1.

Which of the following diagrams show(s) a relationship in accordance with the taxation principle
of equality put forth by Adam Smith?

(1)
Tax payment
0

) Tax
(2
payment
0
(3)
Average tax rate
Income

e
Incom
0

Average
)
4
(
0

tax rate
Income

Income

A. (1) only
B. (1) and (3) only
C. (2) and (3) only
D. (2) and (4) only
2. Which of the following statements about indirect tax is/are CORRECT?
(1) The tax burden of indirect tax can be shifted to other parties.
(2) To improve income inequality, imposing an indirect tax is better than imposing a direct tax.
(3) Government revenue generated from levying indirect tax is more than that from direct tax.

A. (1) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)
3. Study the following information.

Income ($) Tax payment ($)

10,000 600
 20,000 1,600
30,000 3,000
40,000 4,800

The above tax is a

A. progressive tax.
B. proportional tax.
C. regressive tax.
D. lump-sum tax.
Average tax rate
4. Which of the following represents a regressive tax? C

A.
Tax payment
0

0
Income

Income
Average tax rate

B.
D.

Tax payment
0

0
Income

Income

5. Which of the following diagrams represent(s) a progressive tax?

(1)
Tax payment
0

) payment
2 Tax
(
0
Income

me
Inco
 (3)
Average tax rate
0

) Average tax
(4
rate
0
Income

e
Incom
A. (2) only
B. (3) only
C. (1) and (3) only
D. (1), (3) and (4) only

6. The diagram below shows the relationship between tax payment and income of a certain tax.
Tax payment
0

Which of the following statements about the above tax is CORRECT?

Income

A. It represents the profits tax in Hong Kong.

B. It helps reduce income inequality.
C. It is a proportional tax.
D. The average tax rate decreases when income increases.
7. Study the following information.

Tax payment ($)

Income ($)
Old system New system
10,000 1,400 1,000
 20,000 2,400 2,400
30,000 3,000 4,200

From the above information, which of the following statements is CORRECT?

A. Compared to the old system, more people fall into the tax net.
B. Government revenue from the new system is relatively more susceptible to economic
fluctuations than the old system.
C. The average tax rate of the new system is higher than that of the old system for all levels of
income.
D. Compared to the old system, income of the economy under the new system is more evenly
distributed.
8. Study the following information carefully.

Tax payment ($)

Income ($)
Tax A Tax B
10,000 1,000 1,000
20,000 1,000 2,000
30,000 1,000 3,000

In order to reduce income inequality, the government should adopt

A. Tax A.
B. Tax B.
C. either Tax A or Tax B.
D. neither Tax A nor Tax B.
9. Lowering the profits tax rate is _______________ fiscal policy and will result in _______________.
A. a contractionary … a rightward shift of the SRAS curve
B. a contractionary … a leftward shift of the AD curve
C. an expansionary … a leftward shift of the SRAS curve
D. an expansionary … a rightward shift of the AD curve
10. Refer to the following diagram.
Price level
0

E0

LRAS
AD

SRAS
Quantity of output
(real GDP)
Suppose the economy initially operates at E0. Which of the following fiscal policies help to improve the
employment situation without raising the price level?
A. increasing government consumption expenditure
B. reducing the salaries tax rate
C. reducing the profits tax rate
D. reducing the sales tax imposed on producers

11. Refer to the following diagram.

Price level
LRAS

SRAS

P0

AD

0 Yf Y0 Quantity of output
The output level of the economy is currently at Y0. Suppose the government imposes a sales tax on all
(real GDP)
goods and services and the tax will be paid by the producers. Which of the following statements are
CORRECT?
(1) The real GDP will decrease.
(2) The price level will decrease.
(3) The government will have a budget surplus.
(4) The income distribution will become more uneven.

A. (1) and (2) only

B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

12. Which of the following is an example of a contractionary monetary policy?

A. The government prints more money.
B. The government sells government bonds to the public.
C. The government lowers the discount rate.
 D. The government lowers the required reserve ratio.

13. Which of the following are examples of expansionary monetary policy?

(1) buying government bonds from the public
(2) lowering the discount rate
(3) raising the required reserve ratio

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

14. Suppose the government of an economy raises the required reserve ratio. Which of the following is
her possible aim?
A. to make income more evenly distributed
B. to eliminate a deflationary gap
C. to lower the price level
D. to reduce unemployment
15. Lowering the discount rate will lead to _______________ in money supply and hence
_______________ in the interest rate.
A. an increase … an increase
B. an increase … a decrease
C. a decrease … an increase
D. a decrease … a decrease
16. To eliminate a deflationary gap, the government can _______________. As a result,
_______________ and the full-employment output level will be restored.
A. print more money … the SRAS curve will shift to the left
B. lower the required reserve ratio … the AD curve will shift to the right
C. raise the discount rate … the AD curve will shift to the left
D. sell government bonds to the public … the SRAS curve will shift to the right
17. In a country with an extremely high unemployment rate, which of the following measures can help
to ease the problem?
(1) The government buys government bonds from the public.
(2) The government lowers the discount rate.
(3) The government lowers the profits tax rate.
A. (1) and (2) only
 B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

18. Study the following diagram.

Price level
LRAS

SRAS

P0

AD
0 Y0 Yf Quantity of
output
(real GDP)
The current output level of the economy is Y0. Suppose the government purchases government bonds
from the public and reduces the required reserve ratio at the same time. In the long run,
(1) the price level will be higher than P0.
(2) the output level will be higher than Yf.
(3) the long-run aggregate supply will remain unchanged.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

19. Suppose an economy initially operates at the above-full employment equilibrium. If the
government lowers the profits tax rate and sells government bonds to the public at the same time, the
price level will ____________ and the output level will ____________ in the short run.
A. increase … increase
B. increase … increase, decrease or remain unchanged
C. increase, decrease or remain unchanged … increase
D. increase, decrease or remain unchanged … increase, decrease or remain unchanged

20. In an economy, the government decided to refund part of the salaries tax to the low-income group
and lower the discount rate. The real GDP of the economy will _____________ and the level of income
inequality will _____________.
 A. increase … remain unchanged
B. increase, decrease or remain unchanged … increase
C. increase … decrease
D. increase, decrease or remain unchanged … remain unchanged
21. A government changes the salaries tax structure as shown in the following diagram.

Tax rate (%)

0

New tax structure

Old tax structure

Income ($)

When compared to the old tax structure, the new tax structure
(1) raises people’s working incentive.
(2) has a larger personal tax allowance.
(3) will widen the income gap between the rich and the poor.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

22. Suppose the government decides to construct a new airport which is financed by selling
government bonds to the public. This will result in
(1) an increase in aggregate output in the short run.
(2) an increase in aggregate output in the long run.
(3) an increase in employment in the short run.

A. (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

23. Which of the following government policies can lower the price level and increase employment at
the same time?
A. providing interest-free loans to small and medium-sized enterprises
 B. increasing the unemployment benefits
C. lowering the profits tax rate
D. increasing the money supply

LQ:
1. Suppose an economy is experiencing a deflationary gap. What type of fiscal policy can help the
economy to restore the full-employment output level? Explain with the aid of an AS-AD diagram.
(7 marks)

2. Currently, the output level of Country X is below the full-employment output level. To tackle the
problem, the government is considering adjusting the profits tax rate.
(a) Explain whether the government should raise or lower the profits tax rate. (2 marks)
(b) With the aid of a diagram, explain how the adjustment in the profits tax rate helps the economy to
restore full-employment output level. (7 marks)

3. To stimulate the economy, the central bank decides to lower the discount rate. Explain the effect of
lowering the discount rate on the nominal GDP in the short run by using
(a) the quantity theory of money; and (3 marks)
(b) an aggregate-demand-aggregate-supply diagram. (4 marks)