Question 1

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

Accepted Answer

When the tax wedge increases, the after-tax return for the economic activity decreases. As a result, individuals and companies have less incentive to engage in that activity, leading to a decrease in the level of that activity.

Question 2

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________.
A)aggregate demand; government spending
B)aggregate supply; taxes
C)aggregate demand; taxes
D)aggregate supply; government spending

Accepted Answer

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

Question 3

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

The statement is correct. The double taxation problem occurs because both households and corporations are taxed on the same income (in the form of dividends, capital gains, or corporate profits).

Question 4

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 lead to increased productivity and economic growth, which can offset some of the crowding out effect of government borrowing. On the other hand, a tax cut that only has a demand-side effect may lead to increased consumer spending and inflation, which can exacerbate the crowding out effect.

Question 5

The tax wedge is the difference between the
A)amount of taxes needed to balance the federal budget and the actual amount of taxes.
B)amount of taxes needed to pay off the national debt and the actual amount of taxes.
C)pretax and posttax returns to an economic activity.
D)nominal and real interest rates.

Accepted Answer

The tax wedge is the difference between the pretax and posttax returns to an economic activity. It measures the burden of tax on that activity and can affect incentives for individuals and businesses to participate in the activity. Therefore, choice C is the best answer.

Question 6

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 ________.
A)less; less
B)less; more
C)more; less
D)more; more

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.

Question 7

What is the "tax wedge"?

Accepted Answer

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

Question 8

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
A)less than it would be without the supply-side effects.
B)increased as aggregate real income and output rise in the long run.
C)unaffected by the shifting long-run aggregate supply curve.
D)dependent upon the impact of this tax change on consumer disposable income.

Accepted Answer

Considering the potential effects of a tax reduction and simplification on the labor supply through supply-side economics, we would expect an increase in aggregate supply and a decrease in government revenue. However, this would be accompanied by a decrease in the price level and an increase in output, resulting in a smaller crowding out effect on investment and net exports than would be seen without the supply-side effects. Therefore, the correct answer is A.

Question 9

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 decrease the incentive to save and invest, which in turn reduces the available capital for businesses to use for growth and expansion. This can lead to a decrease in economic growth.

Question 10

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
A)decrease both the price level and increase real GDP.
B)increase both the price level and the level of real GDP.
C)increase the level of real GDP.
D)increase the price level.

Accepted Answer

A tax cut that affects after-tax earnings from labor and financial assets would increase disposable income and incentivize individuals to work and save more. This would lead to an increase in production and investment, ultimately resulting in an increase in real GDP. The tax cut may also lead to an increase in the price level in the short run due to increased demand, but in the long run, the economy would adjust to the increased supply of goods and services, leading to a higher level of real GDP and stable prices. Therefore, the best choice is C.

Question 11

A decrease in which of the following would decrease the tax wedge?
A)marginal tax rate
B)money supply
C)national debt
D)federal budget deficit

Accepted Answer

The tax wedge represents the difference between what an employer pays for a worker's services and what the employee receives after taxes. A lower marginal tax rate would decrease the amount of taxes deducted from an employee's salary, thereby decreasing the tax wedge. The money supply, national debt, and federal budget deficit do not directly affect the tax wedge.

Question 12

Double taxation refers to
A)corporations paying taxes on profits and individuals paying taxes on wage income.
B)individuals paying taxes on wage income and individuals paying taxes on dividends.
C)corporations paying taxes on profits and individuals paying taxes on dividends.
D)corporations paying taxes on capital gains and individuals paying taxes on wage income.

Accepted Answer

Double taxation occurs when the same income is taxed twice - once at the corporate level and again at the individual level when it is distributed to shareholders as dividends. This is the case in option C where corporations pay taxes on profits and individuals pay taxes on dividends.

Question 13

Reducing the marginal tax rate on income will
A)reduce the tax wedge faced by workers and increase labor supplied.
B)raise the return to entrepreneurship and encourage the opening of new businesses.
C)increase the after-tax return on saving,and encourage saving.
D)All of the above are correct.

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 14

How can tax simplification be beneficial to the economy?

Accepted Answer

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

Question 15

If tax reduction and simplification are effective,then
A)real wages will rise as labor supply and demand increase.
B)saving and investment in new capital will increase.
C)interest rates will rise in financial markets and demand for financial assets falls.
D)fewer new firms will be established,since existing firms will make more profit.

Accepted Answer

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

Question 16

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.
A)higher; larger
B)lower; larger
C)higher; smaller
D)lower; smaller

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 17

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 18

As the tax wedge associated with a given economic activity gets smaller,we would expect
A)more of that economic activity to occur.
B)the distortions caused by taxes on that activity to be greater.
C)people to engage in less of that particular activity.
D)no change in the practice of that activity until the tax wedge ultimately disappears.

Accepted Answer

A smaller tax wedge reduces the cost of engaging in an economic activity, making it more attractive and profitable for individuals and businesses to participate in. Therefore, we would expect to see an increase in the level of that economic activity.

Question 19

Economists who believe the supply-side effects of tax cuts are small essentially believe that
A)tax cuts mainly affect aggregate demand.
B)tax cuts mainly affect aggregate supply.
C)tax cuts will increase the quantity of labor supplied.
D)tax cuts will result in relatively small changes in the price level.

Accepted Answer

Economists who believe the supply-side effects of tax cuts are small primarily think that tax cuts will mainly affect aggregate demand, as opposed to increasing aggregate supply.

Question 20

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Accepted Answer

Tax reduction and simplification can encourage firms to invest more and increase productivity, leading to an increase in long-run aggregate supply. At the same time, individuals may have more disposable income to spend, which can increase aggregate demand. Therefore, tax reduction and simplification can lead to an increase in both long-run aggregate supply and aggregate demand.

Quiz 16: Fiscal Policy

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

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

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

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.

The tax wedge is the difference between the

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 .

What is the "tax wedge"?

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

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

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

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

Double taxation refers to

Reducing the marginal tax rate on income will

How can tax simplification be beneficial to the economy?

If tax reduction and simplification are effective,then

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.

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

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

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

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