SOLVED

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) Proponents of spending on infrastructure as a means to stimulate the economy note that the multiplier effect for ________ is estimated to be larger than the multiplier effect for ________, and would therefore have a greater impact on expanding GDP. A) increases in government spending; tax cuts B) tax increases; increases in government spending C) decreases in government spending; a balanced budget D) a balanced budget; tax increases 7) An increase in the tax wedge associated with a given economic activity will decrease the level of that activity. 8) The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect. 9) The double taxation problem occurs because households pay taxes on dividends and capital gains from stock and corporations pay taxes on corporate profits. 10) What is the “tax wedge”?