Higher interest rates can make borrowing more expensive for businesses and consumers, potentially affecting investment and spending decisions.

Quiz 12: Fiscal Policy

Supply-side economists argue that

One part of the supply-side argument is that

By definition, a direct expenditure offset will occur whenever

The crowding-out effect is

Supply-side economics focuses on tax cuts to stimulate

The Ricardian equivalence theorem states that

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve

The crowding-out effect is

If the government increases spending and there is a complete direct expenditure offset, then

If the government increases spending but does not raise taxes

The Laffer curve shows a relationship between

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP) , the reason is that the policy generates

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

If the government increases spending while holding taxes constant, we expect