1) Bob earned $100,000 last year and paid $10,000 in income taxes. Bill earned $50,000 last year and paid $5,000 in income taxes. This is an example of what principle of taxation?

a. Benefits received principle.

b. Ability to pay principle.

c. Progressive.

d. Regressive.

2) Our federal income tax system requires that someone who has $20,000 in taxable income will pay $3000 in income taxes and someone who has $50,000 in taxable income will pay over $8000 in income taxes. This means that the federal income tax is what kind of tax?

a. Benefits received principle.

b. Ability to pay principle.

c. Progressive.

d. Regressive.

3) The flat tax:

a. shift the burden of taxes to businesses.

b. Would complicate tax filing for most individuals.

c. departs from ability to pay principle.

d. It's strictly proportional, or the same tax rate, for each taxpayer.

4) "Crowding out" by government borrowing refers to:

a. politicians waiting in line to spend money.

b. Government borrowing of money taking the place of private investment.

c. Government spending more money than individuals.

d. Government borrowing of dollars from crowded markets.

5) Which is an important problem associated with the public debt?

a. Payments of interest on the debt lead to greater income equality.

b. Interest payments on the debt tend to improve economic incentives to work and produce more unemployment.

c. Government borrowing to finance the debt may increase the level of private investment.

d. Payment of interest on the debt reduce the amount of dollars that can be spent on other needs.

6) Differentiate between the federal deficit in the federal debt.

7) The following table shows government spending and tax revenue for a hypothetical economy over a five-year period. All figures are in billions.

Year Government spending Tax revenues

1 $800 $825

2 $850 $850

3 $900 $875

4 $950 $900

5 $1000 $925

A) In what years were their budget deficits and what were the amounts?

B) In what year was there a budget surplus and what was the amount?

C) What is the public debt in this economy over the five years?

D) If the size of economy (GDP) was $4000 billion, what would be the public debt as a percentage of GDP?

8) Compare and contrast the three budget philosophies: annually balanced budget, cyclically balanced budget, and functional finance.

9) State three causes of public debt.

10) In 2007 the public debt was $9.0 trillion. put this number in perspective by relating the debt to GDP, to other countries debt, to the amount of interest payments on the debt, and to ownership of the debt.

11) Adam Smith once wrote: "what is prudence in the conduct of every private family can scarce be folly of a great kingdom." Evaluate in terms of national debt.

12) Crowding out can weaken the effect of expansionary fiscal policy. Explain how crowding out creates this impact.

13) The table below gives data on interest rates and investment demands in hypothetical economy. Figures are in billions.

Interest rate Id1 Id2

7% $500 $600

6% $600 $700

5% $700 $800

4% $800 $900

3% $900 $1000

A) Use the Id1 schedule. Assume that the government needs to finance a budget deficit and this public borrowing increases the interest rate from 5% to 6%. How much crowding out of private investment will occur?

B) Now assume that the deficit is used to improve the performance of the economy, and that as a consequence the investment demand schedule changes from Id1 to Id2. At the same time, the interest rate rises from 5% to 6% as a government borrows money to finance the deficit. How much crowding out of private investment will occur in this case?

14) What is the problem with the financing of the Social Security program and how will that affect the deficit in their accounts of the United States.