Question 1

Supply-side economists argue that
A)lower tax rates sometimes lead to increased tax revenues.
B)higher tax rates lead to increased productivity.
C)lower tax rates lead to a drop in real Gross Domestic Product (GDP).
D)lower tax rates always lead to lower tax revenues.

Accepted Answer

Supply-side economists believe that lower tax rates can incentivize individuals and businesses to work, save, invest, and innovate more, which can boost economic growth and lead to increased tax revenues in the long run. However, this view is controversial, and there is no consensus among economists on the extent to which tax cuts can pay for themselves through increased economic activity.

Question 2

The Ricardian equivalence theorem states that
A)an increase in government spending has no effect on aggregate supply.
B)increases in government spending have a larger impact on real Gross Domestic Product (GDP)than decreases in taxes.
C)an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand.
D)an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP)because it only affects the price index.

Accepted Answer

The Ricardian equivalence theorem states that an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. This is because individuals recognize that eventually the government will have to pay back the debt incurred from the tax cut, and therefore they save their current tax cut in anticipation of future tax increases. As a result, the increase in demand from the tax cut is offset by the decrease in demand from increased saving.

Question 3

If the government increases spending and there is a complete direct expenditure offset,then
A)aggregate demand and real Gross Domestic Product (GDP)will not change.
B)aggregate demand and real Gross Domestic Product (GDP)will increase by the amount of the spending increase.
C)the price level will drop.
D)the government spending multiplier will be greater than zero.

Accepted Answer

A complete direct expenditure offset means that any increase in government spending is offset by a decrease in private spending or investment. Therefore, there is no net increase in aggregate demand or real GDP.

Question 4

The crowding-out effect is
A)the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the U.S.private sector.
B)the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the U.S.private sector.
C)the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the U.S.private sector.
D)the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the U.S.private sector.

Accepted Answer

The crowding-out effect occurs when an expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, leads to an increase in interest rates. This increase in interest rates then causes a decrease in planned investment or planned consumption in the private sector, as businesses and individuals are less likely to borrow money for investment or consumption when interest rates are high. Therefore, option C is the correct choice, as it describes the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the U.S. private sector.

Question 5

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector,the government's action would result in
A)an increase in real Gross Domestic Product (GDP).
B)a direct expenditure offset.
C)a Ricardian dilemma.
D)a reduction of the government deficit.

Accepted Answer

Providing free textbooks would be a direct government expenditure which would be offset by a reduction in textbook sales by private companies. This would result in a direct expenditure offset. It is unclear if this would result in an increase in real GDP or a reduction of the government deficit. The Ricardian dilemma is not relevant to this scenario.

Question 6

By definition,a direct expenditure offset will occur whenever
A)the government increases spending in an area that competes with the private sector.
B)the government increases spending for the military.
C)the interest rate rises.
D)the interest rate falls.

Accepted Answer

A direct expenditure offset occurs when the government increases spending in an area that competes with the private sector. This means that the resources and funds that could have been used by the private sector are being used by the government instead. This can result in a decrease in private sector investment and economic activity, offsetting the intended benefits of government spending. B, C, and D are not necessarily related to direct expenditure offsets.

Question 7

One part of the supply-side argument is that
A)lower marginal tax rates are required to induce Congress to reduce government spending.
B)lower marginal tax rates can increase total tax revenues.
C)the marginal tax rate should be set at 50 percent.
D)the relevant aggregate supply curve is close to horizontal.

Accepted Answer

The supply-side argument suggests that lower marginal tax rates can stimulate economic growth and lead to an increase in total tax revenues. This is based on the idea that lower taxes can provide greater incentives for individuals and businesses to work, save, and invest, which in turn can lead to more output, employment, and income. However, this argument is controversial and has been subject to debate among economists and policymakers.

Question 8

If the government increases spending while holding taxes constant,we expect
A)an increase in investment spending by businesses too,as they anticipate future economic growth.
B)a decrease in real saving as consumers follow suit and also increase borrowing.
C)planned real investment spending by businesses to increase.
D)interest rates to rise.

Accepted Answer

When the government increases spending while holding taxes constant, it typically finances this additional spending by borrowing more. This increased demand for loanable funds tends to push interest rates up, as there is now more competition for those funds. Higher interest rates can make borrowing more expensive for businesses and consumers, potentially affecting investment and spending decisions.

Question 9

The Laffer curve shows a relationship between
A)inflation rates and unemployment rates.
B)interest rates and investment spending.
C)price level and real Gross Domestic Product (GDP).
D)tax rates and tax revenues.

Accepted Answer

The Laffer curve shows the relationship between tax rates and tax revenues. It suggests that as tax rates increase, tax revenue also initially increases, but eventually reaches a point where further increases in tax rates lead to a decrease in tax revenue due to disincentives to work, invest, and produce.

Question 10

According to supply-side economists,lower marginal tax rates will not necessarily lead to lower tax revenues because
A)the crowding out effect does not apply to taxes.
B)lower tax rates have no effect on the opportunity cost of labor.
C)the aggregate supply curve will shift inward to the left if the tax rates are lowered.
D)the lower marginal tax rates will be applied to a growing tax base due to economic growth.

Accepted Answer

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because the lower rates will encourage economic growth, leading to a larger tax base. This is known as the Laffer Curve, where an increase in tax rates beyond a certain point can result in lower tax revenues, and a decrease in tax rates beyond a certain point can result in higher tax revenues.

Question 11

If the government increases spending but does not raise taxes,
A)aggregate demand will increase without any effect on the price level.
B)borrowing by the government will take place.
C)the government will have to sell some assets,such as oil and national parks.
D)the government will have to either lower expenditures or raise taxes the next year.

Accepted Answer

If the government increases their spending without raising taxes, they will have to borrow money to cover the extra expenses. This can lead to an increase in the national debt and interest payments on that debt. The government does not have to sell assets or lower expenditures but may have to consider raising taxes or reducing spending in the future to address the increase in debt. An increase in spending without a corresponding increase in revenue can also lead to inflation in the long run.

Question 12

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP),the reason is that the policy generates
A)a decrease in aggregate demand.
B)an increase in aggregate supply.
C)a decrease in employment.
D)a decrease in saving.

Accepted Answer

Supply-side policy focuses on increasing aggregate supply, which can lead to an increase in potential output and economic growth. This is achieved through policies that promote investment, innovation, and efficiency in production. As aggregate supply increases, the economy can produce more goods and services, leading to an increase in equilibrium real GDP. Therefore, the correct answer is B, an increase in aggregate supply. The other options are not directly related to the effects of supply-side policy.

Question 13

Supply-side economics focuses on tax cuts to stimulate
A)aggregate demand by reducing saving.
B)aggregate supply by increasing production.
C)government spending.
D)military research.

Accepted Answer

Supply-side economics focuses on increasing production and economic growth by reducing taxes and businesses' regulatory burden. This would incentivize producers to expand their operations and create more employment opportunities, thus increasing the aggregate supply of goods and services available in the economy.

Question 14

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve,
A)an increase in tax rates increases tax revenues.
B)a reduction in tax rates reduces tax revenues.
C)a reduction in tax rates increases tax revenues.
D)any variation in tax rates has no effect on tax revenues.

Accepted Answer

The Laffer curve illustrates the relationship between tax rates and tax revenue, suggesting that there is an optimal tax rate that maximizes revenue. At tax rates higher than this optimal point, reducing tax rates can actually increase tax revenues by encouraging more economic activity and thus expanding the tax base.

Question 15

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues.A supply-side economist would argue that the actual revenue raised will be
A)less than $100 billion because some people will respond by working less.
B)exactly $100 billion because there are no offsetting factors to a tax increase.
C)more than $100 billion,because lower income people will work harder when they perceive the tax system to be fairer.
D)more than $100 billion because interest rates will also be affected.

Accepted Answer

A supply-side economist would argue that increasing taxes on high earners will reduce their incentive to work and invest, leading some to work less and earn less income. This would result in lower tax revenue than expected. Therefore, the actual revenue raised will be less than the projected $100 billion.

Question 16

The crowding-out effect is
A)due to the upward slope of the SRAS when the economy is operating to the right of the LRAS curve.
B)due to the government being more powerful in the markets when there is an increase in government spending.
C)a situation in which expansionary fiscal policy leads to a decrease in planned real investment or planned real consumption in the private sector.
D)only relevant when an inflationary gap is present.

Accepted Answer

The crowding-out effect is the reduction in private sector spending that occurs when government increases its own spending or borrowing. This happens because when the government borrows money, it is competing with the private sector for funds, which can drive up interest rates, making it more expensive for businesses to borrow money for investment or for consumers to borrow money for consumption. This leads to a decrease in planned real investment or planned real consumption in the private sector, resulting in a decrease in overall economic activity.

Question 17

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called
A)the indirect effect.
B)the interest rate effect.
C)the crowding-out effect.
D)the Laffer effect.

Accepted Answer

The crowding-out effect occurs when government spending increases, leading to higher interest rates (due to increased demand for borrowing) and a reduction in private investment spending. This happens because as interest rates rise, the cost of borrowing for private sector firms increases, making it less attractive to invest in new projects or expand existing ones. As a result, the private sector may reduce its planned investment spending, which offsets some of the stimulative effects of fiscal policy.

Question 18

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the
A)inflationary effect.
B)crowding-out effect.
C)aggregate demand effect.
D)Keynesian effect.

Accepted Answer

The crowding-out effect theory suggests that if the government increases its spending, it will compete with private investment and consumer spending for available funds, leading to reduced investment and consumer spending. This theory is often associated with Keynesian economics. Therefore, option B is the correct answer.

Question 19

According to supply-side economics,changes in marginal tax rates will have which of the following effects?
A)change the incentive to work
B)change the incentive to save
C)change the incentive to invest
D)all of the above

Accepted Answer

Supply-side economics suggests that changes in marginal tax rates will affect the behavior of taxpayers in terms of their work effort, saving habits, and investment decisions. A reduction in tax rates would increase the incentives of taxpayers to engage in these activities, thereby stimulating economic growth. Conversely, an increase in tax rates would have the opposite effect by reducing the incentives to work, save, and invest.

Question 20

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help.Taking into account direct expenditure offset effects,what is its best spending option?
A)A new cruise missile for the military
B)Expanding the school lunch program
C)Constructing more low income housing
D)Providing textbooks for college students

Accepted Answer

The answer of The government wants to increase its spending...

Quiz 13: Fiscal Policy

Supply-side economists argue that

The Ricardian equivalence theorem states that

If the government increases spending and there is a complete direct expenditure offset,then

The crowding-out effect is

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector,the government's action would result in

By definition,a direct expenditure offset will occur whenever

One part of the supply-side argument is that

If the government increases spending while holding taxes constant,we expect

The Laffer curve shows a relationship between

According to supply-side economists,lower marginal tax rates will not necessarily lead to lower tax revenues because

If the government increases spending but does not raise taxes,

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP) ,the reason is that the policy generates

Supply-side economics focuses on tax cuts to stimulate

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve,

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues.A supply-side economist would argue that the actual revenue raised will be

The crowding-out effect is

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the

According to supply-side economics,changes in marginal tax rates will have which of the following effects?

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help.Taking into account direct expenditure offset effects,what is its best spending option?