Economics Chapter 11, Economics Chapter 11, Economics Chapter 12, Economics Chapter 12, Econ. Chapter 11, Econ. Chap 12, Economics Chapter 13, Econ. Chap. 14, Economics Chapter 14, Economics Chapter 13, Economics Chapter 14

Refer to Exhibit 11-5 which summarizes the situation prior to the value added tax (VAT). If the government imposes a VAT rate of 10 percent, the miller must pay ___________ in VAT tax and will need to raise the price he charges the baker to _______________.

$0.08; $1.54

Refer to Exhibit 11-4. If a person's taxable income is $50,000, how much does he pay in taxes?

$10,110

Refer to Exhibit 11-4. If a person's taxable income is $90,000, how much does he pay in taxes?

$22,110.

Suppose the economy is in a recessionary gap. If government expenditures are currently $700 billion and tax revenues are currently $450 billion, the (total) budget deficit is _____________. Assume that economists estimate that if the economy were operating at full employment then government expenditures would be $600 billion and tax revenues would be $500 billion. The structural deficit is _________________ and the cyclical deficit is _______________.

$250 billion; $100 billion; $150 billion

Suppose the economy is in a recessionary gap. If government expenditures are currently $3.5 trillion and tax revenues are currently $2.9 trillion, the (total) budget deficit is _____________. Assume that economists estimate that if the economy were operating at full employment, government expenditures would be $3.2 trillion and tax revenues would be $3.1 trillion. The structural deficit must be_________________ and the cyclical deficit must be _______________.

$600 billion; $100 billion; $500 billion

Use the information provided in Exhibit 11-4. What is the marginal tax rate on the 23,000th of dollar of taxable income earned?

17%

According to the textbook (based upon 2014 data), if the bottom half of all U.S. income tax payers were allowed to stop paying the income tax entirely and the top 50% continued to pay as they do now, tax revenues to the government would drop by about

2.75 percent.

Use the information provided in Exhibit 11-4. What is the marginal tax rate on the 23,001st dollar of taxable income earned?

20%

At a taxable income of $120,000 Adam's income tax is $30,500. When his taxable income rises to $130,000 his income tax is $34,500. Based on this information, Adam's marginal tax rate is _____________ percent and his new average tax rate is ____________ percent.

40; 26.5

Refer to Exhibit 11-2. Compare points A and B. Which of the following is true?

At B tax rates are higher than at A, but tax revenues are the same at both points.

A structural deficit refers to that part of the deficit that exists as a result of a downturn in economic activity.

False

A tax rate increase always leads to an increase in tax revenue for the government.

False

The Laffer curve shows the exclusively direct relationship that exists between tax rates and tax revenues.

False

The distinctive feature of a progressive tax is that the dollar value of taxes paid rises as income rises.

False

To identify whether fiscal policy is expansionary or contractionary, one should focus on the cyclical deficit.

False

According to Buchanan and Wagner, why is there a political bias toward expansionary fiscal policy rather than contractionary fiscal policy?

In a democracy, expansionary fiscal policy prescriptions are more politically popular than are the policy prescriptions associated with contractionary fiscal policy.

A curve showing the relationship between tax rates and tax revenues is called a __________ curve.

Laffer

Which of the following illustrates the wait-and-see lag?

Policymakers believe an economic downturn has occurred, but they decide not to take action until they are sure.

Which of the following illustrates the effectiveness lag?

Policymakers implement policy X, but it will be a few months before it starts working.

Smith says that if government purchases rise by $100 billion, the AD curve will shift to the right. Jones says that if government purchases rise by $100 billion, the AD curve will not shift to the right. It follows that

Smith believes there will be incomplete or zero crowding out and Jones believes there will be complete crowding out.

The economy is in a recessionary gap and a Keynesian economist advocates expansionary fiscal policy. What is a likely reason this economist advocates expansionary fiscal policy?

The economist believes the economy is stuck in a recessionary gap and there will be no crowding out.

Which of the following illustrates the data lag?

The economy turns down on January 8, 2019, but policymakers do not figure this out until April 19, 2019.

A permanent marginal tax rate cut would be expected to shift both the short-run and the long-run aggregate supply curves to the right.

True

Crowding out results when an increase in government spending leads to declines in consumption, investment, and/or net exports.

True

Tax revenues equal the (average) tax rate multiplied by the tax base.

True

The transmission lag is the period that elapses between the time fiscal policy is enacted and the time it is put into effect.

True

To finance a budget deficit the federal government borrows funds.

True

When the government decides to increase income taxes, this is an example of contractionary fiscal policy.

True

The answer is: "Policymakers are not aware of changes in the economy as soon as they happen." What is the question?

What is the data lag?

Refer to Exhibit 11-6. The economy is currently in short-run equilibrium producing Q1. In this situation, Keynesian economists would most likely propose

a decrease in government purchases. an increase in taxes. b or c

A taxpayer pays __________ tax rate on additional income if the income tax structure is progressive, __________ tax rate on additional income if the income tax structure is proportional, and __________ tax rate on additional income if the income tax structure is regressive.

a higher; the same; a lower

The top 1% of income earners in the U.S. (those with the highest taxable incomes) pay

a much higher percentage of their incomes in taxes than the average U.S. taxpayer.

An example of expansionary fiscal policy is

an increase in government spending, or a decrease in taxes, or both.

Refer to Exhibit 11-2. At the highest point above the horizontal axis, tax revenues

are maximized.

An example of contractionary fiscal policy is

b and c -increasing taxes. -decreasing government spending.

Suppose aggregate demand is too high to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n) _____________________ to close this inflationary gap.

b or c -decrease in government spending or -increase in taxes

Refer to Exhibit 11-6. The economy is currently in short-run equilibrium producing Q1. In this situation, Keynesian economists would most likely propose

b or c -a decrease in government purchases. or -an increase in taxes.

Keynesians

believe that equilibrium may exist at less than full employment. believe in the use of fiscal policy to stabilize the economy. b and c

The marginal tax rate is equal to the

change in the person's tax payment divided by the change in the person's taxable income.

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $700 million. This is an example of

complete crowding out.

When a decrease in one or more components of private spending completely offsets an increase in government spending, there is

complete crowding out.

Suppose Congress increases income taxes. This is an example of

contractionary fiscal policy.

Reductions in private spending as a result of increased government spending or the need to finance a budget deficit is called

crowding out.

Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, supply-side economists would most likely propose _______________ to make the price level ______________ and Real GDP ___________.

cutting marginal tax rates; fall; rise

That part of the deficit that results from a downturn in economic activity is called the __________ deficit.

cyclical

Some economists believe that higher marginal income tax rates __________ the incentive to work and thus shift the __________.

decrease; SRAS curve to the left

If the economy is on the downward-sloping portion of the Laffer curve, a(an) __________ in tax rates will __________ tax revenues.

decrease; raise

Suppose the economy is at a position below its institutional production possibilities frontier. To improve this situation, Keynesian economists might propose that government __________ taxes, which will cause the aggregate demand curve to shift to the __________ and Real GDP will __________.

decrease; right; increase

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.

effectiveness

To eliminate an inflationary gap, Keynesian theory indicates that government should

either a or d

To eliminate an inflationary gap, Keynesian theory indicates that government should

either a or d -increase taxes. or -decrease government purchases.

What are the two types of discretionary fiscal policy?

expansionary and contractionary

Increased government spending and tax cuts characterize

expansionary fiscal policy.

Suppose Congress decreases income taxes. This is an example of

expansionary fiscal policy.

Suppose government spending rises by $120 billion. It follows that if private expenditures

fall by $100 billion, incomplete crowding out exists.

Suppose the government increases spending on public education by $700 million and individual spending on private education drops by $500 million. This is an example of

incomplete crowding out.

Refer to Exhibit 11-2. At point B, if we cut tax rates slightly, tax revenues will

increase

Supply-side economists believe reductions in tax rates can

increase output and lower prices.

Some economists believe that permanently lower marginal income tax rates __________ the incentive to work and thus shift the __________.

increase; LRAS curve to the right

Suppose the economy is at a point below its institutional production possibilities frontier. To improve this situation, Keynesian economists might propose that the government should __________ expenditures, which will cause the aggregate demand curve to shift to the __________ in an attempt to close this __________ gap.

increase; right; recessionary

Crowding out suggests that

increases in government spending may raise the interest rate, thereby reducing investment.

An example of contractionary fiscal policy is

increasing taxes. decreasing government spending. b and c

Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while contractionary fiscal policy actions include __________ government spending and/or __________ taxes.

increasing; decreasing; decreasing; increasing

Tax revenues can be found by

multiplying the tax base by the (average) tax rate.

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

none of the above

A budget surplus

occurs when tax revenues exceed government expenditures.

Income tax revenues rise as income tax rates fall. It follows that the

percentage cut in the tax rate is less than the percentage increase in the tax base.

Complete crowding out implies that as government increases purchases by $1,

private spending decreases by $1. Real GDP remains unchanged. there is an equal offsetting decrease in one or more of the components of private expenditures. all of the above

Crowding out results in a decrease in

private spending.

Senator Smith proposes that the income tax structure be revised to have two tax rates. The first, 16 percent, applies to persons whose income is between $0 and $40,000 a year. The second, 23 percent, applies to persons whose income is more than $40,000 a year. This is a

progressive income tax structure.

The Laffer curve makes the point that cutting a very high marginal tax rate can __________ the tax base enough so that tax revenues __________.

raise; rise

Suppose that in a certain nation the flat income tax rate of 40 percent is reduced to 35 percent and as a result the tax base rises from $400 billion to $600 billion. As a result, ax revenues __________, indicating the nation is on the __________ portion of its Laffer curve.

rise; downward-sloping

The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes.

rise; fall

If a person predicts that a cut in income tax rates will decrease income tax revenues, he or she implicitly assumes that the percentage __________ in the tax base will be __________ the percentage cut in the tax rate.

rise; less than

Suppose that in a certain nation the flat income tax rate of 30 percent rises to 35 percent and as a result the tax base falls from $400 billion to $375 billion. As a result, tax revenues __________, indicating the nation is on the __________ portion of its Laffer curve.

rise; upward-sloping

A permanent marginal tax decrease is likely to

shift both the short run and the long run aggregate supply curves to the right.

Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is no crowding out. As a result, the aggregate demand (AD) curve in the exhibit

shifts rightward, ideally so that it goes through point 2.

An expansionary fiscal policy will

sometimes result in a budget deficit.

If company Z is receiving a government subsidy, the government is taking money from ____________ and giving it to company Z. If company Z is getting a tax deduction (instead of receiving a subsidy) then company Z is ______________________.

taxpayers; paying less in taxes than it would without the tax deduction

The economy is in a recessionary gap, there is incomplete crowding out, and government implements expansionary fiscal policy. It follows that

the AD curve will shift to the right.

The transmission lag is the time between

the enactment of a policy (getting a policy passed by Congress with the president's approval) and the implementation of the policy (putting a policy into effect).

Fiscal policy is implemented primarily by

the federal government.

The data lag is the time between

the occurrence of an event and policymakers realizing the event has occurred.

An example of automatic fiscal policy is

the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a recession.

Expansionary fiscal policy is ineffective if

there is complete crowding out.

Between the data lag and the legislative lag falls the __________ lag.

wait-and-see