Consider the following quote: “You cut taxes and the tax revenues increase.” (President Bush, in a speech in New Hampshire on 2/8/2006). Explain the economic rationale underlying this statement using the concepts discussed in class, ignoring possible macroeconomic growth effects (2-3 sentences). Would the elasticity of taxable income in the above example need to be larger or smaller than 0.5 in order for the statement in Part C to hold? Why?
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Which of the following statements is true? a. A reduction in tax rates along the downwardsloping portion of the Laffer curve would increase tax revenues. b. According to supply-side fiscal policy, lower tax rates would shift the aggregate demand curve to the right, expanding the economy and creating some inflation. c. The presence of automatic stabilizers tends to destabilize the economy. d. To combat inflation, Keynesians recommend lower taxes and greater government spending.
Prashant B.
What could explain why a decrease in taxes could lead to a less-than-proportionate increase in output? A. Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. B. As a result of diminishing returns to current consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once. C. A decrease in taxes will necessitate lower government outlays, thus largely offsetting the higher consumption expenditures of households. D. All of the above. E. A and B only.
Andrew D.
There is a tax cut that increases your disposable income by $3,400, which you intend to save $510. a. Calculate the MPC. b. Interpret this MPC. (What does it mean? Define MPC and describe it in this context.) c. What is the resulting fiscal multiplier? d. Interpret the multiplier and describe the multiplier effect. e. Find the total change to the economy from this tax change.
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