Question 1

Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9.What is the government spending multiplier?

Accepted Answer

The government spending multiplier is calculated as 1/(1 - marginal propensity to consume), which in this case is 1/(1 - 0.9) = 1/0.1 = 10.

Question 2

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

Accepted Answer

A smaller tax wedge means that the after-tax return to engaging in the economic activity is higher. Therefore, individuals and firms are more likely to engage in that activity. Thus, we can expect more of that economic activity to occur as the tax wedge associated with it gets smaller.

Question 3

What is the "tax wedge"?

Accepted Answer

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

Question 4

The federal government increased income tax deductions (effectively lowered taxes)in 2009.Explain how this might increase aggregate supply.

Accepted Answer

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Question 5

Based on supply-side effects,lower marginal tax rates in Canada result in a ________ tax wedge and a ________ labour supply.

Accepted Answer

Lower marginal tax rates decrease the tax wedge, making work more financially rewarding and thus encouraging a larger labour supply.

Question 6

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

Accepted Answer

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Question 7

The double taxation problem occurs because households pay taxes on dividends and capital gains from stock,and they pay taxes on income.

Accepted Answer

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Question 8

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

Accepted Answer

Crowding out typically refers to a situation where increased government spending leads to a reduction in private sector investment or consumption due to higher interest rates. A tax cut that stimulates supply (supply-side effect) by encouraging investment and increasing productivity could lead to economic growth without necessarily increasing interest rates significantly, thus potentially causing less crowding out compared to a tax cut that primarily boosts demand (demand-side effect) and leads to higher interest rates by increasing borrowing.

Question 9

In an open economy,the government purchases multiplier will be smaller the

Accepted Answer

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Question 10

Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model.Clearly show and identify the impact of the tax change.Assume that aggregate demand and short-run aggregate supply shift as they typically do in the dynamic model.Show what happens to the price level and real GDP because of the tax change.

Accepted Answer

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Question 11

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

Accepted Answer

Tax reduction and simplification typically increase long-run aggregate supply by providing more incentives for investment and work, and they also increase aggregate demand by increasing disposable income for consumers.

Question 12

Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model.To simplify the analysis,assume that aggregate demand is not affected by the tax cut.

Accepted Answer

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Question 13

The case for austerity is different in Canada than in Greece because

Accepted Answer

Canada's government debt is relatively low and stable, making it less urgent for the country to implement austerity measures. Greece, on the other hand, has a high debt-to-GDP ratio and has struggled to meet its debt obligations, leading to pressure from lenders to adopt austerity policies.

Question 14

Reducing the marginal tax rate on income will

Accepted Answer

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Question 15

How can tax simplification be beneficial to the economy?

Accepted Answer

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Question 16

If tax reduction and simplification are effective,then

Accepted Answer

Tax reduction can provide individuals and businesses with more disposable income, which can encourage saving and investment in new capital. This, in turn, can lead to economic growth and an increase in labour demand and wages. Interest rates may not necessarily rise and it is not a necessary outcome for tax reduction and simplification to be effective. While government revenue may decrease in the short term, it is possible that it could increase in the long term due to a boost in economic activity. The establishment of new firms depends on various factors, and tax reduction and simplification may have both positive and negative impacts on entrepreneurship. Therefore, B is the best choice as it corresponds to a known positive outcome of tax reduction and simplification.

Question 17

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

Accepted Answer

A tax cut that affects both consumer disposable income and after-tax earnings from labor and financial assets would increase aggregate demand in the economy. This increase in demand would lead to higher output, which would increase real GDP. However, if the economy operates at full capacity, the tax cut may cause inflationary pressure, which would increase the price level. Therefore, the tax cut would increase the level of real GDP, but its effect on the price level would depend on whether the economy is operating at full capacity.

Question 18

Double taxation refers to

Accepted Answer

Double taxation occurs when corporations pay taxes on their profits and then individuals pay taxes on the dividends they receive from those profits. This results in the same income being taxed twice, hence the term "double taxation".

Question 19

If we consider the potential effects of a proposed new government spending program supported by a tax increase,we would expect crowding out to be

Accepted Answer

Crowding out refers to the reduction in private sector investment as a result of increased government spending. Supply-side effects tend to increase the overall level of investment and productivity, which could in turn reduce the extent of crowding out. Therefore, if the proposed spending program is supported by a tax increase, we would expect crowding out to be greater than it would be without the supply-side effects.

Question 20

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 likely decrease the level of investment and economic growth. Investors may be discouraged from investing and may seek alternative, lower taxed investment options. This can lead to a decrease in economic activity and job creation.

Quiz 12: Fiscal Policy