Question

1) U.S. public policy discourages saving because

Question 4 options:

	other things the same, taxes increase the return from savings.
	means tested programs such as Medicaid provide lower benefits to those who did not save.
	none of parents’ bequest to their children is taxed.
	some forms of capital income are taxed twice.

2) If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections

Question 2 options:

	interest rates and output would rise.
	interest rates would rise and output would fall.
	interest rates would fall and output would rise.
	interest rates and output would fall.

3) Part of the argument against deficits is that they

Question 3 options:

	increase interest rates and investment.
	increase interest rates and decrease investment.
	decrease interest rates and investment.
	decrease interest rates and increase investment.

Answer 1

1) Option d) some forms of capital income are taxed twice.

There is a system of double taxation in the U.S. Double taxation means both the profits of corporations and the dividends shareholders receive are taxed. Thus, U.S. public policy discourages saving.

2) Option c) Interest rates would fall and output would rise.

If there is a political business cycle and the Federal Reserve supports the incumbent, then we should expect that prior to elections interest rates would fall and output would rise.

3) Option b) increase interest rates and decrease investment.

When governments run a budget deficit, they tend to borrow more, this increases the demand for loanable funds and results in a increase in the interest rate. Higher interest rates tend to reduce private investment, this is known as the crowding out effect.