Question 1

If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply,we would expect crowding out of investment and net exports brought about by the tax cut to be

Accepted Answer

Supply-side effects refer to the impact of taxes on labor supply and productivity, which can have long-term effects on economic growth. By considering these effects, we would expect the tax cut to stimulate economic activity and increase labor supply, which would partially offset any crowding out effects on investment and net exports. Therefore, the crowding out effect would be less than it would be without considering supply-side effects.

Question 2

Raising taxes on interest and dividend income will increase the level of investment and economic growth.

Accepted Answer

Raising taxes on interest and dividend income will make these investment options less attractive for individuals and businesses, thereby discouraging investment and potentially leading to a decrease in economic growth.

Question 3

President Bush lowered taxes on capital gains and dividends in 2003.Explain how this might increase aggregate supply.

Accepted Answer

The answer of President Bush lowered taxes on capital gains...

Question 4

The tax wedge is the difference between the

Accepted Answer

The tax wedge is the difference between the pretax and posttax returns to an economic activity. It represents the amount of tax paid by an individual that is above and beyond the cost of the good or service they are consuming. A and B are incorrect as they do not accurately define the concept of tax wedge. D is incorrect as it is not related to the concept of tax wedge.

Question 5

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.

Accepted Answer

Tax reduction can provide incentive to businesses to invest in capital and increase productivity, which will increase long-run aggregate supply. This, in turn, can lead to lower production costs and prices, increasing aggregate demand as consumers can purchase more goods and services with their income. Therefore, tax reduction and simplification can both increase long-run aggregate supply and aggregate demand.

Question 6

Economists who believe the supply-side effects of tax cuts are small essentially believe that

Accepted Answer

Economists who believe the supply-side effects of tax cuts are small argue that tax cuts mainly affect aggregate demand, meaning that they increase consumer spending and business investment but do not significantly impact the supply side of the economy, such as the quantity of labor supplied or changes in the price level.

Question 7

The double taxation problem occurs because households pay taxes on dividends and capital gains from stock and corporations pay taxes on corporate profits.

Accepted Answer

Double taxation occurs when both households/investors and corporations are taxed on the same income/profits, leading to a potentially higher tax burden. In the case of stocks, households pay taxes on dividends and capital gains (when they sell their shares for a profit), while corporations pay taxes on their profits. This can result in a situation where the same income is being taxed twice.

Question 8

How can tax simplification be beneficial to the economy?

Accepted Answer

The answer of How can tax simplification be beneficial to...

Question 9

As the tax wedge associated with a given economic activity gets smaller,we would expect

Accepted Answer

As the tax wedge gets smaller, the after-tax return on the economic activity increases, making it more profitable to engage in that activity. This creates an incentive for individuals and businesses to increase their participation in that activity, leading to an increase in the activity.

Question 10

What is the "tax wedge"?

Accepted Answer

The answer of What is the "tax wedge"?...

Question 11

Consider a tax cut which affects not only consumer disposable income,but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving.In the long run we would expect this tax cut to

Accepted Answer

The tax cut would incentivize individuals to supply more labor to labor markets and save more, leading to an increase in the supply of both factors of production. This would shift the aggregate supply curve to the right, leading to an increase in real GDP. At the same time, the increase in consumer disposable income would lead to an increase in aggregate demand, but the increase in aggregate supply would likely be larger, resulting in a lower price level or at least a price level that doesn't increase as much as real GDP. Therefore, the best choice is C.

Question 12

Reducing the marginal tax rate on income will

Accepted Answer

Reducing the marginal tax rate on income will have multiple effects. By reducing the tax wedge faced by workers, it will increase the after-tax income they receive, which will encourage them to increase their labor supplied. This is why choice A is correct. Reducing the tax rate on income will also increase the return to entrepreneurship, which will encourage the opening of new businesses, create more job opportunities, and increase economic growth. This is why choice B is correct. Finally, reducing the marginal tax rate on income will increase the after-tax return on saving, which will encourage saving and investment in the economy. This is why choice C is correct. All of the choices are correct, and that's why the answer is D.

Question 13

An increase in the tax wedge associated with a given economic activity will decrease the level of that activity.

Accepted Answer

The tax wedge is the difference between the amount of money the employer pays for labor and the amount of money the employee receives as take-home pay. An increase in the tax wedge would mean that it costs more for the employer to hire workers and for the workers to work. This increased cost would lead to a decrease in the level of economic activity.

Question 14

If tax reduction and simplification are effective,then

Accepted Answer

The answer of If tax reduction and simplification are effective,then
...

Question 15

A study by Edward Prescott found that the ________ marginal tax rates in the United States relative to Europe resulted in a ________ quantity of labor supplied in the United States.

Accepted Answer

Prescott's study concluded that lower marginal tax rates in the United States, compared to Europe, led to a larger quantity of labor supplied in the U.S. This is because lower taxes increase the incentive for work by allowing individuals to keep more of their earnings.

Question 16

A decrease in which of the following would decrease the tax wedge?

Accepted Answer

The tax wedge is the difference between the amount of money an employer pays for an employee and the amount of money the employee actually receives after taxes and social security are deducted. A decrease in the marginal tax rate would decrease the amount of taxes deducted, thereby decreasing the tax wedge.

Question 17

Double taxation refers to

Accepted Answer

Double taxation occurs when corporations are taxed on their profits and then shareholders are taxed again on the dividends they receive from those profits. This makes option C the correct choice as it identifies corporations being taxed on their profits and individuals being taxed on dividends. Option A is incorrect because it only includes wage income, and option B is incorrect because it doesn't include corporations being taxed on their profits. Option D is incorrect because it switches who is being taxed on what (corporations being taxed on capital gains instead of profits) and doesn't include individuals being taxed on dividends.

Question 18

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________.

Accepted Answer

The answer of Fiscal policy actions that are intended to...

Question 19

The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect.

Accepted Answer

A tax cut that has a supply-side effect can increase productivity and economic growth, which can offset the decrease in government revenues and reduce the amount of crowding out. However, a tax cut that only has a demand-side effect, such as one that mainly boosts consumer spending, can lead to higher inflation and interest rates, which can increase the government's borrowing costs and result in greater crowding out.

Question 20

Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect.Compared to no supply-side effect,including a supply-side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________.

Accepted Answer

Including a supply-side effect for the decrease in tax rates typically leads to a decrease in the price level because it reduces costs for businesses and increases supply. It also leads to an increase in real GDP because lower tax rates can incentivize investment and work, leading to higher productivity and economic growth.

Quiz 18: Fiscal Policy