Question 1

In 2007, Germany increased the value added tax (VAT) on consumption from 16 percent to 19 percent. According to the supply- side view,

Accepted Answer

According to the supply-side view, an increase in consumption tax (VAT) leads to a decrease in after-tax wage rate. This is because firms would have to pay more for the goods and services they use, leading to higher production costs. To offset these costs, firms may reduce wages or increase prices charged to consumers. As a result, the after-tax wage rate falls, reducing the incentive to work. This is consistent with the supply-side view that higher taxes reduce work incentives and labor supply. Therefore, the correct answer is B.

Question 2

Norway has a lower tax on dividend and interest income than does United Kingdom. We would expect Norway to have a _ tax wedge and a _ growth rate of real GDP.

Accepted Answer

When a country has a smaller tax wedge (the difference between the pre-tax and post-tax income), individuals have more incentive to work, save and invest. This leads to a higher growth rate of real GDP. Therefore, Norway's lower tax on dividend and interest income compared to the United Kingdom would result in a smaller tax wedge and a faster growth rate of real GDP.

Question 3

Between 2000 and 2005, Finland increased its tax on dividend (interest) income. As a result, the tax wedge and the growth rate of real GDP _ .

Accepted Answer

Increasing tax on dividend income means an increase in the tax wedge, which reduces the incentive for individuals to invest in the stock market. This decreases the stock market value and reduces the amount of investment in the economy. This reduction in investment slows down the growth rate of real GDP.

Question 4

In 2008, Britain decided to cut its value added tax (VAT) to 15 percent from 17.5 percent. The VAT is similar to a sales tax. According to the supply- side view, this change will increase
i. the after- tax wage
ii. the incentive to work
iii. the supply of labor

Accepted Answer

The answer of In 2008, Britain decided to cut its...

Question 5

Which of the following policies shifts the AD curve the farthest leftward?

Accepted Answer

A decrease in government expenditure directly reduces aggregate demand, shifting the AD curve leftward. This impact is typically larger than the indirect effects of tax changes, as government spending is a direct component of AD.

Question 6

In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply- side view, as a result of this act the incentive to work _ and the tax wedge _ .

Accepted Answer

According to the supply-side view, lowering taxes on labor income increases the incentive to work, thus leading to an increase in labor supply. This increase in labor supply would lead to a decrease in the equilibrium wage rate (tax wedge) in the labor market.

Question 7

In 2007, Germany increased the value added tax (VAT) on consumption from 16 percent to 19 percent. The supply- side view, this will .

Accepted Answer

When the value added tax (VAT) on consumption is increased, it increases the tax wedge which lowers the incentive to work. This is because the tax wedge is the difference between what employers pay to hire workers and what workers receive in take-home pay, and an increase in VAT translates into higher costs of goods and services, which reduces disposable income and negatively affects consumer demand. As a result, businesses may lay off workers, reduce working hours, or freeze wages to keep costs low. This results in a decrease in the labor supply, which shifts the labor supply curve to the left, not the right. Hence, option D is the correct choice.

Question 8

Which of the following reduces the size of the government expenditure multiplier?

Accepted Answer

The presence of induced taxes reduces the size of the government expenditure multiplier because it means that a portion of the additional income that individuals receive as a result of government spending will be taken away through taxes, rather than being spent on consumption.

Question 9

In 2007, Denmark's government had expenditures of $157 billion and spending of $171 billion. GDP in 2007 was $312 billion. The government ran a budget and government debt
)

Accepted Answer

The government expenditures were greater than spending, indicating a budget deficit. Additionally, since the government spending (deficit) was a larger percentage of GDP than the previous year, the government debt would have increased.

Question 10

In 2007, France's government had revenue of $1.287 trillion while expenditures totalled $1.356 trillion. GDP was $2.56 trillion. In 2007, the government budget balance was _ and government debt .

Accepted Answer

The budget balance is calculated as revenue minus expenditures, which is $1.287 trillion - $1.356 trillion = -$0.069 trillion or -$69 billion. A negative balance indicates a deficit, meaning the government debt increased.

Question 11

In response to the 2008 recession, New Zealand's Finance Minister Bill English stated that "... the 7 b New Zealand dollars would be allocated to new infrastructure spending, providing financial aid to hit by layoffs as the economy slows and includes tax cuts planned for April."
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New Zealand's government expects the policies to shift the but at this point in time the
Might weaken its ability to affect real GDP.

Accepted Answer

The government's policies of allocating funds to new infrastructure spending, providing financial aid to those affected by layoffs, and including tax cuts are all aimed at increasing aggregate demand (AD) in the economy. Therefore, the policies are expected to shift the AD curve rightward. However, there will be an impact lag, as it takes time for these policies to take effect and stimulate the economy. The other options (A, B, and C) are not applicable in this context.

Question 12

Britain is cutting its value added tax (which is similar to a sales tax) to 15 percent from 17.5 percent to encourage British consumers to keep spending money. According to the supply side view,

Accepted Answer

The supply side view suggests that tax cuts can increase economic growth and stimulate consumer spending. By cutting the value added tax, the cost of goods and services may decrease, which could increase the purchasing power of consumers. This increase in purchasing power is equivalent to an increase in the real wage rate, as consumers can purchase more goods and services with their income. Therefore, Choice C is the correct answer. Choices A, B, and D are incorrect as they do not align with the supply side view.

Question 13

In 2007, Norway's government had revenue of $226.3 billion and expenditures of $158.7 billion. At the same time, GDP totalled $392 billion and government debt was about 67 percent of GDP. In 2007, Norway's government ran a government budget _ and government debt .

Accepted Answer

Norway's government had a surplus because its revenue ($226.3 billion) exceeded its expenditures ($158.7 billion). A surplus typically allows for a reduction in government debt, so the debt decreased.

Question 14

In October 2008, President Bush enacted the Alternative Minimum Tax Relief Act of 2008, which resulted in lower taxes on labor income. According the supply- side view, this would result in

Accepted Answer

The supply-side view suggests that lower taxes on labor income will increase the incentive for individuals to work, leading to a rightward shift in the supply of labor curve. This is because workers will be able to keep more of their income, making it more desirable for them to work longer hours or take on additional jobs.

Question 15

Between 2000 and 2005, Finland increased its tax on dividend (interest) income. As a result, the supply curve for loanable funds shifted _ and the tax wedge .

Accepted Answer

Increasing the tax on dividend income would decrease the return on investment for lenders, leading to a decrease in the supply of loanable funds. Therefore, the supply curve for loanable funds shifted leftward. Additionally, the tax wedge increased because the difference between the before-tax and after-tax returns on investment became greater due to the higher tax on dividend income.

Question 16

In response to the economic downturn, New Zealand's government had enacted a $3.8 stimulus pa
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The stimulus plan is considered

Accepted Answer

The stimulus plan mentioned in the article is a discretionary fiscal policy because it was enacted by the government in response to the economic downturn.

Question 17

How do needs- tested spending programs affect the size of the government expenditure multiplier?

Accepted Answer

Needs-tested spending programs reduce the size of the government expenditure multiplier because they are targeted towards specific individuals who have a greater propensity to consume, and therefore have less of a spill-over effect on the overall economy. This means that for each dollar spent on a needs-tested program, there is less of an overall increase in economic activity compared to a dollar spent on a broader-based program.

Question 18

In response to the economic crisis in 2008, President Merkel "highlighted in her speech what the Ge government has already done: a financial sector rescue package worth up to €500 billion, and a prop stimulus package of tax breaks [on income] and spending measures aimed at triggering investment to €50 billion over the next two years."
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Which parts of the stimulus plan will increase labor supply?

Accepted Answer

Tax breaks can increase labor supply by effectively increasing workers' take-home pay, incentivizing more people to enter the workforce or existing workers to work more hours.

Question 19

A report on the EU economic stimulus plan suggested that "... Governments must consider ... cutting VAT [value added tax] and labor taxes ..." The VAT is similar to a sales tax. If governments follow the suggestions, there will be according to the supply- side view.

Accepted Answer

According to the supply-side view, cutting labor taxes would incentivize more people to enter the workforce or work longer hours, thereby increasing the labor supply. Cutting VAT would increase consumer spending and stimulate demand, which would encourage firms to hire more workers to meet the increased demand. Both these actions would result in an increase in labor supply and a decrease in the tax wedge, making option D the best choice.

Question 20

If the government's budget is in surplus even when the economy is at full employment, the surplus is said to be

Accepted Answer

A structural surplus occurs when government revenue exceeds government spending even when the economy is at full employment. This means that the surplus is not a result of temporary factors such as a booming economy (which would be a cyclical surplus) or specific policy decisions (which would be a discretionary surplus). Instead, it reflects a fundamental imbalance between the government's ongoing revenue and spending patterns.

Quiz 13: Fiscal Policy