Question :
18.7 The Effects of Fiscal Policy in the Long Run
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18.7 The Effects of Fiscal Policy in the Long Run
1) Which of the following best describes supply-side economics?
A) Labor productivity affects aggregate supply.
B) Education affects labor productivity which affects aggregate supply.
C) Education affects the incentive to work, save, and invest and, therefore, aggregate supply.
D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.
2) The tax wedge is the difference between the
A) amount of taxes needed to balance the federal budget and the actual amount of taxes.
B) amount of taxes needed to pay off the national debt and the actual amount of taxes.
C) pretax and posttax returns to an economic activity.
D) nominal and real interest rates.
3) A decrease in which of the following would decrease the tax wedge?
A) marginal tax rate
B) money supply
C) national debt
D) federal budget deficit
4) Economists who believe the supply-side effects of tax cuts are small essentially believe that
A) tax cuts mainly affect aggregate demand.
B) tax cuts mainly affect aggregate supply.
C) tax cuts will increase the quantity of labor supplied.
D) tax cuts will result in relatively small changes in the price level.
5) 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 ________.
A) less; less
B) less; more
C) more; less
D) more; more
6) Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________.
A) aggregate demand; government spending
B) aggregate supply; taxes
C) aggregate demand; taxes
D) aggregate supply; government spending
7) As the tax wedge associated with a given economic activity gets smaller, we would expect
A) more of that economic activity to occur.
B) the distortions caused by taxes on that activity to be greater.
C) people to engage in less of that particular activity.
D) no change in the practice of that activity until the tax wedge ultimately disappears.
8) Reducing the marginal tax rate on income will
A) reduce the tax wedge faced by workers and increase labor supplied.
B) raise the return to entrepreneurship and encourage the opening of new businesses.
C) increase the after-tax return on saving, and encourage saving.
D) All of the above are correct.
9) Double taxation refers to
A) corporations paying taxes on profits and individuals paying taxes on wage income.
B) individuals paying taxes on wage income and individuals paying taxes on dividends.
C) corporations paying taxes on profits and individuals paying taxes on dividends.
D) corporations paying taxes on capital gains and individuals paying taxes on wage income.
10) If tax reduction and simplification are effective, then
A) real wages will rise as labor supply and demand increase.
B) saving and investment in new capital will increase.
C) interest rates will rise in financial markets and demand for financial assets falls.
D) fewer new firms will be established, since existing firms will make more profit.
