210
PART SIX: ECONOMIC GROWTH
CHAPTER 19: POLICIES FOR
INTERMEDIATE-RUN GROWTH
Additional Questions
Essay Questions and/or Problems:
1. Briefly state the four propositions of supply-side economics.
2. Graphically show and explain the Laffer curve.
3. According to data on U.S. growth, what has happened to growth between 1960 and 2007?
What factor has been most responsible for this change in growth? Why has this happened?
4. Some people have referred to the time period between 1992 and 2002 as a “New
Economy”. Looking at the growth data in Table 19-1, why do you think people mean when
they use the term “New Economy”. Does the data from this period stand out in any way
from previous periods.
5. Discuss four Keynesian critiques supply-side economics.
6. Assume a nominal interest rate of 8 percent, an inflation rate of 3 percent, and a marginal
tax rate of 25 percent. Calculate the after-tax nominal return and after-tax real return.
According to supply-side economics, which of these matter for savings and investment
decisions.
7. Would you classify the U.S. income tax system in the 1970s as progressive, regressive, or
proportional? Has it gotten more or less progressive since then?
8. Explain the corporate dividend tax cut enacted by the Bush administration in 2004. What
was the rationale behind this tax cut? Was its primary aim to stimulate income in the short
run? Why or why not?
9. How would you describe the macroeconomic policies of George W. Bush’s administration?
What economic theory do you believe he would be a proponent of?
10. The United States experienced a slowdown in its growth rate during the 1970s. Explain
how, according to supply-side economists, this increase in government regulatory activity
slowed economic growth in two ways.
Additional Essay Questions and/or Problems:
11. What are the main determinants of the long-run equilibrium rate of growth of output in the
economy? Using the graphical analysis of the aggregate production function, explain how
each of the factors you list enters into the growth process. Has the relative importance of
these factors changed over time?
12. Suppose that an increase in the marginal tax rate increases total tax revenues. Is this result
consistent with supply-side theory? Why or why not?
13. Two key assumptions in the supply side model are that labor supply is highly elastic to
changes in the real wage, and that investment is highly inelastic to change in interest rates.
Explain why these assumptions are critical, using graphs of the labor market and loanable
funds market to illustrate.
14. Discuss recent changes in macroeconomic policy in terms of the tradeoff between equity
and efficiency. How have different administrations put different weights on equity and
efficiency in terms of the policies they have adopted?
15. In a recent article in the New York Times, Alan Blinder, a Keynesian, argued that
“Events of the past decade seem to have discredited the three newer theories and verified
many ‘old fashioned’ Keynesian ideas.”
The three newer theories to which he refers are the monetarist, new classical, and supply-
side theories. To what events do you think Blinder refers to? In which way do you think
recent events support or refute these newer theories?
16. What is meant by the “productivity slowdown”. When did it begin? Discuss two possible
hypothesis as to why it is occurring.
17. Characterize government policy during the Obama administration. What has driven fiscal
and monetary policy during this time? Explain.
18. Why is the elasticity of labor supply such an important component of supply-side
economics? Explain.
Multiple-Choice Questions:
1. According to supply-siders, an switch from consumption to savings by households will
2. Relative to the Keynesians, the supply-side economists
3. If the nominal rate of interest on a bond was 7 percent, the inflation rate was 6 percent and
an individual was in a 50-percent tax bracket, the after-tax real return on the bond would be
equal to
4. In the Keynesian view, a reduction in the marginal income tax rate would cause
5. Keynesians have been critical of supply-side economics because it ignores
6. According to the supply-side economists, a cut in the marginal income tax rate would cause
7. The Keynesian economists do not believe that a cut in the marginal income tax rate will
have strong effects on aggregate supply because they
8. “Reagonomics” was consistent with supply-side economics except for the fact that it
9. Strong growth in the U.S. during the 1990s may have been the result of
10. Which of the following statements is (are) correct? According to United States data,
11. Which of the following policies followed by the Clinton administration were not Keynesian
policies?
12. The supply-siders argue that investment is
13. Since the 1970s, the income tax system in the U.S. has become
14. The tradeoff between equity and efficiency is evident in debates over
15. If an increase in marginal tax rates leads to an increase in tax revenues, then
16. During the Clinton administration,
17. An essentially classical feature in the supply-side perception of the saving-investment
process is an emphasis on
18. The largest component of output growth in the U.S. is
19. Which of the following statements is correct?
20. The Tax Reform Act of 2004
21. Which of the following classical views is (are) accepted by supply-side economists?
22. The after-tax rate of return is defined as the pretax profit rate
23. According to supply-side economists, the incentive to save during the Clinton
Administration fell due to a combination of
24. It has been hypothesized that the productivity slowdown could have been caused by all of
25. Public policies designed to increase labor productivity do not include
26. The redirection of macroeconomic policy that took place during the Reagan and both Bush
administrations was inspired by
27. In 1994, the Republicans’ “Contract with America” encompassed economic provisions that
drew upon the ideas of
28. During the first three years of a recovery from a recession, productivity
29. An inflation-induced increase in the effective tax rate on interest income and capital gains
results in
30. According to the classical system, a decrease in the income tax rate reduces the after-tax
real wage
31. Which of the following factors are included in the determination of growth rates of output
in the intermediate run?
32. Supply-side economists argue that taxing of nominal gains and interest earnings during
inflationary periods
33. The supply-side economists expect that a cut in the marginal income tax rate, with lost
revenues made up by a cut in government spending, would
34. During the recession of 2001,
35. During the 2000s, the Federal government’s deficit
36. The Laffer curve specifies
37. Critical assumptions behind the Laffer curve include
38. The U.S. economy during the 2001-2004 period was been characterized by all of the
following except
39. A critical component of supply-side economics is that
40. Supply-side economists argued that, given existing tax laws, the high inflation of the 1970s
41. The worldwide slowdown in labor productivity began in the early
42. An increase in the effective corporate tax rate due to increased inflation results in a. a
43. Regarding the output growth slowdown during the 1970s and 1980s, it is true that
44. According to supply-siders
45. Higher rates of inflation
46. A piece of evidence in favor the Keynesian model would be that
47. Which of the following statements is (are) correct?
48. Over the long-run, fluctuations in the growth rate in output are primarily driven by
fluctuations in
49. According to supply-side advocates, the increase in government regulatory activity in the
late 1960s slowed economic growth
50. In the debate between equity and efficiency, _____ tend to favor efficiency, while _____
tend to favor equity.
51. According to supply-siders, an switch from taxing income to taxing consumption to will
52. If the nominal rate of interest on a bond was 5 percent, the inflation rate was 3 percent and
an individual was in a 25-percent tax bracket, the after-tax real return on the bond would be
equal to
53. Which of the following statements is (are) correct? According to United States data,
54. Which of the following factors are important in the determination of growth rates of output
in the intermediate run?
55. Evidence in favor the Keynesian model would be that: