Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved
Tax policies designed to encourage saving do so by increasing the rate of return on saving. A higher rate of return raises the benefit of saving since dollars saved today allow for more consumption in the future. This substitution effect tends to increase saving. On the other hand, a higher rate of return lowers the need for saving since a household has to save less to achieve a desired level of consumption in the future. This income effect tends to reduce saving. These two effects tend to cancel each other out, implying that lowering taxes to encourage saving may not increase saving.
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The marginal revenue product of labor is:
a. how much labor can be purchased with the revenue from the sale of one more unit of the good. b. how much does the marginal revenue change when you add more labor. c. the same as the marginal revenue product of capital in equilibrium. d. determined by the wage rate. e. the contribution to total revenue made by the marginal laborer.
When people use recent information to gradually adjust their forecasts of inflation, they are said to have:
a. static expectations. b. adaptive expectations. c. rational expectations. d. spiraling expectations.
If there is a leftward shift of the money demand curve, which of the following should the Fed do if it wants to keep the price level stable?
a. Lower its interest rate target b. Sell bonds in the open market c. Wait, since the price level does not usually change when the money demand curve shifts d. Raise its interest rate target e. Buy bonds in the open market
Which of the following statements is true?
a. In the long run, for any output level a firm can select a plant size that will allow it to minimize average total cost. b. In the long run, the firm is committed to a particular plant size, and can only vary such resources as labor and some material inputs. c. In the long run, the firm is committed to a particular plant size, and thus cannot vary any input. d. The long-run average cost curve connects the minimum points on marginal cost curves for different plant sizes.