Dropbox - CH 29 Fiscal Policy - University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor Michael G Lanyi

Dropbox - CH 29 Fiscal Policy - University of Lethbridge...

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Unformatted text preview: University of Lethbridge — Department of Economics ECON 1012 — Introduction to Microeconomics Instructor: Michael G. Lanyi Chapter 29 — Fiscal Policy 1) If revenues exceed outlays, the government's budget balance is and the government has a budget A) positive; deficit B) negative; surplus C) positive; surplus D) negative; deficit E) zero; deficit Topic: Government Budgets 2) If outlays exceed revenues, the government's budget balance is , and the government has a budget A) negative; surplus B) negative; deficit C) zero; surplus D) positive; surplus E) positive; deficit Topic: Government Budgets 3) Government debt is A) always increasing. B) the result of a rising price level. C) the total amount of government borrowing. D) a phenomena that occurs only during times of war. E) equal to revenues minus outlays. Topic: Government Budgets 4) All of the following statements are true except A) revenues include corporate income taxes, personal income taxes; indirect taxes and investment income. B) the main source of fluctuations in revenues is corporate income taxes. C) total revenues have no strong trends. D) indirect taxes decreased during the 19905 due to the introduction of the GST. E) total revenues increased through the 1960s and 19805. Topic: Govermnent Budgets 5) All of the following statements are true except A) outlays increased steadily from 1971 through 1985. B) the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest. C) debt interest has been steadily increasing since 1960. D) expenditures on goods and services have a downward trend. E) transfer payments decreased sharply during the 1990s. Topic: Government Budgets 6) Choose the correct statement A) The debt—to—GDP ratio was 18 percent in 1974 . B) The debt—to—GDP ration increased dramatically between 1981 and 1986 . C) The government debt increases when the government has a budget deficit. D) The federal government debt was 113 percent of GDP in 1945. E) All of the above. Topic: Government Budgets 7) During the 19805 and 19905 in Canada, A) personal income taxes as a percentage of GDP decreased. B) total revenues as a percentage of GDP increased by over 5 percent. C) indirect taxes as a percentage of GDP increased steadily. D) investment income as a percentage of GDP increased. E) none of the above. Topic: Government Budgets 8) Between 1981 and 1986, the federal government debt A) averaged 80 percent of GDP. B) fluctuated widely in value, but exhibited no trend. C) fell substantially. D) remained constant. E) rose dramatically in value. Topic: Government Budgets 9) The main components of goverrunent revenues are A) corporate income taxes, indirect taxes, and transfer payments. B) debt interest, corporate income taxes, and income taxes. C) transfer payments, investment income, and indirect taxes. D) personal income taxes, corporate income taxes, indirect taxes, and investment income. E) debt interest, expenditures on goods and services, and income taxes. Topic: Government Budgets 10) The category of federal government revenues that fluctuates the most is A) investment income. B) debt interest. C) personal income taxes. D) indirect taxes. E) transfer payments. Topic: Government Budgets 11) Suppose the government starts with a debt of $0. Then in year 1, there is a deficit of $100 billion, in year 2 there is a deficit of $60 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a deficit of $20 billion. What is government debt at the end of year 4? A) $140 billion. B) $180 billion. C) Somewhat greater than $140 billion, depending on the interest rate. D) Somewhat greater than $220 billion, depending on the interest rate. E) $20 billion. Topic: Government Budgets 12) Which of the following would not increase the budget deficit? A) an increase in government transfer payments B) an increase in indirect taxes C) an increase in govenment expenditures on goods and services D) an increase in interest on the government debt E) a decrease in investment income Topic: Government Budgets 13) Fiscal policy is A) any policy by the Bank of Canada. B) effective only when the federal government has a budget surplus. C) the use of the federal budget to achieve macroeconomic objectives. D) budgeting policy by aggregate households. E) any attempt by the federal government or Bank of Canada to control inflation. Topic: Government Budgets 14) Which of the following is not a source of government revenues? A) transfer payments B) corporate income taxes C) investment income D) indirect taxes E) personal income taxes Topic: Government Budgets 15) Which of the following is not a source of government revenues? A) personal income taxes B) indirect taxes C) corporate income taxes D) investment income E) transfer payments Topic: Government Budgets 16) Which of the following is a government outlay? A) investment income B) corporate income taxes C) indirect taxes D) debt interest E) personal income taxes Topic: Government Budgets 17) As a percentage of provincial GDP, provincial government outlays are highest in A) Alberta. B) the Yukon Territory. C) Quebec. D) Newfoundland and Labrador. E) Nunavut. Topic: Government Budgets 18) What are the main categories of the federal government outlays? A) investment income, debt interest and transfer payments B) transfer payments, expenditures on goods and services, and debt interest C) indirect taxes, farmers' subsidies, and debt interest D) personal income taxes, expenditures on goods and services, and debt interest E) none of the above Topic: Government Budgets 19) Outlays as a percentage of provincial GDP are the highest in , whereas the largest transfers from the federal government are made to . A) Northern Canada; Northern Canada and the Atlantic provinces B) Northern Canada and the Atlantic provinces; Quebec C) British Columbia; Northern Canada and the Atlantic provinces D) Ontario; Northern Canada and the Atlantic provinces E) Alberta; Northern Canada and the Atlantic provinces Topic: Government Budgets 20) The government of Ricardia's budget lists the following projected revenues and outlays: $25 million in personal income taxes, $15 million in corporate income taxes, $5 million in indirect taxes, $2 million in investment income, $30 million in transfer payments, $12 million in government expenditure, and $8 million in debt interest. Ricardia has a government budget A) surplus of $3 million. B) deficit of $3 million. C) deficit of $13 million. D) surplus of $57 million. E) surplus of $13 million. Topic: Government Budgets 21) The largest source of revenues for the federal government is A) expenditures on goods and services. B) indirect taxes such as the GST. C) corporate income taxes. D) personal income taxes. E) transfer payments. Topic: Government Budgets 22) An increase in income taxes A) decreases potential GDP because workers' incentives to work are weakened. B) does not affect potential GDP because the potential GDP depends on technology only. C) decreases potential GDP because real GDP decreases when households have less disposable income to spend. D) does not affect potential GDP as long as the economy's endowments of resources and the state of technology remain unchanged. E) increases potential GDP because workers have to work longer hours to maintain the same standard of living before the tax increase. Topic: Supply Side Effects of Fiscal Policy 23) A tax cut on capital income A) does not affect potential GDP because it has no impact on the supply of labour. B) increases potential GDP because the supply of loanable funds increases. C) does not affect potential GDP because the interest rate affects aggregate expenditure only. D) increases potential GDP because households have more disposable income to spend. E) increases potential GDP because workers have greater incentives to work. Topic: Supply Side Effects of Fiscal Policy 24) Consider all the effects of fiscal policy. A cut in the income tax A) shifts the AD curve rightward but does not shift either the LAS or SAS curve. B) shifts the LAS curve rightward but does not shift either the AD or SAS curve. C) shifts the SAS curve rightward but does not shift either the AD or LAS curve. D) shifts both the SAS and LAS curves rightward but does not shift the AD curve. E) shifts the AD, SAS, and LAS curves rightward. Topic: Supply Side Effects of Fiscal Policy 25) Consider all the effects on fiscal policy. A cut in the tax on capital income A) shifts the AD curve rightward. B) shifts the SAS curve rightward. C) shifts the LAB curve rightward. D) all of the above. E) only B and C. Topic: Supply Side Effects of Fiscal Policy 26) Consider all the effects of fiscal policy. An income tax cut A) increases real GDP but decreases the price level. B) increases real GDP but leaves the price level unchanged. C) increases real GDP and the price level may rise or fail. D) increases both real GDP and the price level. E) does not change real GDP or the price level. Topic: Supply Side Effects of Fiscal Policy 27) An income tax cut that provides a greater incentive to work than an alternative tax cut will result in comparatively A) the same level of long—run real GDP and a lower price level. B) the same level of long—run real GDP and price level. C) higher long—run real GDP and a lower price level. D) the same level of long—run real GDP and a higher price level. E) higher long—run real GDP and a higher price level. Topic: Supply Side Effects of Fiscal Policy 28) If the nominal interest rate is 11 %, the inflation rate is 4% and the tax rate is 25%, what is the real after —tax interest rate? A) 4.25% B) —1.25% C) 5.25% D) 10% E) 8% Topic: Supply Side Effects of Fiscal Policy 29) The Laffer Curve has been criticized by mainstream economists because A) tax cuts are just spent, not saved as predicted by the theory. B) empirically, tax cuts have not led to higher tax revenues. C) higher tax rates do not create negative incenIive effects. D) there is no theoretical possibility of higher tax rates leading to lower tax revenues. E) savers look only at real interest rates, not nominal interest rates. Topic: Supply Side Effects of Fiscal Policy 30) An income tax potential GDP by shifting the labour curve A) decreases; supply; leftward B) increases; supply curve and labour demand curve; rightward C) increases; demand; rightward D) increases; supply; rightward E) decreases; demand; rightward Topic: Supply Side Effects of Fiscal Policy 31) If we compare Canada to France and the United Kingdom, Canada's tax wedge is the French tax wedge and the U.K. tax wedge. A) smaller than; smaller than B) larger than; larger than C) smaller than; larger than D) equal to; larger than E) larger than; smaller than Topic: Supply Side Effects of Fiscal Policy 32) The difference between the before —tax and after—tax rates is the A) tax plug. B) deadweight loss. C) taxation penalty. D) deadweight gain. E) tax wedge. Topic: Supply Side Effects of Fiscal Policy 33) If we compare the United States to France, we see that potential GDP per person in France is than that in the United States because the French tax wedge is than the U.S. tax wedge. A) greater; larger B) greater; smaller C) less; smaller D) less; larger E) none of the above Topic: Supply Side Effects of Fiscal Policy 34) Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. The real after —tax interest rate is A) 3.5 percent. B) 3.0 percent. C) 4.0 percent. D) —3.5 percent. E) —0.5 percent. Topic: Supply Side Effects of Fiscal Policy 35) Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. The real after —tax interest rate is A) 0.5 percent. B) —0.5 percent. C) 2.0 percent. D) 3.5 percent. E) 4.0 percent. Topic: Supply Side Effects of Fiscal Policy 36) The Laffer curve is the relationship between A) government outlays and revenues. B) the tax rate and potential GDP. C) the tax rate and the amount of tax revenue. D) government expenditure and potential GDP. E) tax revenue and potential GDP. Topic: Supply Side Effects of Fiscal Policy 37) According to the Laffer curve, raising the tax rate A) might increase, decrease, or not change the amount of tax revenue. B) always increases the amount of tax revenue. C) has no effect on the amount of tax revenue. D) always decreases the amount of tax revenue. E) does not change the amount of tax revenue. Topic: Supply Side Effects of Fiscal Policy 38) The Laffer curve shows that increasing increases when low. A) potential GDP; tax revenue; tax revenue is B) tax revenue; potential GDP; tax revenue is C) investment; potential GDP; the interest rate is D) the tax rate; tax revenue; the tax rate is E) government outlays; the budget deficit; government expenditure is Topic: Supply Side Effects of Fiscal Policy 39) An increase in the tax on capital income the supply of loanable funds and investment. A) decreases; decreases B) increases; increases C) decreases the demand for loanable funds; decreases or increases D) increases; decreases E) decreases; increases Topic: Supply Side Effects of Fiscal Policy 40) Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. The government budget the supply of loanable funds, which the real interest rate and investment. A) deficit decreases; raises; decreases B) surplus decreases; raises; increases C) surplus increases; raises; decreases D) surplus increases; lowers; decreases E) surplus increases; lowers; increases Topic: Supply Side Effects of Fiscal Policy 41) Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. in government expenditure or in taxes will further increase China's budget increase investment and speed economic growth. A) An increase; an increase; surplus B) A decrease; an increase; deficit C) An increase; a decreases; deficit D) A decrease; an increase; surplus E) A decrease; a decrease; deficit Topic: Supply Side Effects of Fiscal Policy 42) The government is proposing to increase the tax rate on labour income and asks you to report on the supply—side effects of such an action. According to the research of Edward C. Prescott, cross—country evidence for Canada, the United States, the United Kingdom, and France shows all of the following except A) potential GDP per person in France is 14 percent below that of the United States {per person) and the entire difference can be attributed to the difference in the tax wedge in the two countries B) between Canada, the United States, France, and the United Kingdom, the tax wedge is greatest in the United Kingdom, and the country with the smallest tax wedge has the smallest potential GDP C) potential GDP per person in Canada is 16 percent below that of the United States but this difference is due to different productivities D) the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP E) potential GDP per person in the United Kingdom is 41 percent below that of the United States (per person) and about a third of the difference arises from the different tax wedges Topic: Supply Side Effects of Fiscal Policy 43) The government increases the tax rate on labour income and at the same time cuts the rate of sales tax to keep the amount of tax collected constant. As a result, the supply of labour the demand for labour and the equilibrium level of employment . The before —tax wage rate and the after —tax wage rate . Potential GDP A) decreases; does not change; decreases; rises; falls; decreases B) decreases; increases; does not change; rises; falls; does not change C) decreases; decreases; decreases; rises; falls; decreases D) does not change; increases; increases; does not change; decreases; increases E) does not change; does not change; does not change; does not change; does not change; does not change Topic: Supply Side Effects of Fiscal Policy 44) The government increases the tax rate on labour income. As a result, the supply of labour and the demand for labour . The equilibrium level of employment A) decreases; does not change; decreases B) does not change; decreases; decreases C) does not change; decreases; decreases D) decreases; decreases; decreases E) decreases; increases; does not change Topic: Supply Side Effects of Fiscal Policy 45) The government increases the tax rate on labour income. At the equilibrium level of employment, the before —tax wage rate and the after —tax wage rate . Potential GDP A) falls; rises; does not change B) rises; falls; decreases C) rises; falls; does not change D) falls; rises; decreases E) rises; falls; increases Topic: Supply Side Effects of Fiscal Policy 46) Which one of the following statements is true, using absolute values? The autonomous tax multiplier A) is larger than the government expenditure multiplier. B) is smaller than the government expenditure multiplier. C) always equals the government expenditure multiplier. D) is larger than the government expenditure multiplier during expansions. E) has the same value as the government expenditure multiplier except during recessions. Topic: Stabilizing the Business Cycle 47) Which of the following are automatic stabilizers? A) induced taxes B) transfer payments C) exports D) investment E) A and B Topic: Stabilizing the Business Cycle 48) An automatic stabilizer works by A) decreasing fluctuations in aggregate expenditure and decreasing fluctuations in real GDP. B) increasing fluctuations in aggregate expenditure and decreasing fluctuations in real GDP. C) making the aggregate supply ourve steeper which decreases fluctuations in real GDP. D) decreasing fluctuations in aggregate expenditure and increasing fluctuations in real GDP. E) increasing fluctuations in aggregate expenditure and increasing fluctuations in real GDP. Topic: Stabilizing the Business Cycle 49) Due to automatic stabilizers, when income rises A) government outlays fall and revenues rise. B) the economy will automatically move to full employment. C) government outlays rise and revenues fall. D) the economy will automatically return to its original level of real GDP. E) government outlays equal revenues. Topic: Stabilizing the Business Cycle 50) Due to automatic stabilizers, when real GDP increases, the A) government budget deficit increases or the govermnent budget surplus decreases. B) the economy will automatically move to full employment. C) the price level remains constant. D) goverrunent budget remains in balance. E) goverrunent budget deficit decreases or the government budget surplus increases. Topic: Stabilizing the Business Cycle 51) Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes 2 $25 billion + 0.1(real GDP). What are autonomous taxes in Ricardia? A) $25 billion B) It depends on the level of real GDP. C) $2.5 billion D) $250 billion E) 0.1 Topic: Stabilizing the Business Cycle 52) Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes 2 $25 billion + 0.1(real GDP). What is the real GDP when the government has a balanced budget? A) $250 B) $100 C) $1,250 billion D) $750 billion E) $1,000 billion Topic: Stabilizing the Business Cycle 53) If the economy is in a recession, and the government has a budget deficit, then there A) may be either a structural surplus or deficit. B) must be a structural surplus. C) may be a structural deficit, but not a structural surplus. D) may be a structural surplus, but not a structural deficit. E) must be a structural deficit. Topic: Stabilizing the Business Cycle 54) The structural deficit is the defic...
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