Question

1 Which government fiscal policy is a negative supply shock?

A) decreasing taxes

B) decreasing transfer payments

C) decreasing government spending

D) increasing government spending

E) none of the above

2 According to the Laffer Curve, raising the tax rate

A) always increases total tax revenue.

B) always decreases total tax revenue.

C) does not change total tax revenue.

D) increases or decreases total tax revenue, depending on the tax rate.

E) taxes are a joke.

3. It is a largely a myth about the national debt that

A) government borrowing may crowd out private investment.

B) government borrowing may crowd in private investment.

C) high interest payments on the debt may create self-perpetuating debt.

D) Canada will go bankrupt unless we repay the debt.

E) going into debt may be a not-smart choice.

Answer 1

1. Option E

2. Option B

The Laffer Curve states that if tax rates are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from working. Equally, the Laffer Curve states that cutting taxes could, in theory, lead to higher tax revenues.

3. Option A

It crowds out investment
This is an obvious mistake during an era of low real interest rates. Government debt crowds out private capital in OLG models by raising interest rates. So if interest rates are low enough to finance any decent investment, there can be no harmful crowding out.