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1

What are the 3 largest sources of tax revenue?

individual income tax

social security and medicare taxes

corporate income tax

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2

tax rate paid on additional dollar of income

marginal tax rate

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3

Why do we care most about the marginal tax rate?

it determines things like incentive to work additional hours

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4

If the marginal tax rate is 10%, then the tax rate owed on an additional $100 will be…

$10

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5

the total tax payment divided by total income

average tax rate

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6

formula for the average tax rate

total tax payment/total income

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7

If your income is $50,000 and total tax owed is $7500, we can calculate the average tax rate as…

15%

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8

What is the difference between marginal tax rates and average tax rates?

marginal tax rates are set by the government and the average tax rate is calculated after the tax is known

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9

tax that imposes higher tax rates on people with higher incomes

progressive tax

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10

tax system that has a constant tax rate

flat tax

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11

tax that imposes higher tax rates on people with lower incomes

regressive tax

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12

Where does the tax money go?

social security, defense, medicare, medicaid

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13

the annual difference between federal spending and revenues

deficit

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14

The Federal Reserve influences short-term rates through…

a) quantitative easing

b) open market operations

c) reserve ratio

b

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15

Systematic risk is the risk that:

a) an illiquid but solvent institution will fail

b) the failure of one financial institution will bring down other such institutions

c) an insolvent but liquid institution will fail

b

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16

Which monetary policy can the Federal Reserve use to increase aggregate demand?

a) increase the rate of growth of the money supply

b) increase interest rates

c) discourage consumer borrowing

a

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17

A negative real shock poses difficulties for monetary policy because:

a) policymakers can reduce inflation or unemployment but not both

b) increasing the money supply is politically unpopular

c) increasing the money supply is illegal

a

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18

If initially an economy is in a long run equilibrium with M(→) = 5%, v(→) = 3%, pi = 2%, and then the potential growth rate Yr(→) is 6% and then because of economic uncertainty v(→) falls to 1%, what should the Federal Reserve do?

a) quietly raise Yr(→) to 8% to offset the decrease in v(→)

b) publicly lower M(→) to 3% so that M(→)-v(→) stays constant at 2%

c) publicly demonstrate a commitment to keep M(→) + v(→) at 8% by raising M(→)

d) quietly raise M(→) without telling anyone, as only unexpected inflation is expansionary

c

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19

Which of the following should the Federal Reserve have used to limit the recent housing bubble?

a) decrease the money supply

b) lower interest rates

c) regulate subprime mortgages

c

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20

If your total taxable income is $100,000, how much income tax do you have to pay on it?

a) $10,000

b) $16,542.50

c) $25,000

d) $37,885

e) $45,000

b

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21

Suppose a high-income individual, subject to 15% of capital gains tax rate sells 100 shares of Company X and makes a loss of $500. She also sells 100 shares of Company Y and makes a profit of $1200. How much in capital gains tax will she pay?

a) $75

b) $105

c) $180

d) $255

c

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