Question

The Bush tax cuts

	a.	held constant tax rates for the upper brackets and decreased tax rates for lower income taxpayers.
	b.	reduced tax rates for the upper brackets and increased tax rates for lower income taxpayers.
	c.	reduced tax rates for the upper brackets and held constant tax rates for lower income taxpayers.
	d.	Increased tax rates for the upper brackets and decreased tax rates for lower income taxpayers.
	e.	reduced tax rates for the upper brackets and decreased tax rates for lower income taxpayers.

An increase in taxes shifts the

	a.	aggregate supply curve outward.
	b.	aggregate demand curve outward.
	c.	consumption schedule downward.
	d.	consumption schedule upward.

How does the multiplier for a change in government spending compare to the multiplier for a change in taxes?

	a.	It is smaller.
	b.	It is the same.
	c.	It is larger.
	d.	It cannot be calculated.

Suppose the federal government is considering alternatives to increase the level of real GDP in order to reduce unemployment. It can only do one of the following. Which will have the smallest impact on the federal budget?

	a.	decreasing government spending
	b.	increasing transfer payments
	c.	decreasing transfer payments
	d.	increasing government spending

Answer 1

1. e. reduced tax rates for the upper brackets and decreased tax rates for lower income taxpayers.
(Bush tax cut reduced the tax rate for everyone.)

2. c. consumption schedule downward.
(As tax increase, consumption would decrease so consumption schedule shifts downward.)

3. c. It is larger.
(Government spending multiplier is larger than the tax multiplier.)

4. b. increasing transfer payments
(Real GDP can be increased by increasing government spending or transfer payments and increase in transfer payments will have lower impact on budget.)