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2) An increase in government expenditure can ________ potential GDP and an increase in
taxes can ________ potential GDP.
A) increase; increase
B) increase; never change
C) decrease; decrease
D) never change; never change
E) increase; decrease
Skill: Level 1: Deinition
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
3) Looking at the supply-side efects on aggregate supply shows that a tax hike on labor
income
A) weakens the incentive to work.
B) decreases potential GDP.
C) increases potential GDP because people work more to pay the higher taxes.
D) Both answers A and B are correct.
E) None of the above is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
4) Once supply side efects are taken into account, tax cuts for labor income can change
i. the supply of labor.
ii. potential GDP.
iii. the growth rate of potential GDP.
A) i only
B) i and ii
C) iii only
D) ii only
E) i and iii
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
41
5) The supply-side efects of a change in taxes on labor income means that ________ in taxes
on labor income shifts the ________.
A) an increase; labor supply curve rightward
B) an increase; labor supply curve leftward
C) an increase; labor supply curve leftward and the labor demand curve rightward
D) a decrease; labor demand curve rightward
E) a decrease; labor demand curve leftward
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
6) An increase in taxes on labor income shifts the labor supply curve ________, and the
________.
A) leftward; after-tax wage rate falls
B) rightward; before-tax wage rate rises
C) leftward; after-tax wage rate does not change
D) leftward; after-tax wage rate rises
E) leftward; before-tax wage rate does not change
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
7) An income tax hike
A) increases potential GDP.
B) increases employment.
C) decreases potential GDP.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
42
8) An increase in the income tax ________ potential GDP by shifting the labor ________ curve
________.
A) increases; demand; rightward
B) decreases; supply; rightward
C) decreases; demand; leftward
D) increases; supply; rightward
E) decreases; supply; leftward
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
9) The supply-side efects show that a tax cut on labor income ________ employment and
________ potential GDP.
A) increases; increases
B) increases; does not change
C) increases; decreases
D) decreases; increases
E) decreases; decreases
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
10) If a tax cut increases people's labor supply, then the tax cut
A) increases potential GDP.
B) decreases aggregate demand.
C) decreases potential GDP because the real wage rate falls.
D) does not afect aggregate demand.
E) Both answers B and C are correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
43
11) An increase in income taxes ________ employment and ________ potential GDP.
A) increases; increases
B) increases; does not change
C) decreases; decreases
D) does not change; does not change
E) increases; decreases
Skill: Level 1: Deinition
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
12) The greater the tax wedge, the ________ the amount of employment and the ________
potential GDP.
A) larger; larger
B) larger; smaller
C) smaller; smaller
D) smaller; larger
E) None of the above because the tax wedge does not afect employment or potential GDP.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
13) In the labor market, the income tax creates a tax wedge which raises the ________ wage
rate, reduces the ________ wage rate, and ________ employment.
A) before-tax; after-tax; does not afect
B) before-tax; after-tax; increases
C) after-tax; before-tax; does not afect.
D) before-tax; after-tax; decreases
E) after-tax; before-tax; decreases
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
44
14) A cut in the income tax rate ________ the tax wedge and ________ employment, saving,
and investment.
A) decreases; increases
B) does not change; increases
C) increases; increases
D) decreases; does not change
E) increases; decreases
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
15) If we compare the United States to France, the U.S. tax wedge is ________ the French
tax wedge.
A) larger than
B) equal to
C) smaller than
D) not comparable to
E) smaller in the labor market and larger in the goods market than
Skill: Level 1: Deinition
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
16) If we compare the United States to France, we see that potential GDP per person in
France is ________ that in the United States because the French tax wedge is ________ the
U.S. tax wedge.
A) greater than; larger than
B) greater than; smaller than
C) the same as; the same as
D) less than; larger than
E) less than; smaller than
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
45
17) Suppose the tax rate on interest income is 25 percent, the real interest rate is 4
percent, and the inlation rate is 4 percent. In this case, the real after-tax interest rate is
A) .5 percent.
B) 3.5 percent.
C) 1.0 percent.
D) 4.0 percent.
E) 2.0 percent.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
18) The crowding out efect refers to the ________ from ________ in the government's budget
deicit.
A) decrease in investment; an increase
B) decrease in employment; an increase
C) decrease in consumption; a decrease
D) increase in consumption; an increase
E) increase in investment; an increase
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
19) A tax cut that increases the budget deicit results in ________ in the ________ loanable
funds.
A) an increase; demand for
B) an increase; supply of
C) a decrease; demand for
D) a decrease; supply of
E) no change; either the demand for or the supply of
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
46
20) The standard view in economics is that tax cuts without ________ will ________ the
budget deicit resulting in ________.
A) spending cuts; increase; crowding out investment
B) spending cuts; decrease; crowding out investment
C) increasing spending; decrease; unemployment
D) increasing spending; increase; crowding out investment
E) spending cuts; decrease; unemployment
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
21) If a tax cut increases aggregate demand more than aggregate supply, real GDP ________
and the price level ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
E) increases; does not change
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
22) How could an expansionary iscal policy increase real GDP and lower the price level?
A) if aggregate supply decreases more than aggregate demand increases
B) if aggregate supply increases more than aggregate demand increases
C) if the aggregate supply increases equals the aggregate demand increase
D) if aggregate supply decreases more than aggregate demand decreases
E) if aggregate supply decreases less than aggregate demand decreases
Skill: Level 4: Applying models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
47
23) When taxes are cut, aggregate demand ________ and aggregate supply ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
24) The quantity of employment is determined in the ________ market and that quantity,
along with the ________, determines potential GDP.
A) loanable funds; production function
B) goods and services; labor market
C) labor market; tax rate
D) labor market; production function
E) labor market; tax wedge
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
25) Increasing the income tax rate ________ the ________.
A) decreases; demand for labor
B) increases; supply of labor
C) decreases; supply of labor
D) does not change; supply of labor
E) increases; demand for labor
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
48
26) Increasing the income tax rate ________ the before-tax real wage rate and ________ the
after-tax real wage rate.
A) raises; raises
B) does not change; raises
C) lowers; lowers
D) lowers; raises
E) raises; lowers
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
27) If the income tax rate is 20 percent and the tax rate on consumption expenditure is 15
percent, then the tax wedge is
A) 2 percent.
B) 5 percent.
C) 35 percent.
D) 300 percent.
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
28) The supply-side efects of an income tax cut ________ potential GDP and ________
aggregate supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increases; do not change
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
49
29) An income tax on labor income decreases the ________ of potential GDP, and a tax on
interest income decreases the ________ of potential GDP.
A) level; growth rate
B) growth rate; level
C) level; level
D) growth rate; growth rate
E) None of the above answers is correct.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Relective thinking
30) If the nominal interest rate is 10 percent, the inlation rate is 6 percent, and the tax
rate on interest income is 25 percent, what is the after-tax real interest rate?
A) 4.0 percent
B) 6.0 percent
C) 3.0 percent
D) 1.5 percent
E) 3.5 percent
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
31) An income tax cut ________ aggregate demand and ________ aggregate supply.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; increases
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Analytical thinking
50
