Q1. Michael Vincent and Elizabeth Matthews, economists at Macro Associates, conduct research into the effects of fiscal policy on the economy. Vincent states that government taxing decisions affect the supply of labor. Matthews contends that government taxing decisions affect potential GDP.

Regarding their statements, Vincent and Matthews are:

                Vincent             Matthews

A) Correct                                       Incorrect

B) Correct                                       Correct

C) Incorrect                                     Correct

Q2. Edmund Jones, an economist, recommends that the federal government consider reducing its budget deficit during a recession by raising income taxes with no other fiscal policy changes. Jones’ income tax increase recommendation will most likely have the following effects on the supply of labor and on potential GDP?

          Supply of labor         Potential GDP

A) Increase                                     Decrease

B) Decrease                                   Increase

C) Decrease                                   Decrease

Q3. When potential real GDP is less than actual real GDP, the economy is most likely experiencing:

A)   recession.

B)   underemployment.

C)   inflation.

答案和详解如下：

Q1. Michael Vincent and Elizabeth Matthews, economists at Macro Associates, conduct research into the effects of fiscal policy on the economy. Vincent states that government taxing decisions affect the supply of labor. Matthews contends that government taxing decisions affect potential GDP.

Regarding their statements, Vincent and Matthews are:

                Vincent             Matthews

A) Correct                                       Incorrect

B) Correct                                       Correct

C) Incorrect                                     Correct

Correct answer is B)

Fiscal policy refers to the federal government’s decisions regarding government spending and taxing. Income tax increases cause after-tax wages to fall, dampening the incentive to work. Consequently, workers will be less likely to work the same number of hours as they did when their after-tax wages per hour were higher. As income taxes increase, the full-employment supply of labor (a key factor of production) decreases, which causes potential GDP to decrease. Therefore, government taxing decisions affect both the supply of labor and potential GDP.

Q2. Edmund Jones, an economist, recommends that the federal government consider reducing its budget deficit during a recession by raising income taxes with no other fiscal policy changes. Jones’ income tax increase recommendation will most likely have the following effects on the supply of labor and on potential GDP?

          Supply of labor         Potential GDP

A) Increase                                     Decrease

B) Decrease                                   Increase

C) Decrease                                   Decrease

Correct answer is C)

Taxes dampen the incentive to work. An increase in income taxes causes after-tax wages per hour to fall. Consequently, workers will be less likely to work the same number of hours as they did when their after-tax wages per hour were higher. As income taxes rise, the full-employment supply of labor (a key factor of production) falls, which then causes the potential GDP (intersection of the supply and demand for labor curves) to fall.

Q3. When potential real GDP is less than actual real GDP, the economy is most likely experiencing:

A)   recession.

B)   underemployment.

C)   inflation.

Correct answer is C)

The economy is in an inflationary phase if actual real GDP is greater than potential real GDP. When actual real GDP equals potential real GDP, the economy is said to be at full employment. The economy is in a recessionary phase if real GDP is less than potential GDP.

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