Barro
Chapter 13
TRUE/FALSE
1. The marginal tax rate is the change in taxes when taxable income change one unit.
2. The term (1 – w) is the faction of labor income the worker gets to keep.
3. An increase in the marginal tax on labor income, increases the supply of labor.
4. An increase in the marginal tax on labor income, decreases the demand for capital services.
5. A decrease in the marginal tax on asset income, reduces investment short run and the capital stock and
GDP in the long run.
6. An increase in the marginal tax rate on labor income reduces overall market activity, as gauged by
GDP.
7. The largest sources of tax revenue for the U.S. federal government include the individual income tax
and social-insurance contributions.
8. The largest source of tax revenue for the U.S. federal government is the corporate-profit tax.
9. U.S. data show that state and local government revenues currently far exceed federal government
revenues.
10. A graduated income-tax rate has a marginal tax rate which equals the average tax rate.
MULTIPLE CHOICE
1. The US Federal government gains revenue from:
a.
individual income taxes.
c.
excise taxes.
b.
social insurance taxes.
d.
all of the above.
2. The US Federal government gains revenue from:
a.
property taxes.
c.
UN grants.
b.
social insurance taxes.
d.
all of the above.
3. The US Federal government gains revenue from:
a.
property taxes.
c.
individual income taxes.
b.
sales taxes.
d.
all of the above.
4. The US Federal government gains revenue from:
a.
revenue from money creation.
c.
sales taxes.
b.
social insurance taxes.
d.
all of the above.
5. The US Federal government gains revenue from:
a.
property taxes.
c.
UN grants.
b.
excise taxes and customs.
d.
all of the above.
6. The US state and local governments gains revenue from:
a.
property taxes.
c.
sales taxes.
b.
income taxes.
d.
all of the above.
7. The US state and local governments gains revenue from:
a.
property taxes.
c.
sales taxes.
b.
income taxes.
d.
all of the above.
8. The US state and local governments gains revenue from:
a.
property taxes.
c.
revenue from money creation.
b.
customs.
d.
all of the above.
9. The US state and local governments gains revenue from:
a.
revenue from money creation.
c.
sales taxes.
b.
customs.
d.
all of the above.
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10. The US state and local governments gains revenue from:
a.
customs.
c.
revenue from money creation.
b.
federal grants.
d.
all of the above.
11. The US state and local governments gains revenue from:
a.
revenue from money creation.
c.
income taxes.
b.
customs.
d.
all of the above.
12. The marginal income tax rate is:
a.
taxes divided by income.
c.
income divide by taxes.
b.
the change in taxes when income changes
one dollar.
d.
the change in income when taxes change
one dollar.
13. The average income tax rate is:
a.
income taxes divided by income.
c.
income divide by income taxes.
b.
the change in income taxes when income
changes one dollar.
d.
the change in income when income taxes
change one dollar.
14. The average marginal income tax rate is:
a.
the marginal tax rate of the average
household.
c.
the change in income taxes divided by
income.
b.
the average tax rate of the marginal
household.
d.
all of the above.
15. A graduate-rate tax structure is one:
a.
whose marginal rate increases as income
increases.
c.
whose average rate equals the marginal
rate.
b.
that has a flat rate.
d.
whose marginal rate decreases as income
increases.
16. A flat-rate tax structure is one:
a.
whose marginal rate increases as income
increases.
c.
whose average rate equals the marginal
rate.
b.
that has graduated rates.
d.
whose marginal rate decreases as income
increases.
17. One less the marginal tax on wages, (1 – w) is:
a.
the fraction of wage income paid in taxes.
c.
the fraction of income the government
receives.
b.
the fraction of wage income the worker
gets to keep.
d.
the average marginal tax rate.
18. The after tax real wage is:
a.
(w/P)• w
c.
(w/P)•(1 – w)
b.
(w/P)•L•(1 – w)
d.
(w/P)/(1 – w)
19. If government purchases are constant, then an increase in the marginal income tax rate, w, leads to:
a.
a positive income effect.
c.
no income effect.
b.
a negative income effect.
d.
a marginal income effect.
20. If the marginal tax rate on income, w, changes but government purchases don’t then the government
could have:
a.
lowered some other lower marginal rate
wage tax like the social security payroll
tax.
c.
raised some income tax deductions.
b.
the increased revenue due to the higher
marginal tax rate is all used for real
transfers.
d.
all of the above.
21. If the marginal tax rate on income, w, changes but government purchases don’t then the government
could have:
a.
lowered some other lower marginal rate
wage tax like the social security payroll
tax.
c.
reduced some income tax deductions.
b.
reduced real transfers.
d.
all of the above.
22. If the marginal tax rate on income, w, changes but government purchases don’t then the government
could have:
a.
raised some other lower marginal rate
wage tax.
c.
reduced some income tax deductions.
b.
used all the increased revenue due to the
higher marginal tax rate for real transfers.
d.
all of the above.
23. If the marginal tax rate on income, w, changes but government purchases don’t then the government
could have:
a.
raised some other lower marginal rate
wage tax.
c.
raised some income tax deductions.
b.
lowered real transfers.
d.
all of the above.
24. If the real marginal tax rate, w, increases in the market clearing model then:
a.
the supply of labor decreases.
c.
real output, Y, declines.
b.
the demand for capital decreases.
d.
all of the above.
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25. If the real marginal tax rate, w, increases in the market clearing model then:
a.
the supply of labor decreases.
c.
real output, Y, rises.
b.
the demand for capital increases.
d.
all of the above.
26. If the real marginal tax rate, w, increases in the market clearing model then:
a.
the supply of labor increases.
c.
real output, Y, declines.
b.
the demand for capital increases.
d.
all of the above.
27. If the real marginal tax rate, w, increases in the market clearing model then:
a.
the supply of labor increases.
c.
real output, Y, rises.
b.
the demand for capital decreases.
d.
all of the above.
28. The after tax real interest rate is:
a.
r/ r
c.
(1–r)•r
b.
(1+ r)/(1+r)
d.
r/r
29. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a.
household current consumption will rise
compared to future consumption.
c.
the after tax real interest rate falls.
b.
current investment will fall.
d.
all of the above.
30. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a.
household current consumption will rise
compared to future consumption.
c.
the after tax real interest rate rises.
b.
current investment will rise.
d.
all of the above.
31. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a.
household current consumption will fall
compared to future consumption.
c.
the after tax real interest rate rises.
b.
current investment will fall.
d.
all of the above.
32. In the short run if the tax rate on asset income, r , rises, then in the market clearing model:
a.
household current consumption will fall
compared to future consumption.
c.
the after tax real interest rate falls.
b.
current investment will rise.
d.
all of the above.
33. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a.
increases the stock of capital and real
GDP.
c.
decreases the stock of capital and real
GDP.
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b.
increases the stock of capital and
decreases real GDP.
d.
decreases the stock of capital and
increases real GDP.
34. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a.
decreases GDP.
c.
lowers consumption.
b.
decrease the capital stock.
d.
all of the above.
35. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a.
increases GDP.
c.
raises consumption.
b.
decrease the capital stock.
d.
all of the above.
36. In the long run an increase in the marginal tax rate on asset income, r, in the market clearing model:
a.
decreases GDP.
c.
raises consumption.
b.
increase the capital stock.
d.
all of the above.
37. With an increase in government purchases financed by an increase in the marginal tax rate on labor
income, the change in labor supply depends on whether the:
a.
negative substitution effect is bigger than
the positive income effect.
c.
positive substitution effect is bigger than
the negative income effect.
b.
negative substitution effect is bigger than
the negative income effect.
d.
positive substitution effect is bigger than
the positive income effect.
38. An increase in government purchases financed by an increase in the marginal tax rate on labor income,
increases the quantity of labor supplied, if the:
a.
negative substitution effect is bigger than
the positive income effect.
c.
positive substitution effect is bigger than
the negative income effect.
b.
negative substitution effect is smaller than
the positive income effect.
d.
positive substitution effect is smaller than
the negative income effect.
39. An increase in government purchases financed by an increase in the marginal tax rate on labor income,
decreases the quantity of labor supplied, if the:
a.
negative substitution effect is bigger than
the positive income effect.
c.
positive substitution effect is bigger than
the negative income effect.
b.
negative substitution effect is smaller than
the positive income effect.
d.
positive substitution effect is smaller than
the negative income effect.
40. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor
income, then:
a.
the income effect would be toward a
decrease in labor supply.
c.
the substitution effect would be towards
an increase in labor supply.
b.
the overall effect on labor supply is
uncertain.
d.
all of the above.
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41. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor
income, then:
a.
the income effect would be toward a
decrease in labor supply.
c.
the substitution effect would be towards
an decrease in labor supply.
b.
the overall effect on labor supply is
negative.
d.
all of the above.
42. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor
income, then:
a.
the income effect would be toward an
increase in labor supply.
c.
the substitution effect would be towards
an increase in labor supply.
b.
the overall effect on labor supply is
positive.
d.
all of the above.
43. If there is an decrease in government purchases along with a decrease in the marginal tax rate on labor
income, then:
a.
the income effect would be toward an
increase in labor supply.
c.
the substitution effect would be towards a
decrease in labor supply.
b.
the overall effect on labor supply is
uncertain.
d.
all of the above.
44. If the marginal tax on labor income, w, rises then the tax receipts of the government:
a.
rise.
c.
stay the say.
b.
fall.
d.
may rise, fall or stay the same.
45. If transfer payments are related to characteristics of households like income, then an increase in the
marginal tax on labor income, w,:
a.
will have smaller effects in the market
clearing model.
c.
will have the same effects in the market
clearing model.
b.
will have stronger effects in the market
clearing model.
d.
will have no effects in the market clearing
model.
46. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a.
does not change the stock of capital
c.
does not change the market clearing rental
price of capital.
b.
does not change real GDP.
d.
all of the above.
47. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a.
does not change the stock of capital
c.
reduces the market clearing rental price of
capital.
b.
decreases real GDP.
d.
all of the above.
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48. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a.
raises the stock of capital
c.
does not change the market clearing rental
price of capital.
b.
increases real GDP.
d.
all of the above.
49. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a.
raises the stock of capital
c.
reduces the market clearing rental price of
capital.
b.
does not change real GDP.
d.
all of the above.
50. A decrease in the marginal tax rate on asset income, r, in the short run in the market clearing model:
a.
raises change the stock of capital
c.
increases gross investment.
b.
increases real GDP.
d.
all of the above.
51. From 1929 to the present, total government revenue grew to be about
a.
30% of GDP.
c.
10% of GDP.
b.
50% of GDP.
d.
1% of GDP.
52. Before World War II, state and local government revenue comprised about
a.
less than one-third of total government
revenues.
c.
10% of total government revenues.
b.
more than half of total government
revenues.
d.
0% of total government revenues.
53. Since World War II, state and local government revenues have been a
a.
growing share of total government
revenues.
c.
shrinking share of total government
revenues.
b.
stable share of total government revenues.
d.
miniscule share of total government
revenues.
54. Individual income taxes in the U.S.
a.
began during the Revolution.
c.
affect only the richest 10% of people.
b.
are an insignficant source of revenue.
d.
mostly began in 1913.
55. The major sources of federal government revenue, in descending order of their importance, are
a.
individual income taxes, social-insurance
contributions, and corporate profits taxes.
c.
payments from the Federal Reserve,
corporate profits taxes, and individual
income taxes.
b.
social-insurance contributions, corporate
profits taxes, and individual income taxes.
d.
corporate profits taxes, payments from the
Federal Reserve, and individual income
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taxes.
56. The single largest source of federal government revenue from those listed below is
a.
taxes on corporate profits.
c.
excise and customs taxes.
b.
individual income taxes.
d.
payments from the Federal Reserve to the
U.S. Treasury.
57. The U.S. federal income-tax structure is designed so that
a.
all citizens pay a flat marginal tax rate.
c.
the marginal tax rate generally rises with
income.
b.
the average tax rate falls as income rises.
d.
all citizens pay a flat average tax rate.
58. Data on U.S individual income taxes shows that the income tax
a.
is not graduated, because higher-income
citizens pay a high share of the taxes.
c.
is flat, because higher-income citizens pay
a low share of the taxes.
b.
is flat, because higher-income citizens pay
a high share of the taxes.
d.
is graduated, because higher-income
citizens pay a high share of the taxes.
59. Data on U.S adjusted gross income show that the income tax is progressive because
a.
high-income citizens pay a high share of
taxes relative to the share of income they
receive.
c.
low-income citizens pay a high share of
taxes relative to the share of income they
receive.
b.
high-income citizens pay a low share of
taxes relative to the share of income they
receive.
d.
all citizens pay a high share of taxes
relative to the share of income they
receive.
60. Historical data on U.S. marginal taxes rates show, that on average, the marginal tax rate
a.
fell during the Korean War in the 1950s to
an all-time low.
c.
were at their highest in the pre-World War
II era.
b.
rose after World War II to a high of about
40% in 1981.
d.
none of the above.
61. The U.S. Social Security contribution or tax on individuals
a.
is a graduated tax for incomes up to
$94,200.
c.
is a flat tax for incomes up to $94,200.
b.
is a graduated tax for all incomes, with no
upper limit.
d.
is a progressive tax for all incomes up to
$10,000.
62. The U.S. Social Security contribution or tax on individuals has a marginal tax rate which equals the
average tax rate. This makes it
a.
a progressive tax.
c.
an alternating tax.
b.
a depreciating tax.
d.
a flat tax.
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63. An increase in the marginal tax rate on labor income will shift the
a.
labor supply curve leftward.
c.
labor demand curve rightward.
b.
labor supply curve rightward.
d.
labor demand curve leftward.
64. An increase in the marginal tax rate on labor income will shift the
a.
supply curve for capital services leftward.
c.
demand curve for capital services
leftward.
b.
supply curve for capital services
rightward.
d.
demand curve for capital services
rightward.
65. A decrease in the marginal tax rate on labor income will shift the
a.
labor supply curve leftward.
c.
labor demand curve rightward.
b.
labor supply curve rightward.
d.
labor demand curve leftward.
66. The Laffer Curve shows that total real tax revenue
a.
rises continuously as the marginal tax rate
rises.
c.
falls, then rises, as the marginal tax rate
rises.
b.
falls continuously as the marginal tax rate
rises.
d.
rises, then falls, as the marginal tax rate
rises.
SHORT ANSWER
1. What are the effects of an increase in the marginal tax rate on labor income in the market clearing
model?
2. What does (1 – w) tell us and what are the real after tax returns on assets and labor if income from
them are taxed?
3. What are the short run effects of an increase in the marginal tax rate on assets income in the market
clearing model?
ANS:
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4. What are the long run effects of an increase in the marginal tax rate on asset income in the market
clearing model?
5. Under what conditions in the market clearing model will the quantity of labor supplied increase when
government purchases are increased and financed by an increase in the marginal tax rate on labor
income?
6. What are the major sources of revenue for the U.S. government, and which are most important today?
7. Explain the difference between a graduated-rate tax and a flat-rate tax.
ANS: