Question 1

Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings. Which of the following would be true?

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Question 2

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

Accepted Answer

The substitution effect occurs when the interest income earned on saving increases since the tax rate has decreased, making saving relatively more attractive. This will increase the quantity of saving. On the other hand, the income effect says that when the tax rate decreases, the after-tax return on saving increases, which may increase consumption and decrease the quantity of saving. In this case, the income effect is assumed to be smaller than the substitution effect, so overall savings increase.

Question 3

Eliminating means requirements for government benefits would

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The answer of Eliminating means requirements for government benefits would
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Question 4

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

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Those who oppose tax-law changes to encourage saving typically argue that saving is not very responsive to changes in the tax rate (A), reducing the budget deficit instead of changing the tax laws could raise saving (C), and changes in the tax laws to induce saving would distribute the tax burden less fairly (D). However, they do not typically argue that saving is not an important determinant of a nation's ability to produce output (B).

Question 5

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

Accepted Answer

When the substitution effect is larger than the income effect, an increase in saving could lead to a decrease in consumption. This could result in a decrease in the demand for goods and services, which lowers interest rates. Lower interest rates make saving less expensive, and borrowing more attractive, leading to an increase in spending on capital goods. Therefore, tax reform designed to increase saving would decrease the interest rate and increase spending on capital goods.

Question 6

A year ago a country reduced the tax rate on all interest income from 20% to 10%. During the year private saving was $500 billion as compared to $400 billion the year before the tax reform. Taxes on interest income fell by $10 billion. Assuming no other changes in income, or government revenues or spending, which of the following is correct?

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Question 7

An increase in the tax rate on interest income

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Question 8

A reduction in the tax rate on interest income

Accepted Answer

Reduction in tax rate on interest income primarily benefits the wealthy as they have more interest income to save, and thus the effect on national savings is uncertain as it depends on the responsiveness of saving behavior to changes in tax rates. Therefore, only option B is correct.

Question 9

A higher rate of return on saving has

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Question 10

Eliminating double-taxation would likely

Accepted Answer

Eliminating double-taxation, such as the corporate income tax, would likely increase the return on capital investment and incentivize individuals to save more. However, those with higher incomes are more likely to have investment income and therefore would benefit more from a higher return on capital. Thus, eliminating double-taxation would primarily benefit people with higher incomes.

Question 11

Which of the following is true concerning IRA's, 401(k) and 403(b) plans?

Accepted Answer

IRA's, 401(k), and 403(b) plans are subject to eligibility requirements, contribution limits, and penalties for withdrawals before retirement. Therefore, all of the statements in A, B, and C are correct.

Question 12

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Accepted Answer

This statement actually supports the argument for reforming tax laws to encourage saving, as it suggests that lower-income households would benefit from such policies. The other options all give reasons against or concerns about implementing such reforms.

Question 13

Which of the following is not an argument in favor of reforming the tax laws to encourage saving?

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Question 14

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Accepted Answer

A decrease in tax rate on savings would increase the disposable income of individuals, which would lead to higher consumption, and consequently, a decrease in saving. This is the income effect on saving. However, a reduction in tax revenue from savings would also have an impact on the government's budget. Thus, both the income effect on saving and the effect on the government budget would explain the decrease in national saving.

Question 15

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Accepted Answer

When the tax rate on savings is reduced, individuals are encouraged to save less, as they can keep more of their income. This leads to a decrease in national saving. Additionally, a reduction in the tax rate on savings will result in a reduction in government revenue, which can negatively impact the government budget. Therefore, the effect on the government budget but not the substitution effect on saving is the best explanation for this decrease in national saving.

Question 16

Suppose the tax rate on interest income from saving were reduced.

Accepted Answer

With a reduced tax rate on interest income from saving, individuals would have a higher after-tax return on their savings. This would increase their disposable income and lead to a substitution effect, where they would be inclined to spend more and save less. However, the income effect would also come into play, as individuals would have less of a tax incentive to save, reducing their overall desire to save. The net effect would be a reduction in private saving.

Question 17

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

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Question 18

A year ago a country reduced the tax rate on all interest income from 40% to 10%. During the year private saving was $600 billion as compared to $500 billion the year before the tax reform. Taxes collected on interest income fell by $150 billion. Assuming no other changes in government revenues or spending which of the following is correct?

Accepted Answer

The reduction in tax rate on interest income creates both income and substitution effects on saving behavior.

- Substitution effect: Since the tax on interest income decreased, the after-tax return on savings increased. This created an incentive for people to save more, and as a result, saving increased. Therefore, the substitution effect was positive.
- Income effect: With the decrease in tax rate, people have more money in their pocket, which they can either save or spend. The increase in disposable income creates a positive income effect, which can lead to an increase in consumption. This could reduce saving, or it could increase saving if households see the tax cut as a one-time windfall increase in income and choose to save most of it.

The national saving is the sum of private saving and government saving. Since there is no change in government saving, any change in private saving would change national saving in the same direction.

Here, private saving increased from $500 billion to $600 billion after the tax reform. This increase in private saving suggests that the substitution effect was larger than the income effect. However, the taxes collected on interest income decreased by $150 billion, which reduced government saving. As a result, the overall national saving could have fallen even though private saving increased.

Therefore, the correct choice is B: the substitution effect was larger than the income effect; national saving fell.

Question 19

Which of the following are both correct?

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Question 20

If a reduction in taxes on savings reduced the amount of private saving, then the

Accepted Answer

A reduction in taxes on savings would increase the after-tax return on savings, raising the opportunity cost of current consumption and creating a substitution effect that would encourage more saving. However, it would also increase the after-tax income of individuals, reducing the need to save for future consumption and creating an income effect that would discourage saving. If the income effect outweighs the substitution effect, then a reduction in taxes on savings could actually lead to a decrease in private saving.

Quiz 36: Six Debates Over Macroeconomic Policy

Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings. Which of the following would be true?

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

Eliminating means requirements for government benefits would

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

Assuming that the substitution effect is large relative to the income effect, tax reform designed to increase saving

An increase in the tax rate on interest income

A reduction in the tax rate on interest income

A higher rate of return on saving has

Eliminating double-taxation would likely

Which of the following is true concerning IRA's, 401(k) and 403(b) plans?

Which of the following is not an argument made by those who oppose reforming the tax laws to encourage saving?

Which of the following is not an argument in favor of reforming the tax laws to encourage saving?

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

Suppose the tax rate on interest income from saving were reduced.

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

Which of the following are both correct?

If a reduction in taxes on savings reduced the amount of private saving, then the