Question 1

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 2

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 3

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

Accepted Answer

When the tax wedge associated with a given economic activity gets smaller, it means that the tax burden on that activity is reduced, which makes it more attractive for people to engage in that particular activity. As a result, we would expect to see an increase in the amount of that economic activity occurring. This is because people are more likely to engage in activities that offer them better returns and benefits. Therefore, reducing the tax burden on an economic activity can encourage more investment and growth in that sector.

Question 4

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.

Question 5

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 6

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

This tax cut would increase consumer disposable income, which would lead to increased consumer spending and aggregate demand. Additionally, the after-tax earnings from labor supplied to labor markets and financial assets acquired through saving would increase, leading to an increase in investment and potential output. In the long run, these factors would lead to an increase in the level of real GDP without affecting the price level significantly.

Question 7

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 could discourage investment and reduce the incentive to save, leading to less economic growth. Investors may also look for alternative investment options with lower taxes.

Question 8

What is the "tax wedge"?

Accepted Answer

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

Question 9

If tax reduction and simplification are effective, then

Accepted Answer

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

Question 10

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 believe that tax cuts mainly affect aggregate demand, meaning that they increase consumer spending and business investment, but do not have a significant impact on the overall growth potential of the economy.

Question 11

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

Accepted Answer

Tax reduction and simplification can increase incentives for individuals and businesses to work, save, and invest, ultimately leading to an increase in long-run aggregate supply. Additionally, a decrease in taxes can increase disposable income, potentially increasing aggregate demand as individuals have more money to spend. Therefore, both long-run aggregate supply and aggregate demand would increase.

Question 12

How can tax simplification be beneficial to the economy?

Accepted Answer

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

Question 13

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 14

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 potential impacts of tax changes on the ability and willingness of individuals and businesses to supply labor and invest capital. The crowding out effect on investment and net exports is likely to be lessened by supply-side effects as the tax cut could stimulate investment and productivity growth, leading to the expansion of the economy in the long run. Therefore, option A is the correct choice.

Question 15

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 associated with a specific economic activity increases, the cost of engaging in that activity increases. As a result, producers may reduce or stop the activity, which leads to a decrease in the level of output that results from that activity.

Question 16

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

Accepted Answer

A decrease in the marginal tax rate would mean less taxes are taken out of each dollar earned, thus decreasing the tax wedge. The other options (B, C, and D) are not directly related to the tax wedge.

Question 17

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 supply-side effect of a tax cut can increase economic growth and productivity, leading to an increase in the overall supply of goods and services. This can offset some of the decrease in government revenue resulting from the tax cut, leading to a smaller crowding out effect. On the other hand, a tax cut that only has a demand-side effect may increase consumption and aggregate demand, leading to higher inflation and interest rates, which can crowd out private investment and reduce the effectiveness of the tax cut.

Question 18

The tax wedge is the difference between the

Accepted Answer

The tax wedge is the difference between the pre-tax and post-tax returns to an economic activity, meaning the amount of taxes taken out of an individual or business's income. This can have an effect on economic decisions and behaviors, as individuals and businesses may be incentivized to choose activities with lower tax burdens or adjust their behavior to minimize taxes. Options A and B relate to government finances and debt, while option D refers to the difference between nominal and real interest rates.

Question 19

Double taxation refers to

Accepted Answer

Double taxation refers to corporations paying taxes on their profits and then the individuals (shareholders) paying taxes on the dividends they receive from those profits. This is because corporations are considered separate legal entities from their shareholders, and therefore are subject to their own taxation. As a result, when the corporation distributes profits to its shareholders through dividends, those dividends are also taxed as personal income for the shareholder.

Question 20

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 the corporation and the individual shareholders are taxed on the same income. In the case of stocks, corporations pay taxes on their profits, and then individual shareholders are taxed on dividends and capital gains they receive from owning the stock.

Quiz 27: Fiscal Policy

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