Chapter 16

Question 1

Tools of Fiscal Policy

Answer 1

• Taxes
• Expenditures
• Regulations

Question 2

Taxes

Answer 2

Payed on incomes, goods and services to:

• discourage certain activities.
• provide resources for public expenditures.

Question 3

Expenditures

Answer 3

Payed on certain goods and services (e.g. roads, education) and transfer payments that provide resources to individuals.

Question 4

Regulations

Answer 4

Directions that urge people to perform or refrain from certain activities (e.g. limit amount of pollution for firms, mandate testing new drugs).

Question 5

Functions of Governments

Answer 5

• Improve economic efficiency.
• Reduce economic inequality.
• Stabilize the economy through policies.
• Conduct international economic policy.

Question 6

Reducing Economic Inequality

Answer 6

Income redistribution through taxes.

Question 7

Stabilizing the Economy

Answer 7

The government should work on preventing depression, inflation and unemployment through setting the right policies, like fiscal and monetary.

Question 8

Conducting International Economic Policy

Answer 8

• Reducing trade barriers.
• Coordinating macroeconomic policy.
• Protecting the global environment.

Question 9

Improving Economic Efficiency

Answer 9

• Government should ensure fulfillment of contracts and prevent fraud.
• Government should ensure perfect competition ( avoid monopolies).
• Government should control air pollution,…

Question 10

Public-Choice Theory

Answer 10

Branch of economics and political science that studies the way governments make decisions.

Question 11

Levels of Governments

Answer 11

Federal, state and local.

Question 12

Federal Government

Answer 12

Direct activities concerned with the whole nation.

Question 13

State Governemnt

Answer 13

Builds roads, run university systems.

Question 14

Local Government

Answer 14

Education, police streets and remove garbage.

Question 15

Benefit Principle

Answer 15

Taxes should be in proportion to the benefit received.

Question 16

Ability-to-Pay Principle

Answer 16

Amount of taxes paid should be related to income level, the higher the income the more taxes paid.

Question 17

Horizontal Equity

Answer 17

Everyone pays the same as long as they are equal.

Question 18

Vertical Equity

Answer 18

Considers level of income in taxation.

Question 19

Progressive Income Tax

Answer 19

The higher the income, the higher the fraction of it is payed as taxes. For every additional $ of income, the percent of income paid as tax.

Question 20

Proportional Tax

Answer 20

All taxpayers pay the same fraction of their income as tax.

Question 21

Regressive Tax

Answer 21

Takes a larger fraction of income from poor families.

Question 22

Indirect Taxes

Answer 22

Applied to goods and services, such as sales tax. Easier to collect at retail level.

Question 23

Direct Tax

Answer 23

Applied directly to individuals and firms, such as income taxes. Easier to tailor to fit personal circumstances.

Question 24

Effective/ Average Tax Rate

Answer 24

Total Taxes / Total Income

Question 25

Corporate Income Tax

Answer 25

Tax on profits of corporations.