Workbook Chapter 07 Answers Answers to Multiple-Choice Questions 1. b 2. a 3. b 4. a 5. c 6. b 7. a 8. c 9. b 10. b 11. b 12. d 13. d 14. a 15. d 16. c 17. c 18. a 19. a 20. c 21. a 22. d 23. d 24. d 25. d 26. b 27. d 28. c 29. a Answers to Fill-In Questions 1. 1933 2. spend, tax, regulate the economy, provide public goods, economic stabilization, and income redistribution 3. October 1, 2006 4. Social Security 5. taxes paid by taxable income 6. rich 7. sales, Social Security, excise 8. 6.2 9. personal income tax 10. 35 11. $1,530 12. big 13. rises Answers to Problems 1. $4,960 2. $620 3. ATR = Taxes paid/Taxable income = $1,000/$20,000 = .05 = 5 percent. 4. $2,800 5. 15 percent 6. $5,000 × 0.1 = $500 7. $100,000,000 × .35 = $35,000,000 8. MTR = change in taxes paid/change in taxable income = $2,500/$10,000 = .25 9. ATR = taxes paid/taxable income = $5,000/$40,000 = 1/8 = .125. 10. $30,000 × 10 = $300,000. $300,000 × .0765 = $22,950. 11. Social Security: $100,000 x 0.62 = $6,200. Medicare: $100,000 × .0145 = $1,450. Total = $7,650. 12. The standard or itemized deductions, exemptions, and child care tax credits would mean that none of the $15,000 is taxable. The Social Security and Medicare tax would be $15,000 x .0765 = $1,147.50. 13. (a) You would pay no federal income tax (b) $15,000 x .0765 = $1,147.50. 14. The lowest tax bracket is 10%. If you paid only $1,000 in taxes, you would be in that bracket. So your MTR and your ATR would both be 10%. 15. (a) $102,000 x 0.62 = $6,324; (b) $1,000,000 x 0.0145 = $14,500; (c) 35% 16. The first $102,000 of your earned income is subject to 6.2 percent Social Security tax, so you would pay a maximum of $6,324. Your entire earned income is subject to a 1.45 percent Medicare tax. So how much income would you be earning if you paid $6,324 in Medicare tax? Let?s let x = that income. Then we could use this equation: 0.0145x = $6324 0.0145x = $6,324 0.0145 0.0145 X = $436,137.93 Answers To Questions For Further Thought And Discussion 1. If a political candidate said that if she were elected to Congress, she would work toward cutting federal government spending by one-third over the next four years, would she stand much chance of fulfilling her promise? Why not? At least three-quarters of the federal budget consists of items that cannot be cut, either for legal or political reasons?Social Security, defense, interest on the national debt, and Medicare. So where do you cut? Even if she voted for such cuts, there would not be enough votes to pass them. 2. When you retire, will you be able to collect Social Security benefits? Give the reasons why you might not be able to collect? The Social Security trust fund, according to actuaries, will run out of money by the year 2040, unless Congress acts fairly soon. The money in this fund is in the form of U.S. Treasury securities. So, in effect, the trust fund is money owed by the U.S. Treasury to retirees. As long as the U.S. government is solvent, those securities are sound. But what if the federal government starts running deficits again and the national debt shoot up, especially as the ratio of workers to retirees continues to fall? So if you plan on retiring before 2040, you?ll probably be able to collect benefits, but there is no question the Social Security system will need to be fixed well before then. 3. Discuss the pros and cons of having a high cigarette tax. Pros: A high tax raises tens of billions in government revenues every year and it discourages people, especially teenagers, from smoking. Cons: It is a regressive tax and it places the government in the position of punishing us for our sins. 4. Make up a numerical example to show why the Social Security tax is regressive. Income Tax rate Taxes Paid Taxes as a percentage of income $10,000 6.2% $620 6.2% 100,000 6.2% 5. If Adam Smith were alive today, to what degree would he approve of the present economic role of the American government? Although he wouldn?t be at all happy with the myriad federal economic rules and regulations or with attempts to use the level of government spending and taxation to smooth out the business cycle, he might agree with much of the provision of public goods and services?certainly defense, and very likely police and fire protection, streets, highways, and parks. 6. What additional goods and services do we expect from government today as opposed to 60 years ago? We expect an extensive national defense, Social Security, universal education at least through high school, some form of medical insurance, and the maintenance of a national highway network. 7. Some politicians say that Americans pay too much in taxes. Explain why you agree or disagree with them. Compared to other industrial nations, taxes in the U. S. are extremely low. Nevertheless, it could be argued that taxes are still too high in the U.S., and that they are ridiculously high in other countries. 8. Describe the growth of the economic roles of the federal government since the 1930s. In the 1930s the federal government, under the New Deal, began to regulate the banks through the Federal Deposit Insurance Corporation (FDIC), and to intervene in the economy to put people to work in jobs programs. Social Security and public assistance were also launched. In the 1940s the government spent hundreds of billions of dollars fighting World War II. After the war, although military spending was slashed, it never fell to prewar levels, and it rose to about $300 billion (in 2001 dollars) in the early 1980s, never falling much below that level. In the 1960s the Medicare, Medicaid, and food stamp programs were started, and expenditures of each has risen exponentially since then. 9. Explain the difference between government spending and government purchases of goods and services. The federal, state, and local governments spend about half of their receipts on the purchase of goods and services, like highways, teachers? salaries, defense, and the justice system. The other half goes for Social Security benefits, public assistance, pensions for government retirees, and other transfer payments. So government spending includes government purchases of goods and services and well as transfer payments. 10. Give two examples of public goods or services that you use. Streets, highways, police protection, fire protection, the courts 11. Practical application: If you could order a cut of $100 billion in federal spending, which programs would you cut and why would you cut them? My two favorites for cutting would be defense and agriculture. Do we need to spend as much on defense as the rest of the world put together? With the disappearance of the Soviet Union, surely there is less need for a huge military establishment. And why must we pay farmers tens of billions of dollars a year to not grow certain crops, or to support the prices of crops they grow? amsler Workbook Chapter 07 Answers
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