$$\text{Budget Balance} = \text{Receipts} - \text{Outlays} \u003c 0$$

$$\text{Real After-Tax Interest Rate} = (1 - \text{Tax Rate}) \times \text{Nominal Interest Rate} - \text{Inflation Rate}$$

$$\text{Receipts} = \text{Outlays}$$

Question 1

Which of the following best describes the effect of an income tax on the labor market, as shown in the diagrams above?

Accepted Answer

The labor supply curve shifts left, decreasing employment and creating a tax wedge between before-tax and after-tax wage rates.

Question 2

Suppose the government increases the income tax rate. What is the most likely effect on potential GDP, according to the supply-side diagrams?

Accepted Answer

Potential GDP decreases because the quantity of labor employed falls.

Question 3

What is the 'tax wedge' in the labor market?

Accepted Answer

The difference between the before-tax and after-tax real wage rates.

Question 4

If the government budget balance is calculated as receipts minus outlays, which equation correctly represents a budget deficit?

Accepted Answer

$$	ext{Budget Balance} = 	ext{Receipts} - 	ext{Outlays} \u003c 0$$

Question 5

Which of the following is NOT a supply-side effect of fiscal policy?

Accepted Answer

An increase in aggregate demand due to government spending.

Question 6

A tax on capital income affects the loanable funds market by:

Accepted Answer

Decreasing the supply of loanable funds, raising the real interest rate, and creating a tax wedge.

Question 7

Which formula best represents the real after-tax interest rate?

Accepted Answer

$$	ext{Real After-Tax Interest Rate} = (1 - 	ext{Tax Rate}) 	imes 	ext{Nominal Interest Rate} - 	ext{Inflation Rate}$$

Question 8

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Induced taxes that rise during expansions and fall during recessions.

Question 9

If real GDP is below potential GDP and there is a budget deficit, what type of deficit is this?

Accepted Answer

Cyclical deficit

Question 10

Which of the following statements about transfer payments is correct?

Accepted Answer

Transfer payments decrease during economic expansions and increase during recessions.

Question 11

A balanced budget occurs when:

Accepted Answer

$$	ext{Receipts} = 	ext{Outlays}$$

Question 12

Which of the following best describes the effect of a consumption tax (like HST) on the labor market?

Accepted Answer

It acts like a cut in the real wage rate, increasing the tax wedge and reducing labor supply.

Question 13

Which of the following is a discretionary fiscal policy action?

Accepted Answer

A change in government spending or taxes initiated by Congress to close an output gap.

Question 14

If the economy is at full employment and there is a budget deficit, what type of deficit is this?

Accepted Answer

Structural deficit

Question 15

Which of the following best explains why automatic stabilizers moderate the business cycle?

Accepted Answer

They decrease the multiplier effect, making real GDP more stable.

Question 16

If the government runs a structural deficit and the actual deficit is larger than the structural deficit, what does this imply?

Accepted Answer

There is also a cyclical deficit.

Question 17

Which of the following is NOT a receipt in the federal budget?

Accepted Answer

Transfer payments

Question 18

If a tax on capital income lowers the real after-tax interest rate, what is the likely effect on saving and investment?

Accepted Answer

Saving and investment decrease.

Question 19

Which equation correctly represents the government debt?

Accepted Answer

$$	ext{Government Debt} = \sum (	ext{Past Deficits}) - \sum (	ext{Past Surpluses})$$

Chapter 13: Fiscal Policy and Government Budgets

Study Guide - Practice Questions