What is the Laffer Curve? Explain the relationship that is shown in the curve.
What will be an ideal response?
The Laffer Curve indicates that the relationship between tax rates and tax revenues is not a clear one. At the extreme, both a zero rate and 100% tax rate will produce zero revenue. In between the two extremes there is an optimal tax rate in terms of maximizing revenue. If tax rates are above the optimal level, then tax revenues will rise as tax rates are cut. If tax rates are below the optimal level then tax revenues will fall as tax rates are cut. Laffer argued that tax rates were above the optimal level and that by lowering tax rates, the government could increase tax revenue and increase economic output at the same time.
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Compared to coffee, we would expect the cross elasticity of demand for:
A. tea to be negative, but positive for cream. B. tea to be positive, but negative for cream. C. both tea and cream to be negative. D. both tea and cream to be positive.
Suppose that a specific tax of $3 is imposed on producers of bread. The bread market supply is Qs = 10 + 0.5P and the bread market demand is Qd = 100-P. What is the change in the equilibrium quantity of bread induced by the tax incidence?
A) Equilibrium quantity decreased by three units. B) Equilibrium quantity increased by two units. C) Equilibrium quantity decreased by one unit. D) Equilibrium quantity increased by one unit.
GDP minus final sales gives a measure of the
A. change in business inventories. B. non-residential investment. C. value of intermediate goods. D. GNP.
Tax shifting is more easily accomplished when all items are subject to taxation.
Answer the following statement true (T) or false (F)