AP Macroeconomics : Tax Policy

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : How To Find Tax Incentives

A progressive tax structure is designed in order to put more of the tax burden on _______.

Possible Answers:

wealthier individuals instead of poorer individuals

poorer individuals instead of wealthier individuals

sales tax instead of income tax

individual income instead of corporate profits

corporate profits instead of individual income

Correct answer:

wealthier individuals instead of poorer individuals

Explanation:

A progressive tax system is so-called because, as a person or corporation makes more money, the overall tax burden as a percent of income gets progressively higher. A progressive tax seeks to produce more government revenue from those individuals who are perceived as being more able to bear the burden. Progressive taxation is usually popular politically, making it such a widespread form of taxation.

Example Question #1 : How To Find Tax Credits

A tax credit describes an element of tax policy that ________.

Possible Answers:

reduces taxes for people who qualify under certain circumstances

allows for an additional tax on specific kinds of income, such as gambling

allows for an additional tax on goods deemed unseemly

raises money on investment income

only allows exemptions for people making under a certain income level per year

Correct answer:

reduces taxes for people who qualify under certain circumstances

Explanation:

Tax law includes small exemptions and refunds, which are known as tax credits. Often, these tax credits are provided for groups of people like homebuyers, parents, and students. Tax credits are also usually seen as a way to lighten specific tax burdens without rewriting or transforming tax policy.

Example Question #2 : Tax Policy

In order, the four phases of the business cycle are:

Possible Answers:

peak, contraction, expansion, and trough

expansion, contraction, peak, and trough

expansion, peak, contraction, and trough

contraction, expansion, peak, and trough

Correct answer:

expansion, peak, contraction, and trough

Explanation:

The four phases of the business cycle are expansion, peak, contraction, and trough. Real GDP growth is positive during an expansion, followed by a point at which real GDP growth peaks, then begins to decline during a contraction, and finally a bottoming out at the point of the trough. Each of the other answer choices represents a distortion of this order.

Example Question #3 : Tax Policy

If the income level in a given economy increases by $100 and spending increases by $80, the marginal propensity to save in that economy is equal to which of the following?

Possible Answers:

0.5

0.2

0.75

0.8

Correct answer:

0.2

Explanation:

The marginal propensity to consume is calcuated by the change in consumption over the change in income. In this example, the marginal propensity to consume is 80/100 = 0.8. However, the problem asks for the marginal propensity to save and not the marginal propensity to consume.

In any economy, whatever money is not used for consumption is considered savings. Therefore, to find the marginal propensity to save, subtract the marginal propensity to consume from 1. Thus, 1 - 0.8 = 0.2. The marginal propensity to consume in this problem would be 0.2.

Example Question #1 : Tax Policy

An excise tax levied by a state government on gasoline is paid to the government by __________.

Possible Answers:

the oil company who sells the gasoline

only individuals who buy a certain amount of gasoline

any individual who buys the gasoline

the individual owners of gas stations

Correct answer:

the oil company who sells the gasoline

Explanation:

An excise tax is an indirect tax, or one that is not paid directly by consumers, but instead by the producers of the good being taxed. Gasoline excise taxes are typically paid by the oil companies who refine, produce, and sell the gasoline, in order to offset pollution and other trandportation costs governments incur from the sale of gas. Quite often, the cost of the tax to the company is passed on to the consumer in the form of higher prices.

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