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Chapter 13: Q.20 (page 298)

Every 1-percentage-point increase in the marginal income tax rate induces some workers to supply less labour, which cuts real GDP by \( 0.2 trillion. At the same time, each 1-percentage point increase in the marginal income tax rate causes spendable income to drop, which induces some workers to supply labour that yields \) 0.1 trillion more in real GDP. Is the net outcome consistent with the supply-side theory? Why?

Short Answer

Expert verified

Yes, the net outcome consistent with the supply-side theory

Step by step solution

01

introduction

The supply-side hypothesis is a macroeconomic hypothesis that accepts that monetary development in an economy can be upgraded by decreasing minor expense rates and eliminating guidelines on organizations.

02

explanation

Whenever negligible assessment rates are diminished, two restricting powers work on work supply:

1. Laborers will work more as they get to keep a more noteworthy piece of their profit.

2. Laborers decline the quantity of hours set forth at the effort as their way of life improves with lower negligible assessment rates.

Subsequently, the net consequence of the expansion in peripheral expense rate is an abatement in real GDP and a net outcome consistent with the supply-side theory.

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Most popular questions from this chapter

Suppose that Congress enacts a lump-sum tax cut of $750 billion. The marginal propensity to consume is equal to 0.75. Assuming that Ricardian equivalence holds true, what is the effect on equilibrium real GDP? On saving?

Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.

a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.

b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.

It is late 2019 , and the U.S. economy is showing signs of slipping into a potentially deep recession. Government policymakers are searching for income-tax-policy changes that will bring about a significant and lasting boost to real consumption spending. According to the logic of the permanent income hypothesis, should the proposed income-tax-policy changes involve tax increases or tax reductions, and should the policy changes be short-lived or long-lasting?

Discuss ways in which indirect crowding out and direct expenditure offsets can reduce the effectiveness of fiscal policy actions.

2. Why do you suppose that some economists have argued that a key determinant of a nation's stabilization coefficient value is whether its government relies to a greater extent on automatic fiscal stabilizers instead of discretionary policy actions?
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