Test 3 Econ

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94. Both Jones and Smith agree that the economy is in a recessionary gap. Jones proposes a tax cut. Smith couldn't agree more. Jones says that lower taxes will result in higher Real GDP. Again, Smith couldn't agree more. It follows that
- Both Jones and Smith believe that lower taxes will raise aggregate demand, but not aggregate supply.
- Both Jones and Smith believe that lower taxes will raise aggregate supply, but not aggregate demand.
- One person believes lower taxes will raise Real GDP by increasing aggregate demand and the other person believes lower taxes will raise Real GDP by increasing aggregate supply.
- Both Jones and Smith believe that lower taxes will raise Real GDP by increasing both aggregate demand and aggregate supply.
- C or d

About This Quiz

Test 3 Econ focuses on key economic concepts such as recessionary gaps, tax impacts, and aggregate demand shifts. It assesses understanding of Keynesian policies, crowding out, and fiscal interventions, crucial for students studying advanced economics.

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2.

97. Which piece of evidence is consistent with zero crowding out?
- Government purchases rise and Real GDP does not change.
- Government purchases rise and investment spending declines.
- Government purchases rise and net exports decline.
- Government purchases rise and consumption declines.
- None of the above
Correct Answer

A. None of the above

Explanation

The correct answer is "none of the above" because zero crowding out refers to a situation where an increase in government purchases does not lead to any changes in other components of the economy, such as investment spending, net exports, or consumption. In this case, all the given options indicate changes in other components of the economy, which is inconsistent with zero crowding out.

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3.

The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
- Rise; rise
- Rise; fall
- Fall; rise
- Fall; fall
Correct Answer

A. Fall; rise

Explanation

When government purchases (G) fall, it leads to a decrease in aggregate demand (AD) because there is less spending in the economy. This causes the AD curve to shift to the left. On the other hand, when taxes rise, it reduces disposable income for individuals and businesses, leading to a decrease in consumption and investment. This also causes a decrease in aggregate demand and shifts the AD curve to the left. Therefore, the correct answer is "fall; rise".

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4.

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.
- Increase in government spending
- Decrease in government spending
- Increase in taxes
- Decrease in taxes
- B or c
Correct Answer

A. B or c

Explanation

A Keynesian policy prescription would call for a decrease in government spending or an increase in taxes to close this inflationary gap. This is because Keynesian economics suggests that during periods of high aggregate demand, the government should reduce its own spending or increase taxes to reduce the overall level of demand in the economy. By doing so, it can help to bring the economy back to its natural real GDP level and prevent inflationary pressures.

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5.

96. Which of the following is not an example of crowding out?
- Government purchases rise, the budget deficit rises, the federal government's demand for loanable funds rises, the interest rate rises, and investment falls.
- Government spends more on X, prompting individuals to spend less on X.
- Taxes decline, the budget deficit rises, the federal government's demand for loanable funds rises, the interest rate rises, the demand rises for U.S. dollars, the dollar appreciates, and net exports decline.
- Business firms spend more on X, prompting households to spend less on Y.
- None of the above
Correct Answer

A. None of the above

Explanation

All of the given options are examples of crowding out. Crowding out refers to a situation where an increase in government spending or borrowing leads to a decrease in private sector spending or borrowing. In the first option, an increase in government purchases leads to a rise in the budget deficit, which increases the government's demand for loanable funds and raises the interest rate, causing a decrease in investment. In the second option, government spending on X prompts individuals to spend less on X, indicating a decrease in private sector spending. In the third option, a decline in taxes leads to a rise in the budget deficit, which increases the government's demand for loanable funds and raises the interest rate, causing a decrease in net exports. In the fourth option, an increase in business firms spending on X prompts households to spend less on Y, indicating a decrease in private sector spending. Therefore, none of the given options are not examples of crowding out.

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6.

The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
- Rise; rise
- Rise; fall
- Fall; rise
- Fall; fall
Correct Answer

A. Fall; rise

Explanation

When government purchases (G) fall, it means that the government is spending less on goods and services. This decrease in government spending causes a decrease in aggregate demand (AD), shifting the AD curve to the left. On the other hand, when taxes rise, it means that individuals and businesses have less disposable income to spend on goods and services. This decrease in consumer spending also leads to a decrease in aggregate demand, shifting the AD curve to the left. Therefore, a fall in government purchases (G) and a rise in taxes both lead to a leftward shift of the AD curve.

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7.

Which of the following illustrates the data lag?
- The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006.
- Policymakers wait and see what is really going on with the economy.
- Policymakers implement policy X on September 12, 2006, but the effects are not felt until six months later.
- The data lag is illustrated equally well by a, b, and c.
Correct Answer

A. The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006.

Explanation

The correct answer illustrates the data lag because it shows a situation where the economy experiences a downturn on a specific date, but policymakers only become aware of this downturn several months later. This delay in policymakers' understanding of the economic situation represents a data lag, as there is a gap between when the event occurs and when it is recognized and acted upon.

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8.

Suppose that government expenditures are currently $700 billion and tax revenues are currently $550 billion. Assume further that the government estimates that if the economy were operating at full employment government expenditures would only be $685 billion and tax revenues would be $600 billion. In this case, the total budget deficit is _____________ billion.
- $85
- $65
- $150
- $215
Correct Answer

A. $65

Explanation

The total budget deficit can be calculated by subtracting tax revenues from government expenditures. In this case, the government expenditures are $700 billion and tax revenues are $550 billion. If the economy were operating at full employment, government expenditures would be $685 billion and tax revenues would be $600 billion. Therefore, the total budget deficit is $700 billion - $550 billion = $150 billion.

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9.

Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the budget deficit?
- $116
- $284
- $140
- $144
Correct Answer

A. $284

Explanation

The budget deficit can be calculated by subtracting government revenues (taxes) from government expenditures. In this case, taxes are 18 percent of GDP, which is $6,200, resulting in taxes of $1,116. Government expenditures are given as $1,400. Therefore, the budget deficit is $1,400 - $1,116 = $284.

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10.

Suppose that government expenditures are currently $700 billion and tax revenues are currently $550 billion. Assume further that the government estimates that if the economy were operating at full employment government expenditures would only be $685 billion and tax revenues would be $600 billion. In this case, the structural deficit is _____________ billion.
- $85
- $65
- $150
- $215
Correct Answer

A. $85

Explanation

The structural deficit is calculated by subtracting the estimated tax revenues at full employment from the estimated government expenditures at full employment. In this case, the estimated tax revenues at full employment are $600 billion and the estimated government expenditures at full employment are $685 billion. Therefore, the structural deficit is $685 billion - $600 billion = $85 billion.

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11.

Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the structural deficit?
- $116
- $284
- $140
- $144
Correct Answer

A. $140

Explanation

The structural deficit is calculated by subtracting the potential GDP from the actual GDP and then multiplying it by the tax rate. In this case, the potential GDP is $7,000 and the actual GDP is $6,200, resulting in a difference of $800. The tax rate is 18%, so multiplying $800 by 18% gives us $144. However, since the question asks for the structural deficit, we need to consider that the government expenditures are $1,400. Subtracting $1,400 from $144 gives us a structural deficit of $140.

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12.

Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the cyclical deficit?
- $1,260
- $284
- $144
- $1,008
Correct Answer

A. $144

Explanation

The cyclical deficit is the difference between actual GDP and full-employment GDP, multiplied by the tax rate. In this case, the actual GDP is $6,200 and the full-employment GDP is $7,000, so the difference is $800. The tax rate is 18 percent, so multiplying $800 by 0.18 gives us $144, which is the cyclical deficit.

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13.

That part of the deficit due to output being below Natural Real GDP is called the __________ deficit.
- Net
- Gross
- Cyclical
- Structural
Correct Answer

A. Cyclical

Explanation

The part of the deficit due to output being below Natural Real GDP is called the cyclical deficit. This refers to the portion of the deficit that is caused by economic downturns or recessions, which lead to a decrease in production and income. During these periods, tax revenues are lower and government spending on programs like unemployment benefits increases, resulting in a cyclical deficit. This deficit is temporary and tends to decrease as the economy recovers.

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14.

The deficit that exists when the economy operates at full employment is called the __________ deficit.
- Net
- Gross
- Cyclical
- Structural
Correct Answer

A. Structural

Explanation

The deficit that exists when the economy operates at full employment is called the structural deficit. This type of deficit occurs due to long-term imbalances between government spending and revenue, which are not influenced by changes in the business cycle. Unlike cyclical deficits, which are temporary and caused by economic downturns, structural deficits require structural changes in government policies or revenue sources to be resolved.

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15.

Which of the following statements is true?
- A budget deficit occurs when government expenditures exceed tax receipts during any single year.
- The public debt is the total amount the federal government owes its creditors.
- The gross public debt is greater than the net public debt.
- B and c
- A, b, and c
Correct Answer

A. A, b, and c

Explanation

The correct answer is a, b, and c.

This answer is correct because it states that a budget deficit occurs when government expenditures exceed tax receipts during any single year, which is true. It also states that the public debt is the total amount the federal government owes its creditors, which is also true. Lastly, it states that the gross public debt is greater than the net public debt, which is also true. Therefore, all three statements in the answer are true.

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16.

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
- Regressive income tax structure.
- Proportional income tax structure.
- Progressive income tax structure.
- Cyclical income tax structure.
Correct Answer

A. Progressive income tax structure.

Explanation

The given tax structure is considered progressive because it imposes a higher tax rate on individuals with higher incomes. The first tax rate of 16 percent applies to individuals earning between $0 and $40,000 a year, while the second tax rate of 23 percent applies to individuals earning more than $40,000 a year. This means that as income increases, the tax rate also increases, making it a progressive structure.

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17.

Jim and Janet each buy a computer and each pays $200 in sales taxes. Jim's annual income is $40,000 and Janet's annual income is $60,000. The sales tax is
- Progressive
- Cyclical
- Proportional.
- Regressive
Correct Answer

A. Regressive

Explanation

The sales tax in this scenario is regressive. This means that regardless of the income level, both Jim and Janet pay the same amount of $200 in sales taxes. Since Jim's income is lower than Janet's, the sales tax represents a larger proportion of his income compared to Janet's. Therefore, the burden of the sales tax falls more heavily on Jim, making it a regressive tax.

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18.

A "flat tax" is another term for __________ tax.
- A progressive
- A proportional
- A regressive
- The inflation
Correct Answer

A. A proportional

Explanation

A "flat tax" is a term used to describe a tax system where the tax rate remains the same regardless of the individual's income level. This means that everyone, regardless of their income, pays the same percentage of their income in taxes. Therefore, a "flat tax" is synonymous with a proportional tax, as both terms refer to a tax system where the tax rate remains constant.

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19.

The U.S. income tax is currently a __________ tax.
- Progressive
- Proportional
- Regressive
- Proactive
Correct Answer

A. Progressive

Explanation

The U.S. income tax is currently a progressive tax. This means that the tax rate increases as the income level increases. It is based on the principle of ability to pay, where higher-income individuals are taxed at a higher rate compared to lower-income individuals. This progressive tax system aims to reduce income inequality and provide more support for those who may have less financial means.

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20.

The top 1% of income earners in the U.S. (those with the highest taxable incomes) pay
- About the same percentage of their incomes in tax as the average U.S. taxpayer.
- A much lower percentage of their incomes in tax than the average U.S. taxpayer.
- A much higher percentage of their incomes in tax than the average U.S. taxpayer.
- About 15 percent of their incomes in income taxes
- A and d
Correct Answer

A. A much higher percentage of their incomes in tax than the average U.S. taxpayer.

Explanation

The top 1% of income earners in the U.S. pay a much higher percentage of their incomes in tax than the average U.S. taxpayer. This means that the wealthiest individuals contribute a larger portion of their income towards taxes compared to the average taxpayer.

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21.

What are the two types of discretionary fiscal policy?
- Automatic and expansionary
- Expansionary and contractionary
- Expansionary and recessionary
- Automatic and contractionary
Correct Answer

A. Expansionary and contractionary

Explanation

The correct answer is expansionary and contractionary. Discretionary fiscal policy refers to the deliberate changes in government spending and taxation to influence the economy. Expansionary fiscal policy involves increasing government spending and/or reducing taxes to stimulate economic growth and increase aggregate demand. On the other hand, contractionary fiscal policy involves decreasing government spending and/or increasing taxes to slow down economic growth and reduce inflationary pressures. These two types of fiscal policy are used by governments to manage the overall economic conditions of a country.

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22.

If the economy is on the downward-sloping portion of the Laffer curve, a(an) __________ in tax rates will __________ tax revenues.
- Decrease; lower
- Increase; raise
- Decrease; raise
- Decrease; not change
- Increase; not change
Correct Answer

A. Decrease; raise

Explanation

When the economy is on the downward-sloping portion of the Laffer curve, decreasing tax rates will raise tax revenues. This is because lower tax rates incentivize economic activity and growth, leading to increased tax revenue despite the decrease in rates.

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23.

If there is complete crowding out, the effective value of the multiplier is
- Zero
- One
- Infinite
- There is not enough information to answer the question.
Correct Answer

A. Zero

Explanation

Complete crowding out refers to a situation where an increase in government spending is offset by an equal decrease in private sector spending, resulting in no net increase in overall economic activity. In this scenario, the effective value of the multiplier, which measures the impact of government spending on the economy, would be zero. This means that the initial increase in government spending does not lead to any additional economic growth or stimulus, as it is completely offset by reduced private sector spending.

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24.

A curve showing the relationship between tax rates and tax revenues is called a __________ curve.
- Phillips
- Keynesian
- Gaussian
- Laffer
Correct Answer

A. Laffer

Explanation

A curve showing the relationship between tax rates and tax revenues is called a Laffer curve. The Laffer curve illustrates the concept that at a certain point, increasing tax rates beyond a certain threshold can actually lead to a decrease in tax revenues. This is because higher tax rates can discourage economic activity and incentivize tax evasion. The curve is named after economist Arthur Laffer, who popularized this idea in the 1980s.

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25.

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.
- Average
- Fixed
- Total
- Marginal
Correct Answer

A. Marginal

Explanation

The correct answer is "marginal" because the question states that the individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income. This indicates that the tax rate is calculated based on the additional income earned, which is the definition of a marginal tax rate.

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26.

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.
- Data
- Wait-and-see
- Legislative
- Transmission
Correct Answer

A. Transmission

Explanation

The period between the passage of legislation reducing taxes and the actual implementation of the tax cut is referred to as the "transmission lag." During this time, there is a delay in the execution of the tax cut, as various administrative and bureaucratic processes need to be completed before it can take effect. The term "transmission" suggests the transfer or dissemination of the tax cut from the legislation to its actual implementation.

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27.

Elaine's taxable income increases by $1 and her tax payment increases by $0.28. Her marginal tax rate is
- 72 percent.
- 28 percent.
- 56 percent.
- There is not enough information to answer the question.
Correct Answer

A. 28 percent.

Explanation

If Elaine's taxable income increases by $1 and her tax payment increases by $0.28, it means that her marginal tax rate is $0.28/$1, which is equal to 0.28 or 28%. This indicates that for every additional dollar of taxable income, Elaine is required to pay 28% as taxes. Therefore, the correct answer is 28 percent.

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28.

Refer to Exhibit 11-2. Compare points A and B. Which of the following is true?
- At A and B, the tax rates are the same, but tax revenues are different.
- At A tax rates are higher than at B, but tax revenues are the same.
- At B tax rates are higher than at A, but tax revenues are the same.
- None of the above
Correct Answer

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

Explanation

At point B, the tax rates are higher than at point A, but the tax revenues are the same. This can be inferred from the information given in the exhibit.

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29.

Refer to Exhibit 11-2. At point A, if we cut tax rates slightly, tax revenues
- Increase.
- Decrease
- Will not change.
- Drop to zero.
Correct Answer

A. Decrease

Explanation

At point A, if tax rates are cut slightly, it is expected that tax revenues will decrease. This is because when tax rates are reduced, individuals and businesses have less incentive to pay taxes. As a result, they may engage in tax avoidance or evasion strategies, leading to a decrease in overall tax revenues.

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30.

Refer to Exhibit 11-2. At point B, if we cut tax rates slightly, tax revenues
- Increase
- Decrease
- Will not change.
- Drop to zero.
Correct Answer

A. Increase

Explanation

At point B, if tax rates are cut slightly, tax revenues would increase. This is because when tax rates are reduced, it incentivizes individuals and businesses to engage in economic activities, such as spending and investing, which ultimately leads to higher taxable income and increased tax revenues. Therefore, cutting tax rates at point B would result in an increase in tax revenues.

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31.

Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is complete crowding out. As a result, the aggregate demand (AD) curve in the exhibit
- Maintains its present position at AD1.
- Shifts rightward, but does not shift rightward by enough to go through point 2.
- Shifts rightward by enough to go through point 2.
- Shifts leftward.
Correct Answer

A. Maintains its present position at AD1.
32.

Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose
- An increase in government purchases.
- A decrease in government purchases.
- An increase in taxes.
- A and c
Correct Answer

A. An increase in government purchases.

Explanation

Keynesian economists believe that during a recession, when the economy is below full employment, government intervention is necessary to stimulate economic growth. They argue that increasing government purchases, such as infrastructure projects or public spending, can create jobs and increase aggregate demand, leading to economic expansion. Therefore, in the given situation where the economy is at point 1, Keynesian economists would most likely propose an increase in government purchases to boost the economy.

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33.

9. An expansionary fiscal policy will
- Always result in a budget deficit.
- Always result in a budget surplus.
- Sometimes result in a budget deficit.
- Never result in a budget surplus.
- More information is necessary to answer this question.
Correct Answer

A. Sometimes result in a budget deficit.

Explanation

An expansionary fiscal policy involves increasing government spending and/or decreasing taxes in order to stimulate economic growth. This can lead to increased government expenditures and decreased revenue, which may result in a budget deficit. However, it is not always guaranteed to result in a budget deficit as the impact of the policy depends on various factors such as the state of the economy, the effectiveness of the policy measures, and the government's ability to manage its finances. Therefore, an expansionary fiscal policy can sometimes result in a budget deficit.

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34.

110. 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; a lower; the same
- A higher; the same; a lower
- A lower; a higher; the same
- The same; a lower; a higher
- The same; a higher; a lower
Correct Answer

A. A higher; the same; a lower

Explanation

In a progressive income tax structure, the taxpayer pays a higher tax rate on additional income. This means that as the taxpayer's income increases, the tax rate also increases. In a proportional income tax structure, the taxpayer pays the same tax rate on additional income. This means that regardless of the taxpayer's income level, the tax rate remains constant. In a regressive income tax structure, the taxpayer pays a lower tax rate on additional income. This means that as the taxpayer's income increases, the tax rate decreases.

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35.

92. The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable?
- No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and if the increase in tax revenues equals the increase in government purchases there is no deficit.
- Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues.
- No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and if the decrease in tax revenues is less than the increase in government purchases there is no deficit.
- Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and higher interest rates discourage investment spending.
Correct Answer

A. Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues.

Explanation

A cut in tax rates on the upward-sloping portion of the Laffer curve will lower tax revenues. If government purchases are increased, it will further increase government spending. As a result, the combination of lower tax revenues and increased government purchases will lead to a budget deficit.

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36.

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $20,000, how much does he pay in taxes?
- $180 $18,000 $180
- $2,000
- $18,000
- $1,800
Correct Answer

A. $1,800

Explanation

Based on the given tax brackets, if a person's taxable income is $20,000, they fall into the first bracket of $0 - $23,000. In this bracket, the tax rate is 9% of taxable income. Therefore, the person would pay 9% of $20,000, which is $1,800.

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37.

8. __________ flows from government to households.
- A transfer payment
- A tax payment
- The Laffer Curve
- Crowding out
Correct Answer

A. A transfer payment

Explanation

A transfer payment is a payment made by the government to households without any corresponding goods or services being provided in return. This type of payment is typically used to redistribute income and provide assistance to individuals or families in need. Transfer payments include programs such as social security, unemployment benefits, and welfare. Unlike tax payments, which are payments made by households to the government, transfer payments flow from the government to households. The Laffer Curve and crowding out are unrelated concepts and not applicable to this question.

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38.

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $30,000, how much does he pay in taxes?
- $1,345
- $1,950
- $3,900
- $2,980
Correct Answer

A. $2,980

Explanation

Based on the given tax brackets, if a person's taxable income is $30,000, they fall into the second tax bracket. In this bracket, they pay a fixed amount of $2,070 plus 13% of everything over $23,000. Therefore, they would pay $2,070 + (13% of $7,000) = $2,070 + $910 = $2,980 in taxes.

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39.

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $50,000, how much does he pay in taxes?
- $3,760
- $8,500
- $5,900
- $6,840
Correct Answer

A. $5,900

Explanation

Based on the given tax brackets, if a person's taxable income is $50,000, they fall into the $42,001 - $69,000 bracket. In this bracket, they would owe $4,540 plus 17% of everything over $42,000. So, the calculation would be $4,540 + (17% of ($50,000 - $42,000)). Simplifying this calculation gives $4,540 + (17% of $8,000) = $4,540 + $1,360 = $5,900. Therefore, the person would pay $5,900 in taxes.

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40.

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $60,000, how much does he pay in taxes?
- $7,600.
- $10,200.
- $8,780.
- $15,300.
Correct Answer

A. $7,600.

Explanation

Based on the tax brackets provided in Exhibit 11-4, if a person's taxable income is $60,000, they fall into the $42,001 - $69,000 bracket. In this bracket, they would pay $4,540 plus 17% of everything over $42,000. Therefore, the calculation would be $4,540 + (17% x ($60,000 - $42,000)) = $7,600.

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41.

If the structural deficit is $330 billion and the cyclical deficit is $80 billion, it follows that the __________ is __________ billion.
- Public debt; $410
- Total budget deficit; $250
- Total budget deficit; $410
- Net public debt; $250
- None of the above
Correct Answer

A. Total budget deficit; $410

Explanation

The structural deficit represents the portion of the budget deficit that exists even when the economy is at full employment, while the cyclical deficit represents the portion of the deficit that is due to fluctuations in the business cycle. Therefore, the total budget deficit is the sum of the structural deficit and the cyclical deficit. In this case, since the structural deficit is $330 billion and the cyclical deficit is $80 billion, the total budget deficit would be $410 billion.

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42.

If an economy has a structural surplus and a cyclical deficit, it may be concluded that
- Fiscal policy is expansionary.
- Fiscal policy is contractionary.
- The economy is in a boom.
- The economy is in a recession.
Correct Answer

A. Fiscal policy is contractionary.

Explanation

If an economy has a structural surplus, it means that the government's revenue exceeds its expenditure, indicating a long-term budget surplus. On the other hand, a cyclical deficit suggests that the economy is experiencing a downturn or recession, leading to a temporary decrease in government revenue and an increase in expenditure due to automatic stabilizers. Therefore, the presence of both a structural surplus and a cyclical deficit implies that the government is implementing contractionary fiscal policy to reduce the deficit and stabilize the economy.

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43.

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Use the information provided in Exhibit 11-4. What is the marginal tax rate on the 23,000th dollar earned?
- 9%
- 13%
- 17%
- It is impossible to determine the answer to this question.
Correct Answer

A. 9%

Explanation

The marginal tax rate on the 23,000th dollar earned is 9%. This is because according to the given tax brackets, the tax rate for the income range of $0 - $23,000 is 9% of taxable income. Since the 23,000th dollar falls within this income range, the marginal tax rate for that dollar would be 9%.

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44.

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.
- Effectiveness
- Transmission
- Legislative
- Data
Correct Answer

A. Effectiveness

Explanation

The lag between an increase in government spending and the impact of this increased spending on the economy is called the "effectiveness" lag. This refers to the time it takes for the government's spending to have a noticeable effect on the overall economy. It takes time for the increased spending to be implemented and for the economy to respond to it, which is why there is a lag between the two.

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45.

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.
- Data
- Wait-and-see
- Legislative
- Transmission
Correct Answer

A. Transmission

Explanation

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the "transmission" lag. This refers to the delay or time gap between the decision to reduce taxes and the actual implementation of the tax cut. During this lag period, the necessary administrative and operational processes are carried out to ensure the smooth and effective implementation of the tax cut.

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46.

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.
- Average
- Fixed
- Total
- Marginal
Correct Answer

A. Marginal

Explanation

The given scenario describes the marginal tax rate. The individual pays an additional $0.30 in taxes for every $1.00 increase in income. This means that the tax rate is calculated based on the last dollar earned, which is the definition of the marginal tax rate.

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47.

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.
- Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.
- Policymakers first learn of the recession when it is five months old.
- Policymakers implement policy X, but it will be a few months before it starts working.
- Policymakers agree to policy X, but it will be at least two months before the policy is implemented.
Correct Answer

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

Explanation

The wait-and-see lag refers to policymakers delaying taking action until they have concrete evidence or confirmation of a situation. In this case, policymakers believe an economic downturn has occurred, but they choose to wait and gather more information before implementing any measures. This illustrates the wait-and-see lag because they are hesitant to take immediate action and prefer to wait until they are certain about the situation.

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48.

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
- Incomplete crowding out.
- Complete crowding out.
- Zero crowding out.
- A and c
- None of the above
Correct Answer

A. Complete crowding out.

Explanation

This scenario illustrates complete crowding out because the increase in government spending on public education is exactly offset by the decrease in individual spending on private education. As a result, there is no net increase in overall education spending in the economy. This suggests that government intervention has fully replaced private sector activity in this particular context.

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49.

Fiscal policy may not work as policymakers intend it to work because of
- Crowding out.
- Lags
- The position of the physical production possibilities frontier.
- A and b
- A, b, and c
Correct Answer

A. A and b

Explanation

Fiscal policy may not work as policymakers intend it to work due to two reasons: crowding out and lags. Crowding out occurs when increased government spending leads to higher interest rates, reducing private sector investment. This can limit the effectiveness of fiscal policy in stimulating economic growth. Lags refer to the time it takes for fiscal policy measures to have their full impact on the economy. Delays in implementing and experiencing the effects of fiscal policy can make it less effective in achieving its intended goals. Therefore, options a and b are correct as they explain the reasons why fiscal policy may not work as intended.

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Test 3 Econ

94. Both Jones and Smith agree that the economy is in a recessionary gap. Jones proposes a tax cut. Smith couldn't agree more. Jones says that lower taxes will result in higher Real GDP. Again, Smith couldn't agree more. It follows that

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97. Which piece of evidence is consistent with zero crowding out?

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

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.

96. Which of the following is not an example of crowding out?

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

Which of the following illustrates the data lag?

Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the budget deficit?

Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the structural deficit?

Suppose government expenditures = $1,400, taxes are a flat 18 percent of GDP, GDP = $6,200, and full-employment GDP = $7,000. What is the cyclical deficit?

That part of the deficit due to output being below Natural Real GDP is called the __________ deficit.

The deficit that exists when the economy operates at full employment is called the __________ deficit.

Which of the following statements is true?

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

Jim and Janet each buy a computer and each pays $200 in sales taxes. Jim's annual income is $40,000 and Janet's annual income is $60,000. The sales tax is

A "flat tax" is another term for __________ tax.

The U.S. income tax is currently a __________ tax.

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

What are the two types of discretionary fiscal policy?

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

If there is complete crowding out, the effective value of the multiplier is

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

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.

Elaine's taxable income increases by $1 and her tax payment increases by $0.28. Her marginal tax rate is

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

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

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

Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and there is complete crowding out. As a result, the aggregate demand (AD) curve in the exhibit

Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose

9. An expansionary fiscal policy will

110. 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.

92. The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable?

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $20,000, how much does he pay in taxes?

8. __________ flows from government to households.

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $30,000, how much does he pay in taxes?

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $50,000, how much does he pay in taxes?

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Refer to Exhibit 11-4. If a person’s taxable income is $60,000, how much does he pay in taxes?

If the structural deficit is $330 billion and the cyclical deficit is $80 billion, it follows that the __________ is __________ billion.

If an economy has a structural surplus and a cyclical deficit, it may be concluded that

Taxable Income Taxes $0 - $23,000 9% of taxable income $23,001 - $42,000 $2,070 + 13% of everything over $23,000 $42,001 - $69,000 $4,540 + 17% of everything over $42,000 Use the information provided in Exhibit 11-4. What is the marginal tax rate on the 23,000th dollar earned?

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

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.

If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, that individual has a(n) __________ tax rate of 30 percent.

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

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

Fiscal policy may not work as policymakers intend it to work because of

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

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

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

110. 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.

If the structural deficit is $330 billion and the cyclical deficit is $80 billion, it follows that the is billion.