ECON-Chpt 10

Suppose a small economy has two income tax rates: 15% for all income up to $50,000 and 30% for any income earned above $50,000. Suppose that prior to the recession, the economy had five workers earning the following salaries:Amy: $20,000Betty: $40,000Charlie: $60,000Dimitry: $80,000Evelyn: $100,000The total tax revenue paid by the five workers is _____, and it represents _____ percent of total income.

$58,500; 19.5%

In the aftermath of the 2007-2009 recession, the U.S. national debt rose to record levels as the federal government used expansionary fiscal policy to speed up the economic recovery. This led some politicians to propose a significant reduction in the size of government in order to balance the budget. Would such a policy be expansionary or contractionary in nature? What factors would determine whether or not such a policy would harm economic growth?

?

Which statement is TRUE?

Changes in tax rates affect both aggregate demand and aggregate supply.

Suppose policymakers wish to use fiscal policy to fight inflation. Which statement, then, is MOST accurate?

Essentially, the way to lower the inflation rate is to decrease aggregate demand, causing a rise in unemployment.

Our current personal income tax system is progressive: Income tax rates rise with rising incomes and are lower for low-income individuals. Some policymakers have favored a "flat tax" as a replacement to our modestly progressive income tax system. Most exemptions and deductions would be eliminated, and a single low tax rate would be applied to personal income. Would such a change in the tax laws alter the automatic stabilization characteristics of the personal income tax?

It would make taxes less effective as an automatic stabilizer as it would increase individuals' disposable income.

As mandatory federal spending becomes an increasingly larger share of the budget, should we worry that the economic stabilization aspects of fiscal policy are becoming so limited as to be ineffective?

No, even though the share of discretionary spending is lower, it still accounts for over $1.3 trillion.

_____ government spending, _____ transfer payments, and _____ taxes are all examples of contractionary fiscal policy.

Reducing; reducing; raising

The largest category of federal government spending in 2015 was:

Social Security.

If an economy (gross domestic product) is growing faster than the growth of national debt held by the public (both domestic and foreign), what will be its impact on the national debt?

The burden of the debt on the annual budget will become smaller as long as interest rates are low.

Which of these is a benefit to businesses when the government budget is in a surplus?

The government may buy debt.

Why does government spending theoretically give a bigger boost to the economy than tax cuts?

The government tax multiplier has a smaller effect on consumption than the government spending multiplier.

One argument often heard against using fiscal policy to tame the business cycle is that the lags associated with getting a fiscal policy implemented are so long that when the program is finally passed and implemented, the business cycle has moved on to the next phase and the new program may not be necessary and may even be potentially destabilizing at that point. What explains why this argument could be true?

The process of fiscal planning is time consuming during certain periods.

In recent years, a growing number of states have legalized marijuana for recreational purposes. Sales of marijuana are subject to various state sales and excise taxes that add between 25% and 44% to the price. Previously, sales of marijuana in these states took place in the informal or underground economy, where taxes are avoided and there is a high crime rate. Which of the following is NOT a fiscal policy justification for legalizing marijuana?

There will be an increase in the amount of potential marijuana users.

Why does the interest paid on the national debt lead to greater income inequality?

Treasury bonds are mostly owned by high-income individuals.

Which of the following items is NOT public debt?

U.S. dollars

When workers lose their job, they file for unemployment benefits; therefore government spending on such programs naturally rises during recessions. As the economy recovers and people go back to work, spending on unemployment programs shrinks. Based on the given information, which of the following is correct?

Unemployment compensation is a form of an automatic stabilizer.

In 1962 in a speech before the Economic Club of New York, President Kennedy argued that "it is a paradoxical truth that taxes are too high today and tax revenues are too low—and the soundest way to raise revenues in the long run is to cut rates now." Is President Kennedy's argument consistent with supply-side economics?

Yes, high tax rates can create disincentives to work.

A balanced budget amendment to the Constitution requiring Congress to balance the budget every year is introduced in Congress every so often. If the budget is balanced, all these are problems that policymakers and the economy would face EXCEPT:

a balanced budget forces fiscal discipline that decreases the chances of having an unsustainable debt.

If a government collects $1,400 in tax revenue and spends $1,600, it has:

a deficit of $200.

The solution to simultaneous deflation and unemployment is to shift the:

aggregate demand curve to the right.

(Figure: Laffer Curve 3) A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point _____ in the graph.

d

Which of the following is an example of an expansionary fiscal policy?

increasing government spending

Which of the following policies do supply-side economists believe is the best for increasing the standard of living?

increasing investment in capital that boosts worker productivity

The largest source of federal government revenues is:

individual income taxes.

An expansionary fiscal policy can result in:

inflation and higher GDP.

The _____ lag is the time policymakers must wait for economic data to be collected, processed, and reported.

information

According to public choice theorists, deficit spending:

is undertaken as a politically palatable way of funding programs.

The focus of supply-side fiscal policies is on:

long-run economic growth.

Which of the following is an example of contractionary fiscal policy?

reducing military spending

The crowding-out effect recognizes that if the government sells bonds to finance spending, it can cause interest rates to _____ investment.

rise, thereby reducing

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:

supply-side fiscal policy.

Which of the following groups must agree in order to implement fiscal policy?

the Senate, House of Representatives, and executive branch

Which is an accurate measure of a country's debt burden?

the ratio of national debt to GDP