ECON 2105 Lecture Notes - Lecture 10: Cash Flow, Progressive Tax, Patient Protection And Affordable Care Act

1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

2. If the government wants to close a GDP gap, it can:

Answer

3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

5. Discretionary fiscal policy is best defined as:

Answer

6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

7. Which of the following is true about automatic stabilizers?

Answer

8. Increased budget deficits

Answer

9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

1.

12.12. The term fiscal policy refers to

Answer

13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

14. Which of the following is not a means to finance government spending?

Answer

15. An automatic stabilizer is

Answer

16. Budget deficits tend to grow during recessions because

Answer

The table shows the taxable income range and marginal tax rates for a single taxpayer in Oceania. There are no exemptions or deductions on personal income taxes in Oceania.

1. Refer to Table 20.1. The income tax paid by George, a single taxpayer with an income of $65,000, is

A.$11,100.

B.$14,745.

C.$15,345.

D.$17,550.

2.The table shows the taxable income range and marginal tax rates for a single taxpayer in Oceania. There are no exemptions or deductions on personal income taxes in Oceania.

Refer to Table 20.1. George is a single taxpayer with an income of $65,000. What is George's average tax rate?

A.19.00%

B.22.68%

C.23.61%

D.27%

3.Of the following countries, in which one was the true marginal tax rate faced by the typical worker lowest and the average number of hours worked per week highest from 1993 through 1996?

A.Italy

B.Canada

C.the United States

D.Germany

4.Unlike with Social Security taxes, there is no threshold on earnings beyond which the Medicare tax collection stops.

False

True

5.Which of the following expenditures is classified as a discretionary expenditure of the U.S. federal​ government?
A.food stamps

B.Social Security

C.federal employee pensions

D.student loans and grants

6.For the U.S. federal government, mandatory spending refers to
A.spending that is not subject to Congress's annual appropriations process.

B.spending on federal employee salaries.

C.spending that never changes in amount from year to year.

D.spending that must be authorized by Congress each year.

7.Based on the current state of revenue of the Social Security and Medicare programs, the government has two options for funding, which are

A.cutting payroll taxes or raising benefits.

B.cutting payroll taxes or cutting benefits.

C.raising payroll taxes or cutting benefits.

D.raising payroll taxes or raising benefits.

8.Which of the following would be classified as fiscal policy?
A.The Environmental Protection Agency enacts stricter air pollution regulations.

B.The Federal Reserve cuts interest rates to stimulate the economy.

C.The federal government cuts taxes to stimulate the economy.

D.States increase taxes to fund education.

9.Automatic stabilizers refer to

A.the money supply and interest rates that automatically increase or decrease along with the business cycle.

B.changes in the money supply or interest rates that are intended to achieve economic stability.

C.changes in federal taxes and purchases that are intended to influence economic activity.

D.government spending and taxes that automatically increase or decrease along with the business cycle.

10.The implementation lag for fiscal policy ________ it is for monetary policy.

A.can be much longer than

B.is usually the same as

C.is generally much shorter than

D.There is not an implementation lag for fiscal policy.

11.When government decides to increase spending, interest rates generally ________ and this change in interest rates ________ investment spending.

A.decrease; increases

B.increase; decreases

C.decrease; decreases

D.increase; increases

12.The marginal propensity to consume is the proportion of each new​ dollar's worth of income that is spent.

True

False

Dems, GOP talk up deficit reduction, but don't act

WASHINGTON (AP) — Liberals' loud objections to White House proposals for slowing the growth of huge social programs make it clear that neither political party puts a high priority on reducing the deficit, despite much talk to the contrary.

For years, House Republicans have adamantly refused to raise income taxes, even though U.S. taxes are historically low, and the Bush-era tax cuts were a major cause of the current deficit.

And now, top Democrats are staunchly opposing changes to Medicare and Social Security benefits, despite studies showing the programs' financial paths are unsustainable.

Unless something gives, it's hard to see what will produce the significant compromises needed to tame the federal debt, which is nearing $17 trillion.

"There's not much of an appetite for deficit reduction," said Bob Bixby of the Concord Coalition, which pushes for "responsible fiscal policy."

There might be a few small steps this year, he said, when the government again needs to raise its borrowing limit. But a "grand bargain" involving significant spending cuts and revenue increases seems unlikely, Bixby said.

He added, "It's a little depressing to hear the reactions to the president's budget, from both sides."

There was nothing surprising about Republican denunciations of Obama's proposed tax increases, which he wants to combine with spending cuts to reduce the deficit.

The newer wrinkle was the left's sharp criticism of his proposals to slow the growth in Medicare and Social Security benefits, provided Republicans agree to new revenues. Obama has offered Republicans such a deal before. But this month's budget proposal gave it a new imprimatur.

The group MoveOn.org said Wednesday that supporters "who are outraged at President Obama's proposal to cut Social Security benefits will protest and deliver petitions" this week.

Sen. Bernie Sanders, a liberal independent from Vermont, is leading a similar petition drive, opposing "any benefit cuts to Social Security, Medicare or Medicaid." The deficit, his letter says, "was primarily caused during the Bush years by two unpaid-for wars, huge tax breaks for the rich and a prescription drug program" for Medicare, funded through borrowing. He suggests that higher taxes on the wealthy are the fairest way to tackle the deficit.

Democrats cite several reasons to raise taxes on high-income households. Obama campaigned for such tax increases in 2008 and 2012 but accomplished them only partially with the "fiscal cliff" resolution of Jan. 1.

Major tax cuts in 2001 and 2003 played big roles in turning a federal budget surplus into soaring deficits, according to research by the Congressional Budget Office and others. And by many measures, the U.S. tax burden in near historic lows.

Households earning roughly the national median income paid, on average, 11.1 percent of their income in total federal taxes in 2009, the most recent year for such data. That's the lowest level in more than 30 years, the CBO says.

Nonetheless, House Republicans have placed their highest priority on refusing to raise income tax rates, effectively ranking it above all other goals.

"The president got his tax hikes on Jan. 1," House Speaker John Boehner, R-Ohio, is fond of saying. It's a reference to the $620 billion in new revenues, over 10 years, that Republicans were unable to stop because of the "fiscal cliff" law, resolved on New Year's Day.

If it's easy to make a case for higher revenues, the same is true for slowing the growth of Social Security and Medicare benefits. For decades, studies have warned of approaching trouble in these popular but costly programs, as health care costs rise and baby boomers begin to retire.

"Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers," the Social Security Administration says, summarizing findings by the two programs' trustees.

"The early detection light has been going on for a while, and there has been a failure to act," Social Security trustee Charles P. Blahous recently told a House panel. If lawmakers are to preserve the programs for future retirees, he said, they will have to accept much more "political pain" than officials endured during a 1983 overhaul that included "several extremely controversial measures."

Obama has proposed an often-discussed step, which deals with government accounting in general, not just entitlement programs. If Congress agrees to higher tax revenues, the president said, he would back a slower growth calculation for cost-of-living increases for Social Security benefits, plus higher Medicare premiums for higher-income seniors.

Interest groups have criticized both ideas. AARP calls the slower cost-of-living formula a "harmful change," and urges seniors to oppose it.

American voters can largely blame themselves when Congress is more talk than action on deficit reduction. Americans routinely say they want a smaller federal debt, but not at the cost of programs they hold dear — including Social Security and Medicare.

A CBS News poll in March found that most Americans want to cut spending and raise taxes to reduce the deficit. But 4 in 5 oppose cuts to Social Security or Medicare. And two-thirds are unwilling to have their own taxes raised in the name of deficit reduction.

When Pew Research asked which was more important — reducing the national debt or keeping Social Security and Medicare benefits as they are now — the public sided with safeguarding the benefits programs, 53 percent to 36 percent.

The deficit-spending partisanship continued Wednesday. On a party-line vote, House Ways and Means Committee Republicans passed a bill to protect Social Security recipients and investors in Treasury bonds if the government hits its borrowing limit and can't pay all its bills later this year. Democrats say if the federal government starts reneging on any obligations — even if it pays bondholders — financial markets will lose faith and the economy will tank.

Some Democrats fear a lose-lose situation if they support Obama's proposals. First, they could be attacked from the left for tweaking the programs that many Democrats see as their party's greatest legacy. And second, Republicans might accuse them of "raiding Medicare" in next year's congressional elections. That battle cry proved effective in 2010 after Obama's health care overhaul bill was passed.

Democrats call such tactics shamelessly hypocritical. Republicans, they note, have long called for reining in entitlement spending.

Boehner rebuked a top GOP campaign figure for hinting at a renewal of the "raiding Medicare" attacks. But Reince Priebus, the national Republican Party chairman, seemed eager to revive the question of whether Democratic trims to Medicare's costs amount to an unfair cut in benefits.

9. Read the AP article “Dems, GOP talk up deficit reduction, but don't act (Links to an external site.)” by C. Babington (Apr25’13).

a. What are the two basic ways of shrinking a budget deficit?

b. Which of your answers above are Republicans vehemently against? What are the potential negative economic effects of implementing this basic policy?

c. Which of your answers above are Democrats strongly opposed to? What are the potential negative economic effects of implementing this basic policy?