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

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

Including consideration of the supply-side effects of a tax cut on the labor supply suggests that the tax cut would incentivize individuals to work more and innovate, resulting in increased productivity and economic growth. This increased economic growth would partially offset the crowding out of investment and net exports, making the impact of the tax cut less severe than if we were only considering short-term effects. Hence, option A is correct.

Question 3

The tax wedge is the difference between the

Accepted Answer

The tax wedge is the difference between the pretax and posttax return to an economic activity. It represents the amount of tax that reduces the rewards from engaging in the activity, leading to a reduction in production and/or consumption. Choices A, B, and D are incorrect as they do not accurately describe the concept of tax wedge.

Question 4

The federal budget was in deficit from 1931 to 1939,except in the year 1937.Given this fact,how do you explain E.Cary Brown's statement,"Fiscal policy,then,seems to have been an unsuccessful recovery device in the 'thirties-not because it did not work,but because it was not tried."

Accepted Answer

The answer of The federal budget was in deficit from...

Question 5

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 individuals and corporations are taxed on the same income, which is the case with taxes on dividends and capital gains from stocks. Households pay taxes on these earnings, and corporations also pay taxes on their profits, leading to double taxation.

Question 6

The federal budget exhibited a $128.7 billion surplus in 2001 but moved to a deficit of $157.8 billion in 2002.Some argued the deficit was opened up because of the Bush 2001 tax cuts,but others argued that the deficit grew because of the recession suffered in 2001.Evaluate the validity of the second argument.

Accepted Answer

The answer of The federal budget exhibited a $128.7 billion...

Question 7

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

By lowering taxes, people have more incentive to work and save, which increases the supply of labor and capital in the economy. This increase in productive capacity leads to an increase in real GDP. However, since demand for goods and services also increase due to increased disposable income, there may be some upward pressure on prices, but not enough to outweigh the increase in production. Therefore, the tax cut is expected to increase the level of real GDP in the long run.

Question 8

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 9

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

Accepted Answer

The tax wedge is the difference between the pre-tax and after-tax income of an individual. A decrease in marginal tax rate will reduce the amount of tax an individual pays on their income, thereby reducing the tax wedge. The other options (B, C, D) do not directly affect the tax wedge.

Question 10

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 making more resources available for investment and consumption. They also tend to increase aggregate demand by increasing disposable income, leading to higher spending.

Question 11

Double taxation refers to

Accepted Answer

Double taxation is when the same income is taxed twice. In this case, corporations are already taxed on their profits, and if they distribute those profits to shareholders as dividends, then the individuals also have to pay taxes on those dividends, resulting in double taxation. Option A and D are incorrect because they do not involve double taxation, and option B is only partially correct as it only involves double taxation for individuals.

Question 12

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 refers to an increase in the productive capacity of the economy, such as through increased investment or labor supply. This can help offset the decrease in government revenue from the tax cut, resulting in less crowding out. In contrast, a demand-side effect, such as increased consumer spending, may lead to inflationary pressures and higher interest rates, which can lead to more crowding out.

Question 13

Which of the following best describes supply-side economics?

Accepted Answer

Supply-side economics is based on the idea that economic growth is primarily driven by increasing the productivity and efficiency of producers. This is achieved by incentivizing work, saving, and investing, primarily through changes in tax policy. Specifically, supply-side economists believe that reducing marginal tax rates will encourage people to work more, save more, and invest more, which in turn will lead to increased productivity and economic growth. Therefore, choice D is the best description of supply-side economics.

Question 14

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

Accepted Answer

A smaller tax wedge means that individuals or businesses will retain a larger percentage of the income generated from the economic activity. This will incentivize more of that activity to occur as it becomes more profitable.

Question 15

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 16

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 think that tax cuts mainly affect aggregate demand. They believe that any increase in production due to tax cuts would be small and temporary, and that the main impact would be on consumer spending and investment, which would stimulate demand in the economy.

Question 17

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

Accepted Answer

The tax wedge is the difference between the amount that a worker earns and the amount that the employer pays for that worker's labor, due to taxes and social security contributions. When the tax wedge increases, firms and individuals will have to pay more to perform that activity, reducing its profitability. This will likely lead to a decrease in the level of that activity.

Question 18

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 19

If tax reduction and simplification are effective,then

Accepted Answer

The answer of If tax reduction and simplification are effective,then
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Question 20

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

Accepted Answer

This statement is generally false. Increasing taxes on interest and dividend income may discourage investment and reduce economic growth as investors may seek alternative investment options with lower taxes or move their investments to other countries with more favorable tax laws.

Quiz 16: Fiscal Policy

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