Supply-side economics concentrates on the benefits of reducing marginal tax rates. Describe three ways that high marginal tax rates are likely to retard output growth
The most direct way that high tax rates retard output is that they simply discourage work. Individuals who get to keep little of what they make are not motivated to produce. High marginal rates also reduce capital formation as both domestic and foreign investors seek lower taxed investments abroad. Finally, high rates create inefficiencies because individuals do not bear the full costs of tax-deductible purchases. People will substitute less-desired but tax-deductible goods for more-desired, nondeductible goods. Resources are, thus, used to produce goods that may not be valued as much as the cost of producing them.
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To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could
A) reduce taxes rather than increase government spending. B) increase spending less than the simplest Keynesian model would predict. C) both reduce taxes and reduce spending to be able to achieve full employment. D) increase spending more than the simplest Keynesian model would predict.
In chapter 1 your authors marveled at the way highway traffic is orderly and self-regulating. In chapter 6, however, they discuss a growing problem on urban roadways—congestion. What's the cause of roadway congestion?
A) Typically, road use is a scarce good with a zero price tag. B) Not enough drivers have studied economics. C) More and more drivers think only of themselves. D) Population growth
The IS curve will shift down and to the left when
A) desired saving declines. B) government purchases increase. C) consumption increases. D) the expected future marginal product of capital declines.
In the 1965 to 1973 period, U.S. policymakers ________
A) targeted an unemployment rate that, in hindsight, was likely too low B) pursued an easing of monetary policy designed to increase aggregate demand C) made some mistakes that led to the most sustained inflationary episode in U.S. history D) all of the above E) none of the above