Deck 19: Policies for Intermediate-Run Growth

Question 1

Relative to the Keynesians,the supply-side economists

A)place more emphasis on the importance on the level of investment than on the level of income.
B)place more emphasis on the after-tax rate of return as a determinant of investment.
C)are more concerned with government budget deficits.
D)All of the above

Answer 1

D

Question 2

According to supply-siders,an switch from consumption to savings by households will

A)lead to a permanent increase in output-per-worker.
B)lead to a temporary increase in output-per-worker.
C)lead to a decline in output-per-worker.
D)not change output-per-worker.

Answer 2

A

Question 3

Explain the corporate dividend tax cut enacted by the Bush administration in 2004.What was the rationale behind this tax cut? Was its primary aim to stimulate income in the short run? Why or why not?

Answer 3

The corporate dividend tax cut enacted in 2004 reduced the marginal tax rates on dividends shareholders receive from corporations.The idea behind this tax cut was consistent with supply-side economics.Lower tax rates on dividends will encourage the public to hold more shares of stock,meaning national savings and eventually investment will increase.However,these incentives to save and invest were unlikely to work very quickly,meaning that these reforms were aimed primarily at increasing growth in the intermediate to long run.

Question 4

The tradeoff between equity and efficiency is evident in debates over

A)how progressive our tax code should be.
B)how generous our government spending programs should be.
C)the debate over international trade policy.
D)the debate over labor unions.
E)all of the above.

Question 5

"Reagonomics" was consistent with supply-side economics except for the fact that it

A)pushed for lower money growth.
B)called for higher total government spending.
C)pushed for tax cuts.
D)pushed for reductions in nonmilitary government spending.

Question 6

If the nominal rate of interest on a bond was 7 percent,the inflation rate was 6 percent and an individual was in a 50-percent tax bracket,the after-tax real return on the bond would be equal to

A)0 percent.
B).5 percent.
C)6 percent.
D)7 percent.
E)none of the above.

Question 7

If an increase in marginal tax rates leads to an increase in tax revenues,then

A)the Laffer curve model of tax revenue is refuted.
B)supply-side economics is refuted.
C)the economy could be below the tax revenue maximizing tax rate.
D)we could be on the upward sloping portion of the Laffer curve.

Question 8

Since the 1970s,the income tax system in the U.S.has become

A)less regressive.
B)more aggressive.
C)less progressive.
D)regressive
E)more proportional.

Question 9

According to the supply-side economists,a cut in the marginal income tax rate would cause

A)labor supply to rise,output to rise,and the price level to fall.
B)labor supply to rise,the price level to rise,and output to fall.
C)labor supply to fall,the price level to rise,with output unchanged.
D)labor supply to rise,the price level to fall,with output unchanged.

Question 10

Graphically show and explain the Laffer curve.

Question 11

The Keynesian economists do not believe that a cut in the marginal income tax rate will have strong effects on aggregate supply because they

A)do not believe that business investment will respond strongly to changes in the after-tax rate of return to capital.
B)do not believe that labor supply will respond strongly to changes in the after-tax real wage.
C)do not believe that labor demand will respond strongly to a change in the after-tax real wage.
D)believe monetary policy will be too restrictive to allow strong output growth.

Question 12

Some people have referred to the time period between 1992 and 2002 as a "New Economy".Looking at the growth data in Table 19-1,why do you think people mean when they use the term "New Economy".Does the data from this period stand out in any way from previous periods.

Question 13

Assume a nominal interest rate of 8 percent,an inflation rate of 3 percent,and a marginal tax rate of 25 percent.Calculate the after-tax nominal return and after-tax real return.According to supply-side economics,which of these matter for savings and investment decisions.

Question 14

Strong growth in the U.S.during the 1990s may have been the result of

A)higher rates of government savings.
B)reduced international trade barriers.
C)strong labor productivity growth.
D)stable inflation.
E)All of the above

Question 15

Keynesians have been critical of supply-side economics because it ignores

A)the natural rate of unemployment
B)exogenous supply-shocks
C)distributional issues.
D)the costs of high inflation.

Question 16

In the Keynesian view,a reduction in the marginal income tax rate would cause

A)output to rise and the price level to fall.
B)both output and the price level to rise.
C)output to rise with the price level unchanged.
D)the price level to rise with output unchanged.

Question 17

Which of the following statements is (are)correct? According to United States data,

A)the rate of growth in output and labor productivity has slowed over the past two decades.
B)growth in the labor force has steadily increased since 1960.
C)the growth rates of capital has slowly increased since the 1960s.
D)the rate of growth in output and labor productivity was slower during the 1990s.
E)none of the above.

Question 18

The supply-siders argue that investment is

A)primarily a function of current income.
B)
B)highly responsive to changes in after-tax real interest rates.
C)primarily a function of expectations.
D)both a and

Question 19

Which of the following policies followed by the Clinton administration were not Keynesian policies?

A)Reducing the budget deficit during a strong expansion.
B)Concentrating tax increases on upper income households.
C)Attempting to increase government spending in 1992 when the U.S.economy was below its natural rate of output.
D)Adjusting capital gains taxes for inflation in order to encourage savings.

Question 20

Would you classify the U.S.income tax system in the 1970s as progressive,regressive,or proportional? Has it gotten more or less progressive since then?

Question 21

An inflation-induced increase in the effective tax rate on interest income and capital gains results in

A)a leftward shift of the saving schedule.
B)a rightward shift of the saving schedule.
C)no shift of the saving schedule.
D)a rightward shift of the investment schedule.

Question 22

Supply-side economists argue that taxing of nominal gains and interest earnings during inflationary periods

A)results in an increased effective tax rate on real returns but will not retard saving.
B)will retard saving but will not increase the effective tax rate on real returns.
C)will increase the effective tax rate on real returns and will retard saving.
D)None of the above

Question 23

According to the classical system,a decrease in the income tax rate reduces the after-tax real wage

A)and shifts the labor supply schedule to the right.
B)and shifts the labor supply schedule to the left.
C)without shifting the labor supply schedule.
D)None of the above

Question 24

The U.S.economy during the 2001-2004 period was been characterized by all of the following except

A)expansionary fiscal policy.
B)expansionary monetary policy.
C)a jobless recovery.
D)moderate economic growth.
E)none of the above

Question 25

The supply-side economists expect that a cut in the marginal income tax rate,with lost revenues made up by a cut in government spending,would

A)increase output.
B)decrease output.
C)leave output unchanged.
D)affect output but the direction of the effect is uncertain.

Question 26

During the Clinton administration,

A)government savings rose significantly.
B)total savings savings rose significantly.
C)
C)private savings rose because an increase in the tax rates on upper-income Americans and more government regulation
D)both b and

Question 27

The Laffer curve specifies

A)a negative relationship between marginal tax rates and tax revenue.
B)a positive relationship between marginal tax rates and tax revenue.
C)no relationship between marginal tax rates and tax revenue.
D)none of the above.

Question 28

The redirection of macroeconomic policy that took place during the Reagan and both Bush administrations was inspired by

A)supply-side economics.
B)real business cycle theory.
C)new classical economics.
D)new Keynesian directions.

Question 29

The worldwide slowdown in labor productivity began in the early

A)1960s.
B)1970s.
C)1980s.
D)1990s.

Question 30

The largest component of output growth in the U.S.is

A)labor productivity growth.
B)capital growth
C)labor growth.
D)knowledge growth.
E)None of the above.

Question 31

During the first three years of a recovery from a recession,productivity

A)usually rises relatively rapidly.
B)falls slowly.
C)is quite puzzling since it is usually unpredictable with respect to the directional change.
D)usually remains constant.

Question 32

The after-tax rate of return is defined as the pretax profit rate

A)minus the rate at which profits are taxed.
B)multiplied by 1 minus the rate at which profits are taxed.
C)divided by 1 minus the rate at which profits are taxed.
D)plus investment credits.
E)None of the above

Question 33

It has been hypothesized that the productivity slowdown could have been caused by all of the following except

A)lower worldwide money growth.
B)lower technology growth.
C)higher oil prices.
D)increased government regulation.

Question 34

Which of the following statements is correct?

A)According to the supply-side view,the tax cuts during Bush's first term in office were supposed to increase aggregate supply and move the economy towards higher output but a higher price level.
B)President Bush pushed for significant cuts in government spending during his first term in office in order to assure that demand was not overly stimulated and to hold the budget deficit as low as possible
C)The Bush tax cuts were aimed at maximizing the increase in aggregate demand in order to stabilize output.
D)None of the above

Question 35

The Tax Reform Act of 2004

A)lowered marginal income tax rates.
B)cut taxes on inheritance payments.
C)lowered taxes or corporate dividends.
D)Both b and c
E)All of the above

Question 36

According to supply-side economists,the incentive to save during the Clinton Administration fell due to a combination of

A)an increase in net export and a budget surplus.
B)an increase in the tax rates on upper-income Americans and more government regulation.
C)higher inflation and higher tax rates on lower-income Americans.
D)None of the above

Question 37

In 1994,the Republicans' "Contract with America" encompassed economic provisions that drew upon the ideas of

A)Keynesian economists.
B)monetarists.
C)new classical economists.
D)supply-side economists.

Question 38

A critical component of supply-side economics is that

A)there is no wage that is so low that someone will not be willing to work for it.
B)as the wage gets higher,workers choose significantly less leisure.
C)labor supply is inelastic.
D)as the wage gets higher,workers are richer and choose more leisure.

Question 39

Public policies designed to increase labor productivity do not include

A)subsidies for higher education.
B)tax breaks for job retraining.
C)tax breaks on corporate dividends.
D)public education.

Question 40

Which of the following factors are included in the determination of growth rates of output in the intermediate run?

A)Variations in the rates of capital formation.
B)Growth in the labor force that results from growth in the working age population as well as changes in labor force participation rates.
C)Variations in the rate of technological change.
D)All of the above
E)None of the above

Question 41

Regarding the output growth slowdown during the 1970s and 1980s,it is true that

A)the slowdown took place in the U.S.but not other developing countries.
B)the primary determinant of the slowdown was lower labor productivity growth.
C)increases in capital formation did not offset some of the slowdown in labor productivity growth.
C)
D)both b and

Question 42

Which of the following factors are important in the determination of growth rates of output in the intermediate run?

A)Variations in the rates of capital formation.
B)Changes in population growth.
C)Changes in money growth.
D)All of the above.
E)None of the above.

Question 43

A piece of evidence in favor the Keynesian model would be that

A)investment is very sensitive to changes in tax rates.
B)changes in aggregate income cause changes in investment,but not vice versa.
C)the aggregate price level is negatively correlated with income.
D)all of the above.

Question 44

In the debate between equity and efficiency,_____ tend to favor efficiency,while _____ tend to favor equity.

A)Keynesians; classicals
B)monetarists; supply-siders
C)supply-siders; Keynesians
D)classicals; supply-siders.

Question 45

Higher rates of inflation

A)reduce real marginal tax rates,increasing savings and investment.
B)increase real marginal tax rates,reducing savings and investment.
C)reduce real marginal tax rates,reducing savings and investment.
D)have no effect on real marginal tax rates,and no effect on savings and investment.
E)none of the above.

Question 46

According to supply-siders,an switch from taxing income to taxing consumption to will

A)lead to a permanent increase in output-per-worker.
B)lead to a temporary increase in output-per-worker.
C)lead to a decline in output-per-worker.
D)not change output-per-worker.

Question 47

Which of the following statements is (are)correct? According to United States data,

A)the rate of growth in output and labor productivity has grown over the past two decades.
B)has displayed a great deal of stability.
C)is always highly variable from year-to-year and decade-to-decade.
D)the rate of growth in output and labor productivity was slower during the 1990s.
E)none of the above.

Question 48

An increase in the effective corporate tax rate due to increased inflation results in

A)a upward shift of the investment schedule.
B)a downward shift of the investment schedule.
C)no shift of the investment schedule.
D)a rightward shift of the saving schedule.

Question 49

If the nominal rate of interest on a bond was 5 percent,the inflation rate was 3 percent and an individual was in a 25-percent tax bracket,the after-tax real return on the bond would be equal to

A)2 percent.
B)2.5 percent
C).5 percent..
D)-.5 percent.
E)none of the above.

Question 50

Over the long-run,fluctuations in the growth rate in output are primarily driven by fluctuations in

A)investment in capital.
B)educational attainment.
C)fluctuations in the labor force.
D)fluctuations in labor productivity.

Question 51

According to supply-siders

A)there exists a temporary tradeoff between higher inflation and higher output growth.
B)there exists a permanent tradeoff between higher inflation and higher output growth.
C)there exists no tradeoff between higher inflation and higher output growth.
D)there exists a temporary tradeoff between higher inflation and higher output growth during periods of low inflation only.

Question 52

Evidence in favor the Keynesian model would be that:

A)investment is not sensitive to changes in tax rates.
B)labor supply is inelastic.
C)the aggregate price level is positively correlated with income.
D)all of the above.
E)none of the above.

Question 53

Which of the following statements is (are)correct?

A)A central element in the supply-side position is that,for intermediate-run periods,growth in output is determined by demand and not supply
B)Government policy plays a limited role in causing recessions,so it should play no role in ending them.
C)Many supply-side economists agree that demand plays a role in the short-run determination of income
D)none of the above

Question 54

According to supply-side advocates,the increase in government regulatory activity in the late 1960s slowed economic growth

A)by increasing the cost of producing a given output.
B)by requiring capital formation that contributes to increased productivity in terms of measured output.
C)only temporarily until there was an adequate adjustment period.
D)Both a and b