Suppose individuals expect a cut in future taxes. Explain what effect this expected reduction in future taxes will have on the yield curve and on stock prices in the current period
What will be an ideal response?
The reduction in future taxes will cause the future one-year rate to rise. This increase in the expected one-year rate will cause the two-year rate to rise by approximately half the change in the future expected rate. The current one-year rate does not change. So, the yield curve gets steeper (as the long-term rate rises). The effects on stock prices again depend on whether it is anticipated or not. If anticipated, stock prices do not change. If partially unexpected, the effect on stock prices is ambiguous: the rise in future i will decrease stock prices while the increase in future Y will increase stock prices.
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Richard receives government transfer payments and currently consumes 5 guns and 6 goose livers. Assume the price of guns decreases by 10% and the price of goose liver increases by 20%
The government raises Richard's transfer payments so he can still afford 5 guns and 6 goose livers. Does this constitute a true cost-of-living adjustment (COLA)? A) No. Richard is overcompensated. B) No. Richard is undercompensated. C) Yes. The payment just achieves the right level of compensation. D) Not enough information.
A firm in a competitive input market can
A) hire workers at the going wage. B) hire additional workers only by raising wages. C) hire additional workers at lower wages because those who are still unemployed are anxious to work. D) hire additional workers only after a long search process.
A permanent marginal tax decrease is likely to
A) shift the short-run aggregate supply curve to the left and the long-run aggregate supply curve to the right. B) shift both the short-run and the long-run aggregate supply curves to the left. C) shift the short-run aggregate supply curve to the right, and the long-run aggregate supply curve to the left. D) shift both the short run and the long run aggregate supply curves to the right.
Briefly explain what is referred to as the crowding-out effect.
What will be an ideal response?