5.3

Finland and Norway have a net negative debt-to-GDP ratio; this means that:

they have saved a stockpile of money for the future.

The standard deduction for a single person is $12,200. Based on this table, if your total income is $84,200, what is the amount of tax you will pay on your taxable income?

$11,699

Payroll taxes are 6.2%, and Medicare taxes are 2.9%. If your employer owes you $665, approximately how much will you get after these deductions?

$604.49

Payroll taxes are 6.2%, and Medicare taxes are 2.9%. Your employer owes you $665. How much will your work cost your employer?

$725.52

In your current job, you earn $41,000. You take the standard deduction of $12,200. You have an offer of a new job working for a different employer. Your salary would go up by $6,500. How much extra will you owe in federal income taxes if you take the new job?

$780

Payroll taxes are 6.2%, and Medicare taxes are 2.9%. Your employer owes you $850. How much will your work cost your employer?

$927.35

One reason not to worry about the debt is that our government debt is money owed by:

Americans to Americans.

How can increases in government spending crowd out investment spending?

An increase in government spending increases the real interest rate, which reduces private investment spending.

How might future spending change if Medicare and Social Security were discretionary spending programs instead?

Changes in spending on these programs could be made each year

example of federal government tax revenue

Corporate taxes Payroll taxes Income taxes Excise taxes

Is crowding out a major concern when actual output is below potential output? Why?

Crowding out is not a major concern, because the Fed will likely lower the real interest rate when actual output is far below potential.

Dan has an annual earned income of $92,200 a year and plans to take the standard deduction. Suppose the standard deduction is $12,200 and his marginal tax rate is 24%. Social Security taxes are 6.2% and Medicare is 2.9%. Which of these statements is FALSE?

Dan will pay 24% of his taxable income in income taxes. Dan will have $8390.20 withheld for payroll taxes. Dan will pay income taxes on $80,000 of income. Dan will pay a higher percentage of his income in income taxes than someone who earns $45,000 does

When the Federal Reserve can't cut short-term nominal rates any further and its capacity to cut long term rates is limited, __________ might be the only effective tool left to stabilize the economy.

Discretionary fiscal policy

How do automatic stabilizers respond when output is above potential output?

Government spending falls and tax payments rise to help keep the economic expansion in check.

Which of the following is a reason to worry about government debt?

High and rising debt slows economic growth.

The president has just signed a new budget that drastically cuts taxes without decreasing government spending. When asked how he plans to address the dramatic increase in deficits that will occur due to the tax cuts, the president responds, "We're going to see some amazing economic growth because of this new policy, so much growth that we're going to grow our way out of any short-term increases to government debt."

If this extra economic growth doesn't materialize, what are some of the risks to the U.S. economy? Higher government debt may make future borrowing more difficult. Interest payments on the federal debt will consume a larger portion of the federal budget, potentially displacing other government priorities.

A political candidate has written an op-ed piece in which she claims that the U.S. government debt has continually grown and is out of control. She includes the accompanying graph to support her argument. She further argues that the government can't sustain this level of debt by comparing it to an individual who is constantly spending more than she earns, thus racking up large amounts of consumer debt.

In what ways might the political candidate's arguments be misleading? Government debt differs from household debt in that the government has ways of handling debt that households lack. The graph depicts the absolute size of the debt, whereas the sustainability of the debt depends on the size of the debt relative to the size of the economy. The graph depicts gross government debt, whereas what matters is net government debt.

Why might requiring the federal government to balance its budget each year limit its ability to respond to an economic downturn?

It would compel the government to cut spending to offset lost tax revenues, which decline during recessions. prevent the government from employing an expansionary fiscal policy, since increased government spending would have to be offset by increased taxes

Zuri has an annual income of $42,200 a year and plans to take the standard deduction. Suppose the standard deduction is $12,200, and her marginal tax rate is 12%. How much will she have to pay in federal income tax?

Less than $3600 $42,200 - $12,200 = $30,000 $30,000 - $9,700 = $20,300 $20,300 * 12% = $2,436

How does mandatory government spending differ from discretionary government spending?

Mandatory spending is set by law, whereas discretionary spending is appropriated annually

The federal government created ____________ which help(s) states provide health insurance for their poorest residents.

Medicaid

During a recession, there will be higher unemployment, lower wages, and more idle capital equipment. The opportunity cost principle suggests that this would be the best time to use countercyclical fiscal policy. Which of these examples of government spending is explained by the opportunity cost principle?

More idle capital equipment means a lower opportunity cost of putting machines to work on government investment projects. New projects can be completed more cheaply since wages are lower during a recession. During a recession, the next best alternative for unemployed people would be working in a job that doesn't use their skills.

Why don't most tax expenditures help much if your federal tax bill is zero?

Most tax breaks reduce taxable income, but reducing taxable income below zero does not reduce the tax bill.

Taxes statements

Payroll taxes can only be applied on earned income. A property tax is a tax on the value of property, usually real estate. An excise tax is a tax on a specific product. A sales tax is a tax that's typically a percentage of the purchase price of goods and services.

When the federal government __________, it must borrow money to fund this shortfall.

Runs a budget deficit

statements of a regressive tax

Sales taxes tend to be regressive because lower-income households spend more of their income on groceries Excise taxes tend to be regressive because lower-income households spend more of their income on gas. Property taxes tend to be regressive because higher-income households spend a smaller share of their income on property taxes.

government services provided by the local government

Sewer lines, emergency services, bus services, water, local parks, playgrounds, trash and recycling collection, firefighters, and police

a. On average, half of _______ government spending goes to employment and income support, and one-fifth goes toward education b. b. Social insurance programs plus spending on military and veteran's benefits account for about 80% of ________ government spending. c. The biggest chunk of ______ government spending goes to public primary and secondary education, followed by smaller chunks for various community services.

State Federal Local

With a progressive tax, those with more income

Tend to pay a higher share of their income in taxes

One of the reasons that government spending rose during the 2007 to 2009 period was the introduction of:

The Affordable Care Act.

In 2009, investors suddenly became concerned that Greece might not repay its debt. The interest rate lenders charged the government rose from 5% in 2009 to over 25% in 2012. The lesson that many governments learned from Greece involves:

The crisis of confidence

Which of these is NOT a result of corporate tax cuts?

The demand for output will decrease

These would occur if the federal government was required to run a balanced budget:

The federal government would not be able to use fiscal policy to actively help smooth out business cycles. Annually balancing the budget would require policy choices that exacerbate an economic downturn. Raising taxes and lowering benefits to balance the budget during a downturn would reduce aggregate expenditure even more. Government spending would automatically rise during downturns, as more people qualify for benefits.

What are some ways in which government debt differs from personal debt?

The government can pay its debt using options that households do not have in paying off theirs. can pay its debt over multiple generations, whereas individuals cannot.

Statements is true of government spending during a war?

The government borrows money to support the military during a war. It makes sense to borrow during a war because the benefits of winning the war last for generations. Wars require a sudden surge of spending that results in budget deficits.

Government spending

The government rarely brings in enough revenue to pay for all its spending. Business cycles create government budget deficit cycles. Over recent decades, the federal government has mostly run budget deficits. Wars require a sudden surge of spending that results in budget deficits.

Use the three Ts of fiscal policy to explain the challenges faced when using discretionary fiscal policy to counter a recession

The policy must target the specific regions and proups of workers who need help the most be implemented before economic conditions have severely worsened. he used only for as long as needed to avoid crowding out.

How does the saying. "The federal government is an insurance company with a military," while exaggerating a bit, describe U.S. federal government spending?

The saying is true because the federal government spends the vast majority of its budget on the military and social insurance

Low birth rates mean that the share of the population that is working age will fall over the next few decades. What impact will this have on spending on Medicare and Social Security?

The share of GDP spent on these programs will increase.

True of automatic stabilizers

They are targeted because taxes decline only for those whose income has fallen. They are temporary because they automatically reverse course as the economy reverses course. They are timely because they are triggered automatically when people's incomes decline.

What are some key ways in which government spending and tax expenditures differ? Select all that apply.

They differ in that government spending explicitly subtracts from the federal budget, whereas tax expenditures reduce the tax revenue available for government spending. government spending must be renewed or evaluated each year, whereas tax expenditures renew automatically.

Statements of income and payroll taxes

Unearned income, such as pensions and investment income, is subject to taxes. Payroll taxes apply to earned income. Bonuses and commissions are taxable. Everyone who works needs to pay payroll taxes.

Which of these is TRUE of income and income taxes?

When a worker gets a paycheck, they will see that both payroll taxes and income taxes are withheld.

Marissa just got hired at a new job for an annual salary of $112,200. After the standard deduction, her taxable income will be $100,000. Use the marginal tax rates shown in the table to calculate how much she will owe in income taxes if she has no other income and no additional deductions.

With $100,000 in taxable income, Marissa falls into the 24% tax bracket. However, she will not pay 24% of her income in taxes. Marissa pays 10% on her first $9,700: $9,700×0.10=$970 She pays 12% on her next $29,775 (= $39,475 - $9,700): $29,775×0.12=$3,573 She pays 22% on her next $44,725 (= $84,200 - $39,475): $44.725×0.22=$9,839.50 Finally, she pays 24% on the remaining $15,800 (= $100,000 - $84,200): $15,800×0.24=$3,792 Adding it all together yields: $970+$3,573+$9,839.50+$3,792=$18,174.50 Since Marissa earned a total of 112,200 in income, the share of income paid in taxes is: $18.174.50 / $112.200×100=16.2%

A debt crisis occurs when:

a government cannot repay its loans.

Explain how different types of government spending add to GDP directly and indirectly and how a rise in government spending can have a multiplied effect on GDP.

a. A change in the amount of government purchases will directly increase or decrease GOP. This is because something is purchased or produced in the transaction. b. A change in the amount of transfer payments will indirectly increase or decrease GOP. This is because nothing is purchased or produced when a change is made c. An increase in government purchases or in transfer payments will increase GDP by more than that initial amount because it produces extra income across the economy.

You're working as a staffer for a member of Congress from your state. She is looking to co-sponsor a bill to provide assistance to low-wage workers who want to pursue higher education. She asks you to brief her on how she might implement it through (a) a direct-spending program, (b) a lax expenditure, or (c) regulation. Complete the passages below to indicate how you might respond to her request.

a. A direct-spending program might directly provide funds to low-wage workers to attend college. In. partcular, students may receive tuition assistance checks by mail. A potential disadvantage of this approach is that the administrative costs may be high b. A tax expenditure might provide an income tax credit to low-income students. In particular, students might receive a deduction from their tax liabilities if their family incomes are below a certain level. A potential disadvantage of this approach is that it could beneft higher earners, who pay more in taxes, rather than those who need it most. c. A regulation might require employers to provide education assistance to low-wage workers. In. particular, employers might be required to provide such avorkers with a weekly payroll benefit. A potential disadvantage of this approach is that it could incentivize businesses not to hire low-wage workers.

If the economy slides into recession next year, and Congress does nothing to adjust existing tax and spending programs, how will government spending and government revenue change? Do any of these adjustments help stabilize the economy?

a. Government spending will remain the same and government revenue will decrease. b. As the economy slows, the automatic decrease in taxes will help stabilize the economy.

Automatic Stabilizer

a. The government paid an extra $25 million in unemployment insurance claims last month. c. The IRS collected $50 billion more in taxes last year, even though tax rates were unchanged.

In an effort to encourage people to purchase electric cars, the federal government passes a tax credit of $2,500 for each new electric car that is bought in the United States.

a. This policy will primfrily benefit those who pay more than $2,500 in taxes each vear. b. This policy will increase the number of electric cars sold.

A friend of yours argues that federal government spending is out of control and significant cuts in spending are needed to reduce the size of the government. She tells you that if we cut federal government spending on science and international affairs, it will really reduce the size of the government.

a. What percentage of federal government spending comes from science and international affairs? Share of federal spending: 2% b. How much will the federal government spend on science and international affairs if the federal government's total spending is $4.3 trillion: $86 billion c. Your friend's proposed cuts to science and international affairs spending would significantly reduce the size of the government: False

A politician says. "We could help low-wage workers by offering them tax credits like the earned income tax credit, but it would be cheaper to do it by raising the minimum wage because that would cost the government nothing.

a. What type of policy is the minimum wage? A government regulation b. How can the minimum wage increase government spending? If a higher minimum wage increases unemployment, government spending on social insurance programs will increase.

Consider what happens if the federal government introduces new government spending to combat a recession. a. In the short run, the economy will likely expand due to the increased government spending.

b. As the economy recovers, political pressures lead the government to keep this spending in place. Possible long-run consequences of making this increased spending permanent include which of the following? Higher interest rates Inflation

Expansionary Fiscal Policy

b. New legislation temporarily extends unemployment benefits for an additional 26 weeks. d. Congress appropriates an additional $125 million in funds to help states pay teachers during a recession.

The government offers tax breaks to encourage spending on certain goods and services. Tax breaks provide all of these incentives:

becoming a homeowner. purchasing health insurance through an employer. saving for retirement.

The Federal Reserve initially responded to the Great Recession by __________, and the federal government used __________ to further stimulate the economy.

cutting nominal interest rates to zero; discretionary fiscal policy

The Affordable Care Act is an example of:

discretionary spending.

In order to boost output, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.

expansionary; raises; lowers

A budget deficit occurs when:

government spending exceeds government revenue.

Fiscal policy works best when:

it is implemented before economic conditions have severely worsened.

Tax expenditures differ from government spending in that tax expenditures show up as ___________, while a direct- spending program shows up as _________.

lower government revenue; government spending

Steps the government could take to stabilize the economy

lower taxes, increase government spending, increase transfer payments

Steps the government should not or cannot take to stabilize the economy

raise taxes, decrease government spending, decrease transfer payments, raise real interest rates, lower real interest rates

The Philippines government provides retirement benefits, unemployment benefits, maternity leave benefits, death and funeral benefits, and other benefits. These are examples of:

social insurance.

The government's debt is:

the accumulation of all the deficits.

If the government decidIs that all workers are entitled to parental leave, it can pay for this directly through a social insurance program or require employers to pay for parental leave for all workers. As a result, the cost shifts from taxpayers to employers, who pass the costs on to workers in the form of lower wages. This example of regulation tells you that:

the cost associated with a government program doesn't disappear but shifts from taxpayers to employers and to workers.

Fiscal policy refers to

the government's use of spending and tax policies in an attempt to stabilize the economy.

Suppose a high-income person, a middle-income person, and a low-income person all purchase identical houses that are financed by similar mortgages. Who spends the most on tax-preferred goods?

the high-income person

Suppose a high-income person, a middle-income person, and a low-income person purchase identical houses that are financed by similar mortgages. Who gets the largest tax benefit?

the high-income person

Fiscal policy is increased in its effectiveness through:

the multiplier effect.

Fiscal policy works best when it is:

timely, targeted, and temporary.

Which of the following did the New Deal create?

unemployment benefits