1. On a graph of the labor market, show the effects of an increase in the payroll tax.

2. On a graph of the labor market, show the effects of a negative shock to technology on wages and employment.

3. Two examples of major technological innovations that could have caused major economic fluctuations are _________and ________.

4. Edward Prescott believes that Europeans work fewer hours than U.S. workers because are _________higher in Europe.

5. Payroll Tax for a Health Program. To finance a universal health-care program, the government decides to place a 10-percent payroll tax on all labor hired.

a. Draw a graph to show how this shifts the demand for labor.

b. If the labor-supply curve is vertical, what are the effects on real wages, output, and employment? Explain why economists say labor bears the full burden of the tax in this case.

c. If the labor-supply curve were horizontal, what would be the effects on wages, output, and employment?

d. Can your answer to part (c) explain Edward Prescott s claim about the causes of the changes in hours of work in Europe compared to Japan and the United States?

6. Analyzing the Effects of Tax Rate Changes for Families with Different Incomes. The Tax Reform Act of 1986 cut the tax rates sharply for high-income earners. Consider the families in the top 1 percent of all families ranked in terms of income. Before the law was passed, a woman in this group faced a marginal tax rate (the tax rate applied to the last dollar she earned) of 52 percent on average. After the law was passed, the rate fell to 38 percent. The decreases in tax rates were much less, however, for families with lower levels of income. According to a study by Professor Nada Eissa, after the decrease in taxes took effect, the labor supply of women in the highest income group increased more than that of women in other income groups. Use a labor demand and supply model to illustrate the differences between the high-income group and the other groups.

7. Tax Revenue and Labor Supply. Tax revenue collected from a payroll tax equals the tax rate times the earnings of individuals subject to the payroll tax. Let s say the labor-supply curve is close to vertical. Explain why, in this case, raising payroll tax rates will increase the total revenue the government receives from the payroll tax.

8. Explaining a Depression Using Real Business Cycle Theory. Real business cycle theorists look at economic fluctuations in a particular way.

a. Draw a graph to show how a real business cycle economist would explain an economic depression.

b. According to real business cycle theory, how do real wages behave during depressions?

c. How did actual real wags behave during the Great Depression?

d. According to Professor Ohanian, what other factors may have caused wages to behave this way?

9. Taxes on Capital Gains and Tax Revenue. The U.S. government currently taxes increases in the value of stocks when they are sold. This is called the capital gains tax. Explain why, if the government reduced the tax rate on capital gains, it could actually receive more total revenue. In your answer, carefully distinguish between the tax rate and tax revenues.

10. Researching Studies on Taxation, Economic Behavior, and Revenue Collection. Go to the Web site for the Congressional Budget Office (www.cbo.gov) and find a study that explores the effects of taxation on economic behavior and on total tax revenue. Draw a graph that shows how an increase in tax rates can increase tax revenue.