ECO 450 Week 8 Quiz – Strayer
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Quiz 6 Chapter 11 and 12
Chapter 11
Taxation,
Prices, Efficiency,
and the Distribution of Income
and the Distribution of Income
True/False Questions
1. A lump-sum tax
results in both income and substitution effects.
2. A consumer
currently pays $500 a year retail sales taxes. She would be better off if she paid
the same amount annually as a lump-sum tax.
3. Clothing is
sold in perfectly competitive markets where no externalities prevail. An excise
tax on clothing will result in a market price for clothing that equals the
marginal social benefit and marginal social cost of service.
4. Assuming that
the income effects are negligible and that beer is sold in a competitive
market, a 10‑cent per can tax on beer that causes a 10,000 can per month
decline in sales will result in an excess burden of $1,000 per month.
5. A tax on land
results in an income effect on landlords but no substitution effect. Then it
follows that the excess burden of a tax on land will be zero.
6. The excess
burden of a tax on interest income is $5 billion per year. Total interest
income per year is $50 billion. The tax currently collects $15 billion in
revenue per year. The efficiency-loss ratio of the tax is therefore
0.33.
7. A payroll tax
results in a difference between the gross wages paid by employers and the net
wages received by workers.
8. If the market
supply of labor services is perfectly inelastic, a tax on labor income will
reduce the net wages received by workers by the full amount of the tax per
labor hour.
9. If a $10 per
unit tax is levied on the output of a monopolist, more of that tax will be
shifted to consumers than would be the case if the same good were produced by
a competitive industry.
10. A study indicates that taxes in the United States
reduce the Gini coefficient for the nation by 10 percent. This implies
that taxes make the income distribution more equal.
11. A lump-sum tax
only results in income effects.
12. An income tax
is an example of a price-distorting tax.
13. The more
price-elastic the demand of a taxed item, the lower the excess burden of a tax
on the sale of that item.
14. If the tax on the sale of gasoline is doubled from
20 cents per gallon to 40 cents per gallon, the excess burden of the tax
will quadruple.
15. If the
compensated elasticity of supply of labor is zero, then a tax on labor earnings
will have zero excess burden.
16. Lump-sum taxes do not prevent prices from equaling the
marginal social cost and benefit of any goods and services.
17. Lump-sum taxes can vary in amount based on income
level.
18. A lump-sum tax can distort prices and affect consumption
behavior.
Multiple
Choice Questions
1. A lump-sum
tax:
a. distorts
market prices so that they do not simultaneously equal MSB and MSC.
b. can result in price changes but does not prevent
prices from simultaneously being equal to MSB and MSC.
c. results
in substitution effects that change prices.
d. results
in both substitution effects and income effects that change prices.
2. The current price of compact discs, which are
traded in perfectly competitive markets, is $10. A $1 per unit tax
is levied on the discs. Annual record sales decline from five million to four
million as a result of the tax. Assuming that the income effect of the
tax-induced price change is negligible, the excess burden of the tax will be:
a. $500,000
per year.
b. $1
million per year.
c. $2
million per year.
d. $2.5
million per year.
3. The elasticity
of supply of land is zero.A tax on land results only in an income effect to
landlords. Then it follows that
a 10-percent tax on land rents will:
a. have
a positive excess burden.
b. be
shifted forward to tenants.
c. be
paid entirely by landlords.
d. have
zero excess burden.
e. both
(c) and (d)
4. Currently, a 10-cent per gallon tax is levied on
gasoline consumption.The tax is increased to 20 cents per gallon. The
excess burden of the tax will:
a. remain
the same.
b. double.
c. increase
four times.
d. decline.
5. The supply of new cars is perfectly elastic.
A $400 per car tax is levied on buyers. As a result of the tax,
a. the
price received by sellers will fall by $400.
b. the
price paid by buyers, including the tax, will increase by $400.
c. the
quantity of cars sold per year will be unchanged.
d. the
excess burden of the tax will be zero.
e. both
(c) and (d)
6. Other things
being equal, the more inelastic the demand for a taxed good,
a. the
greater the portion of the tax paid by sellers.
b. the
greater the excess burden of the tax.
c. the
greater the portion of the tax paid by buyers.
d. the
less the portion of a tax on sellers that can be shifted to buyers.
7. The market
supply of labor is perfectly inelastic. However, the income effect of
tax-induced wage changes are believed to be substantial. Then it follows that a
tax on labor income will:
a. have
zero excess burden.
b. have
positive excess burden.
c. be
paid entirely by workers as a reduction in net wages.
d. both
(a) and (c)
e. both
(b) and (c)
8. Suppose an
economy is comprised of only two markets: one for food and the other for
housing. A tax on food used to finance transfer payments is likely to:
a. decrease
the price of food.
b. increase
the price of housing.
c. decrease
the price of housing.
d. have
no effect on either the price of food or housing.
9. Differential
tax incidence measures the effect:
a. that
a tax and the expenditures it finances have on the distribution of income.
b. that
one tax alone has on the distribution of income.
c. on
the distribution of income of substituting one tax for another while holding
the size and composition of the budget fixed.
d. on
the distribution of income of substituting one tax for another while changing
the kinds of government services financed.
10. Most studies
of tax incidence assume that taxes on labor income and other input services are
borne entirely by the workers and other input owners that supply the services.
This implies that the:
a. supply
of those input services is very elastic.
b. supply
of those input services is of unitary elasticity.
c. supply
of those input services is perfectly inelastic.
d. demand
for those input services is perfectly elastic.
11. Most studies show that the price elasticity
of demand for gasoline is –0.2. If
the price elasticity of supply is 2, then a tax on gasoline will:
a. have
no effect on the market equilibrium price of gasoline.
b. cause
the market equilibrium price of gasoline to fall.
c. cause
the market equilibrium price paid by buyers to rise.
d. cause
the net price received by sellers to fall.
e. both
(c) and (d)
12. The demand for
medical care is very inelastic. If a 10-percent tax is levied on the sale of
medical services and is collected from medical-care providers, then:
a. the
incidence of the tax is likely to be borne entirely by medical-care providers.
b. most
of the tax is likely to be shifted to those who purchase medical care.
c. the
market equilibrium price of medical care will fall.
d. the
excess burden of the tax is likely to be very high.
13. Which of the
following is true about a lump-sum tax?
a. It
prevents efficiency from being attained in competitive markets.
b. It
causes substitution effects.
c. It
causes income effects.
d. It
causes both income effects and substitution effects.
14. Housing construction is generally believed to be
an industry of constant costs. In the long run, whichof the following is true if a $10 per square foot
tax on housing construction is collected directly from builders?
a. The
incidence of the tax will be borne by builders.
b. The
excess burden of the tax will be zero.
c. The
quantity of new construction supplied will be unaffected.
d. The
tax will be fully shifted to buyers of new construction.
15. If the price
elasticity of supply of labor is equal to 0.5 and the price elasticity of
demand for labor is –2, then which of the following is likely to result from a
tax on labor earnings?
a. The
tax will be fully borne by workers.
b. Some
of the tax will be shifted to employers as market equilibrium wages increase.
c. Market
equilibrium wages will decline.
d. There
will be no effect on market equilibrium wages.
16. If a lump-sum
tax is imposed, the slope of the new budget line relative to the budget line
prior to the tax:
a. remains
unchanged.
b. increases.
c. decrease.
d. can
increase and decrease in different regions.
17. Viewed from
origin a price distorting tax creates a new budget line with a ______ slope
relative to the budget line without the tax.
a. less
steep
b. more
steep
c. similar
d. varying
18. A $0.30 per
unit tax is imposed on a good that reduces the quantity supplied and demanded
by 1000 units. What is the deadweight
loss (ignore price elasticities)?
a. $300.00
b. $100.00
c. $150.00
d. Cannot
be determined.
19. If a per unit
tax is imposed, but the quantity supplied and demanded does not change then:
a. the
demand is perfectly inelastic.
b. the
supply is perfectly inelastic.
c. there
is no deadweight loss.
d. All
of the above.
20. The
efficiency-loss ratio relative to tax is:
a. the
deadweight loss less the tax revenue.
b. the
deadweight loss divided by the tax revenue reduced by one.
c. the
excess burden divided by the tax revenue.
d. None
of the above.
Chapter 12
Budget
Balance and
Government Debt
Government Debt
True/False Questions
1. From 1950 to
2009, the federal government budget has been in balance in most years.
2. The high
employment budget deficit implies that increases in economic activity will not
eliminate the actual deficit.
3. Other things being equal, an increase in
government borrowing is likely to increase interest rates.
4. If taxpayers
anticipate future tax increases when government borrows to finance deficits,
increased government borrowing will increase interest rates.
5. As of 2008, the amount of federal debt outstanding was equal
to twice the annual GDP.
6. From 1950 to
1980, the value of the federal debt as a percent of GDP declined.
7. More than 50
percent of the federal debt in recent years has been outside debt.
8. An increase in
market rates of interest tends to decrease the market value of outstanding
government debt.
9. Deficit
finance postpones taxation from the present to the future.
10. The burden of
the debt is borne by those who purchase government bonds.
11. The federal
government budget recorded surpluses between 1998 and 2001.
12. State and
local governments are usually required by state law to keep the budgets in
balance.
13. If business
and personal saving are constant, then a federal budget deficit will have no
impact on national saving.
14. Other things
being equal, a government surplus increases the supply of loanable funds
available for investment.
15. State revenue
bonds are backed by the taxing power of state governments.
16. A federal budget surplus can lead to more credit being available
for productive activity.
17. A federal budget deficit can strain credit markets forcing
the real rate of interest to decrease.
18. The U.S. deficit in the 1980s was structural in the sense
that federal spending would exceed federal revenue even at a level of full
employment.
Multiple Choice Questions
1. The
outstanding federal debt will decline in value if:
a. budget
deficits continue.
b. the
government runs a budget surplus.
c. the
market rate of interest increases.
d. either
(b) or (c)
2. The federal
budget has been in deficit:
a. for
every year between 1970 and 1997.
b. for
every year between 1950 and 1997.
c. only
since 1980.
d. for
every year between 1960 and 1997.
3. The high employment deficit is
estimated at $100 billion. Assuming that the economy is operating below full
employment and that it will not overheat during the year,
a. the
actual budget is not in deficit.
b. increasing
GDP will eliminate the deficit.
c. increasing
GDP will not eliminate the deficit.
d. the
actual budget is in surplus.
4. An increase in
government borrowing has no effect on the willingness of citizens to save or on
the demand for credit. Increased borrowing to cover deficits will therefore:
a. reduce
interest rates.
b. increase
interest rates.
c. have
no effect on interest rates.
d. not
require increased taxes in the future.
5. As a result of government borrowing to cover
deficits, citizens increase the supply of savings to provide themselves with
funds to pay anticipated increases in future taxes. Then it follows that
increased government borrowing will:
a. reduce
private investment.
b. increase
private investment.
c. have
no effect of private investment.
d. increase
interest rates.
e. both
(a) and (d)
6. The total
dollar value of the federal debt outstanding is:
a. more
than 50 percent of GDP.
b. more
than 100 percent of GDP.
c. less
than 50 percent of GDP.
d. less
than 10 percent of GDP.
7. The federal
government, its agencies, and the Federal Reserve System:
a. are
not permitted to hold outstanding federal debt.
b. hold
50 percent of the outstanding federal debt.
c. hold
between 15 and 25 percent of the outstanding federal debt.
d. hold
75 percent of the outstanding federal debt.
8. The largest
portion of the net federal debt outstanding is owed to:
a. foreigners.
b. U.S.
citizens and companies.
c. federal
government agencies.
d. state
and local governments.
9. The debt of
state and local governments is mostly:
a. internal.
b. external.
c. owed
to citizens of other nations.
d. worthless.
10.
Government borrowing will:
a. postpone
taxation to the future.
b. increase
government interest cost.
c. both
(a) and (b)
d. eliminate
taxes.
11. Which of the
following is true about the federal government budget balance in the United
States?
a. The
federal budget has never had a surplus.
b. The
federal budget had a surplus every year from 1970 to 2008.
c. The
federal budget had a surplus from 1998 until 2001.
d. The
federal budget had a deficit from 1998 until 2001.
12. Which of the
following can contribute to a decrease in national saving?
a. a
federal budget deficit
b. an
increase in the state and local government aggregate surplus
c. a
federal budget surplus
d. an
increase in personal saving
13. Other things
being equal, a government budget surplus:
a. increases
the demand for loanable funds.
b. increases
the supply of loanable funds.
c. is
likely to increase market equilibrium interest rates.
d. is
unlikely to affect market equilibrium interest rates.
14. If the federal government runs a surplus consistently,
then which of the following is likely to occur?
a. National
saving will decline.
b. The
gross federal debt will increase.
c. The
gross federal debt will decrease.
d. Market
equilibrium interest rates are likely to rise as a result of the surpluses.
15. General
obligation bonds of state and local governments are:
a. backed
by revenue from public facilities such as sports stadiums.
b. backed
by the taxing power of state and local governments.
c. usually
used to finance transfer payments.
d. usually
used to finance capital expenditures.
e. both
(b) and (d)
16. A bond that is
backed by the tolls collected from a bridge to be constructed from the proceeds
of the bond is an example of:
a. a
general obligation bond.
b. a
non-obligation bond.
c. a
revenue bond.
d. none
of the above.
17. Evidence of
“crowding out” in the market for loanable funds at a rate of 8% could be:
a. private
investors who will borrow only at a rate lower than 8%.
b. private
investors who are willing to accept a rate higher than 8% for borrowing.
c. a
government surplus.
d. a
social security surplus.
18. High-employment
deficit or surplus is:
a. an
extreme economic situation requiring emergency measures.
b. the
amount of deficit or surplus available assuming current employment levels.
c. the
amount of deficit or surplus available when employment is at its approximately
full capacity.
d. the
amount of deficit or surplus available when unemployment is at a relatively
high level.
19. A government’s
internal debt is:
a. debt
owed to other government agencies.
b. debt
owed to other governments.
c. debt
owed to its citizens.
d. both
(a) and (c).
20. The National
Income and Product Accounts budget balance reflects:
a. an
inflation-adjusted budget balance less social security surplus.
b. new
debt resulting from a federal budget deficit.
c. the
real budget balance.
d. the
nominal budget balance.
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