Define the terms legal incidence and economic incidence. When the legal incidence of a tax is changed, how does this affect the economic incidence of the tax? Why does this result occur?
What will be an ideal response?
Legal incidence refers to the division of a tax burden according to who is required by law to pay the tax, while economic incidence refers to the division of a tax burden according to who actually pays the tax after all price adjustments are taken into account. A change in the legal incidence of a tax will have no effect on the economic incidence. If the legal incidence of a per-unit tax is entirely on suppliers, the supply curve will shift up by the amount of the tax. On the other hand, if the legal incidence is entirely on demanders, the demand curve will shift down by the amount of the tax. In both situations, the equilibrium quantity will fall, suppliers will receive a lower post-tax price, and demanders will pay a higher post-tax price. Simple geometry shows that the magnitudes of these effects are the same in the two cases.
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Refer to the figure below.________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________. 
A. Rising; A B. Falling; A; C C. Falling; B: C D. Rising; A; C
The tax multiplier is the
A) magnification effect of a change in taxes on aggregate supply. B) magnification effect of a change in taxes on the national debt. C) magnification effect of a change in taxes on the budget deficit. D) magnification effect of a change in taxes on government expenditures. E) magnification effect of a change in taxes on aggregate demand.
Using the data in the above table, in the short-run macroeconomic equilibrium, there is
A) an inflationary gap of $1 trillion. B) an inflationary gap of $2 trillion. C) a recessionary gap of $1 trillion. D) a recessionary gap of $2 trillion.
A currency pegged at a value below the market equilibrium exchange rate is
A) achieving purchasing power parity. B) undervalued. C) overvalued. D) None of the above are correct.