SEG 2510 Tutorial 4

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SEG 2510 Tutorial 4

• 5/11/2007

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• A. Illustrate graphically an unemployment
  equilibrium and explain how downwardly sticky
  wages and prices can prevent the economy from
  reaching the long-run macro equilibrium.

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• The economy start at point A, with a price level
  that is too high to reach full-employment output.
  In the long run, that price level will fall, but
  wage and price stickiness might prevent it from
  doing so in short run.
• A

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• B. Explain the appropriate fiscal policy response
  when the economy overheats.

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• When the economy is overheat, the appropriate
  fiscal policy should be reducing aggregate
  expenditures by increasing the amount of tax
  revenue it collects or reducing the amount of its
  spending.

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• C. Which principle of tax equity, the benefit
  principle or the ability-to-pay principle, is in
  closest agreement with your own personal idea of
  what is fair? Explain.

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• The benefit principle states that a fair tax is
  one that taxes people in proportion to the
  benefits they receive when government spends the
  tax revenues.
• The ability-to-pay principle states that those
  who can afford to pay more taxes than others
  should be required to do so.
• The benefit principle seems to be fair since it
  taxes the person who benefits. However, consider
  the programs whose purpose is to redistribute
  income, the ability-to-pay principle is more
  fair, since it taxes the rich more than the poor.
  
• The judgment is up to you.

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• D. What is meant by the term labor productivity?
  What factors most strongly affect your personal
  labor productivity (or, if you have no job, the
  labor productivity of your closest family member
  with a job)? What actions can a person take to
  increase his or her labor productivity?

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• Labor productivity is output per hour worked.
• Both technological change and additional capital
  increase labor productivity.
• To increase a persons labor productivity, she
  or he can improve her or his skill and ability to
  use the new technology or capital.

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• E. Explain how government both reduces and
  increases investment at the same time. In light
  of your answer, interpret the following equation
  Investmentsaving taxation - government
  consumption.

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• Government reduces private saving and investment
  when government taxes away income that might be
  saved and taxes the returns on investment. In
  contrast, government adds to investment when it
  directly invests the tax revenues it receives.
• Without government, aggregate saving and
  investment would be equal. With government, the
  total amount saved plus the total amount taken in
  taxes must equal the sum of private investment,
  government investment, and government spending.
  Hence, investment government consumption saving
  taxation.

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• F. Speculate as to why the war brought about high
  annual savings rates. Would you expect that the
  war on terrorism would lead to an upward spurt in
  the personal saving rate?

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• During the war, the economy reduced the
  production of civilian goods in favor of war
  goods. There were relatively few consumer goods
  available to purchase. At the same time,
  employment was high, as were incomes, as war
  production reduced unemployment. The combination
  of high incomes and few items to purchase led
  people to save more. Unless the war on terrorism
  results in shortages of consumer goods, an
  increase in saving rate is unlikely.

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• G. Explain the similarities and dissimilarities
  between new growth theory and supply-side
  economics.

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• Both focus on the causes of economic growth, but
  with different emphases.
• New growth theory emphasizes the role of
  technology in promoting growth, while supply-side
  economics emphasizes lower tax rates and less
  government regulation as the keys to growth. New
  growth theory also recognizes that technological
  improvements are encouraged when property rights
  are granted to developers of new technologies.

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• An example of an automatic stabilizer is
• a. the U.S. income tax system.
• b. the Internet.
• c. sticky wages.
• d. the full-employment equilibrium.
• Automatic stabilizers are features embedded
  within existing fiscal policies that act as a
  stimulant when the economy is sluggish and act as
  a drag when it is in danger of inflation.

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• The federal budget deficit
• a. Has not exited since 1997.
• b. Is the accumulation of all federal debts.
• c. Equals the national debt minus the budget
  surplus.
• d. Is the amount by which government spending
  exceeds its revenue over the course of a year.

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• An average tax rate is
• a. Additional taxes owed as a percentage of
  additional income.
• b. Total taxes owed.
• c. Total taxes owed as a percentage of total
  income.
• d. The percentage of income not collected in
  taxes.
• Marginal tax rateadditional taxes owed as a
  percentage of additional income
• Average tax ratetotal taxes owed as a percentage
  of total income

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• The corporate income tax takes about ( )
  percent of corporate profits.
• a. 10
• b. 20
• c. 30
• d. 50

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• The two most important sources of revenue for
  local governments are sales taxes and
• a. Personal income taxes.
• b. Corporate income taxes.
• c. Social security taxes.
• d. Property taxes.
• Sales tax 20, property tax 17, personal
  income taxes 13, corporation net income taxes
  2.

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• The benefit principle and the ability-to-pay
  principle refer to
• a. Whether a tax is progressive or regressive.
• b. Principles of tax efficiency.
• c. Principles of tax equity.
• d. Legal principles that question the
  constitutionality of social security.

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• The gasoline tax
• a. Is used to fund various government programs.
• b. Is the best example of a progressive tax.
• c. Seems to satisfy the ability-to-pay principle.
• d. Reflects the benefit principle, since those
  who pay the tax tend to receive the benefits.

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• If a tax collects 1,000 per person, no matter
  what a persons income might be, then the tax is
• a. A head tax, which is regressive.
• b. Progressive.
• c. A user fee.
• d. Proportional.
• A regressive tax collects a higher percentage of
  low incomes than of high incomes.

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• Efficiency in taxation
• a. Is less important than equity in taxation.
• b. Is best exemplified by the progressivity of
  the income tax.
• c. Is increased when a tax is also more
  equitable.
• d. Often involves a tradeoff with equity.

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• An efficient tax
• a. Distorts relative prices.
• b. Changes peoples behaviors.
• c. Is paid entirely by employers.
• d. May not be equitable.

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• When added together, the employer share and the
  employee share of the social security tax total
  just over ( ) percent of an individuals wages.
• a. 5
• b. 10
• c. 15
• d. 24

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• Personal security accounts would be financed by
• a. employers.
• b. government.
• c. individuals.
• d. small- to medium-sized firms, but not large
  corporations.

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• Savings in the social security system consist of
• a. IOUs.
• b. Shares of stock.
• c. mostly hundred-dollar bill.
• d. gold.

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• The difference between the federal budget
  deficit and the national debt is that the budget
  deficit represents the
• a. accumulation of past debts, while the
  national debit is the amount by which spending
  exceeds revenues each year.
• b. amount by which spending exceeds revenues
  each year, while the national debt represents the
  accumulation of past deficits and surpluses.
• c. amount of money the country owes that is
  cannot pay back.
• d. amount of money the United States owes
  foreign countries, while the budget deficit
  represents the amount of money the United States
  owes in total.

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• Technological change and additional capital
• a. increase labor productivity.
• b. decrease labor productivity.
• c. have no effect on labor productivity.
• d. affect labor productivity in unpredictable
  ways.

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• U.S. economic growth
• a. has generally been characterized by a 5
  percent or more growth rate since the 1960s.
• b. varied with each president.
• c. was on a downward trend in the 1990s, but
  has recently reversed its course.
• d. is no longer considered an important
  economic goal.

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• Capital formation is also referred to as
• a. property rights.
• b. technology.
• c. the real interest rate.
• d. investment.

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• Investment equals
• a. saving - taxation.
• b. saving taxation.
• c. saving taxation government consumption.
• d. saving taxation - government consumption.

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• Higher real interest rates
• a. increase the amount of investment.
• b. decrease the amount of investment.
• c. have no effect on the amount of investment.
• d. have varying and unpredictable effects on
  investment.

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• The crowding-out effect refers to
• a. the crowds of people who attend sports events
  and rock concerts.
• b. the crowd mentality of investors who rush to
  buy the latest hot stocks.
• c. private sector borrowing that makes it
  difficult to finance the government.
• d. the reduction in private investment spending
  when the government borrows.

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• The capital gains tax takes a percentage of
• a. the purchase price of an investment.
• b. the selling price of an investment.
• c. the difference between the purchase price and
  the selling price of an investment.
• d. the expected return on an investment minus its
  actual return.

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• External benefits
• a. are most likely during the research phase.
• b. are most likely during the development phase.
• c. are equally likely during the research and
  development phases.
• d. explain why firms undertake research and
  development.

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• Research and development are the cornerstones of
• a. supply-side economics.
• b. the Laffer curve.
• c. old growth theory.
• d. new growth theory.

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• Supply siders emphasize
• a. increases in aggregate demand.
• b. higher real interest rates.
• c. a balanced federal budget.
• d. policies that shift the long-run aggregate
  supply curve to the right.

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• The Laffer curve shows that the effect of
  increasing taxes too much is
• a. less economic growth.
• b. less tax revenue.
• c. more unemployment.
• d. that only the rich get richer.

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• The new economy is characterized by
• a. the application of technology to increase
  business productivity.
• b. the need to rebuild bridges and highways to
  account for todays heavier traffic loads.
• c. widespread goofing off as workers are less
  accountable for their actions.
• d. the extra pollution it causes.

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• In the following figure, the movement from point
  A to point B is most likely to be caused by
• a. external benefits from research.
• b. external benefits from development.
• c. supply-side policies.
• d. The personal income tax.
• The personal income tax requires savers to pay a
  tax on their interest incomes, which reduces
  peoples willingness to save and shifts the
  supply of saving curve to the left.

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• In the following figure, the movement from point
  A to point B is most likely to cause
• a. less capital formation.
• b. more capital formation.
• c. higher capital gains.
• d. more saving.

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• In the following figure, axis C should be labeled
  as
• a. planned investment.
• b. actual investment.
• c. actual saving.
• d. the real interest rate.

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• C
• Supply of saving
• B
• A
• Demand for
  investment
• 
  saving and
  investment