Fiscal Policy
Consider the following tax brackets in Canada. Lower tax bracketUpper tax bracketTax rate (%) 0-24999_36% 25000-49999_33% 50000-74999_30% 75000 or higher_27% Suppose that a person earns $65001. Given this data, what is this pearson's marginal tax rate?
30%
Which of the following stories describe the crowding out effect?
After the large government budget deficit financed through borrowing, less funds are available for private lending and Luis, a builder, just secures a new loan for a new crane with an interest rate of 5% which is higher than the rate on his previous loan (3%).
Which of the following stories illustrates the supply side view of the economy?
All are consistent with the supply side view of the economy.
Which of the following would be an example of a discretionary and expansionary fiscal policy?
Approval of a new spending bill by congress
________ are a form of tax or spending rules that can affect aggregate demand in the economy without any changes in legislation.
Automatic stabilizers
Which of the following are NOT major components of US federal government spending?
Community and regional development.
Which of the following does NOT affect aggregate demand?
Crop failures due to weather events
Which of the following are amongst the main single categories of local government spending?
Education, Highways, Hospitals and Healthcare
A 20% drop in payroll taxes would have a [Select] impact than a 20% corporate income tax on [Select].
Greater; the Federal Government budget.
Suppose that the amount of taxes in Japan is equal to 1000. Suppose that the government expenditures are equal to 1300 (All numbers in billions of domestic currency) Given this data, what can you say about Japan's budget?
In Japan they have a budget deficit
Assuming the government of country Balistan has a balanced budget requirement and collects $100 million more in taxes than expected in 2016. As a result, the government would have to
Increase spending by $100 million.
[Select] would advocate for increased government spending in times of recession while [Select] would advocate against budget deficit as they trigger the crowding out effect and depress investment.
Keynesians; Neoclassicals
Suppose that the amount of taxes in Slovenia is equal to 2000. Suppose that the government expenditures are equal to 1700 (All numbers in billions of domestic currency) Given this data, what will happen to Slovenia's national debt?
National debt will decrease
Ari's income and federal income tax contributions are in the table below. What is the federal income tax in Ari's country? Taxable IncomeFederal Income Tax Payment2016$80,000$10,0002017$94,000$11,750
Proportional
Which of the following example(s) describe a regressive tax?
Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000.
Which of the following are the main single categories of government spending?
Social security payments, Interest payments on government debt, Healthcare and Defense spending.
Which of the following is an example of an automatic fiscal policy stabilizer?
Tax revenues fall as real GDP decreases.
According to the Laffer curve, as tax rates rise The question has been evaluated. Your choice is incorrect.
Tax revenues first increase but eventually fall as tax rates reach certain levels.
The congress of the country of Pi is debating budget issues and decides to cancel $10 billion in infrastructure projects that aimed to modernize the power grid (electricity) and $5 billion in medical research and development in order to balance the budget. An argument against a balanced budget rule would be
That efficiency derived from a renewed power grid and the advances in the medical field were forgone.
Which of the following types of government spending are tied to investment?
The federal government funds grants for medical research towards diabetes in the amount of $20 million.
Of the following examples, which is associated with government spending for investment?
The federal government spends $400 million on fixing airports and upgrading control tower software and technology
Which of the following is an example of a government fiscal policy?
The government recently reduced corporate tax rates
What do goods like gasoline, tobacco, and alcohol typically have in common?
They are all subject to government excise taxes.
Which number is higher?
US federal debt
In 2017, the federal government spent $4 trillion but collected $3.3 trillion in taxes, therefore in 2017, the US government accumulated
a budget deficit of $700 billion
Which of the following can the government use as a tool of fiscal policy if it wants to increase the level of real GDP in the economy?
a cut in taxes
Assume that the federal government of country ABC planned on spending 15 billion Lira (name of their currency) and expected tax revenue of 16 billion Lira in 2016. If the economy of ABC grows at a higher rate than expected (other things equal), the government's annual budget should see
a greater surplus
Head Start program:
a program for early childhood education directed at families with limited educational and financial resources.
individual income tax:
a tax based on the income, of all forms, received by individuals
payroll tax:
a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare
corporate income tax:
a tax imposed on corporate profits
regressive tax:
a tax in which people with higher incomes pay a smaller share of their income in tax
excise tax:
a tax on a specific good—on gasoline, tobacco, and alcohol
estate and gift tax:
a tax on people who pass assets to the next generation—either after death or during life in the form of gifts
progressive tax:
a tax that collects a greater share of income from those with high incomes than from those with lower incomes
proportional tax:
a tax that is a flat percentage of income earned, regardless of level of income
In order to increase the level of aggregate demand in the economy, the government can use ________ in the form of ________.
an expansionary fiscal policy; an increase in government spending
If an economy moves into a recessionary period, examples of fiscal policies that act as automatic stabilizers include
an increase in transfer payments or social spending, such as unemployment benefits.
If an economy moves into an inflationary period, causing that country to produce more than potential GDP, then
automatic stabilizers will cause tax revenue to increase and government spending to decrease.
Supply-side Economics:
belief that economic activity is motivated by after tax returns to that activity, so that tax cuts on personal income increase labor supply, tax cuts on saving increase saving, and tax cuts on investment increase investment
fiscal policy:
changes in Federal government spending or tax rates for the purpose of influencing the macroeconomy.
An expansionary fiscal policy can increase the level of aggregate demand by all of the following EXCEPT
decreasing government purchases
When the government passes a new law that explicitly increases overall tax rates and reduces spending levels, it is enacting:
discretionary and contractionary
standardized (or full) employment budget:
estimate of the budget deficit or surplus excluding the effects of fiscal policy, that is, as if GDP were at potential
crowding out:
federal spending and borrowing causes interest rates to rise and business investment to fall; crowding out can also be caused by federal tax cuts
contractionary fiscal policy:
fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes
Laffer Curve:
hill-shaped relationship between tax rates and tax revenues; if tax rates are high enough, lowering rates actually increases revenues
multiplier effect:
idea that a change in spending causes a more than proportionate change in real GDP
An argument to promote capital deepening is that it will
increase productivity and economic growth in the long run
Assume the government has a balanced budget and that the economy is experiencing a period of growth higher than predicted. The tax revenue collected by the government is likely to ________, which would lead to a ________.
increase; budget surplus
During the 2009 recession, the number of households eligible for food stamps
increased and the additional spending helped lessen the recession.
austerity programs:
measures taken to reduce budget deficits during recessions by raising taxes and cutting government spending
ability to pay principle:
normative argument that citizens with more income or wealth should bear more of the cost of social programs by paying a higher tax rate, since they have a greater ability to pay
benefit principle:
normative argument that tax payers should pay in proportion to the benefit they receive
flat tax:
proportional income tax system where all individuals pay the same income tax rate
A tax that is a flat percentage of all wages earned is a
proportional tax
Infrastructure:
public investment in public and externality goods like roads and transportation features (e.g. airports, seaports), water supply and sewers, schools and hospitals.
tax bracket:
range of personal income at which a given marginal tax rate applies; for a progressive income tax, as one's income increases, one moves to a higher tax bracket and pays a higher marginal tax rate on the amount of income above the tax bracket's lower bound
Former President Ronald Reagan was a supporter of supply side economics. Supply side economists believe that
reducing tax rates increases aggregate supply
Pak's income and federal income tax contributions are in the table below. Based on the numbers above, the federal income tax in Pak's country is: Taxable IncomeFederal Income Tax Payment2016$60,000$10,8002017$75,000$12,800
regressive
Consider the following tax brackets in the US. Lower tax bracketUpper tax bracketTax rate (%)0-24999 35% 25000-49999 31% 50000-74999 27% 75000or higher 23% Given this data, what type of taxes do they have in the US?
regressive taxes
A decrease in taxes will shift the AD curve to the ________, while a decrease in government expenditure will shift the curve to the ________.
right; left
Reaganomics:
see Supply-Side Economics
A reduction in government spending through a new budget would
shift the aggregate demand left as it falls and reduce the Gross Domestic Product at the new equilibrium.
flat tax income tax:
system where all pay the same tax rate
automatic stabilizers:
tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation
sales taxes:
taxes as a percentage of one's retail purchases
property taxes:
taxes based on the value of your home or other real estate
The Congress of the country of Delta is debating budget issues and decides to cancel $5 billion worth of tax cuts in order to balance the budget. An argument against a balanced budget rule would be
that benefits from the tax cut were forgone.
discretionary fiscal policy:
the government passes a new law that explicitly changes overall tax rates or spending levels with the intent of influencing the level or overall economic activity
marginal tax rates:
the tax one pays on the higher income one earns; see tax bracket
national debt:
the total accumulated amount the government has borrowed, over time, and not yet paid back
When inflation begins to climb to unacceptable levels in the economy, the government should
use contractionary fiscal policy to reduce aggregate demand.
balanced budget:
when government spending and taxes are equal
budget deficit:
when the federal government spends more money than it receives in taxes in a given year
budget surplus:
when the government receives more money in taxes than it spends in a year
Suppose that the amount of taxes in Mexico is equal to 1200. Suppose that the government expenditures are equal to 1000 (All numbers in billions of domestic currency) Given this data, what can you say about Mexico's budget? What is the size of Mexico's surplus?
$200
Suppose that the amount of taxes in Mexico is equal to $1700. Suppose that the government expenditures is equal to $1700. In addition, you know that the current level of debt in Mexico is equal to $380000 (all numbers in billions of domestic currency). Given this data, what is the new level of Mexico's debt?
$380000
