Explain how a tax reduction on capital gains and dividends might increase aggregate supply
What will be an ideal response?
A lender earns a capital gain if she purchases an asset such as a stock at a particular price and then sells it later at a higher price. This difference in price is the capital gain, and is subject to taxes. If capital gain taxes are lowered, the after-tax rate of return on stocks will rise.
Dividends are corporate profits that get redistributed to stock shareholders. These are taxed, and the lower the tax, the greater the after-tax rate of return to investing in a stock that pays a dividend.
Increasing this after-tax rate of return will increase the household's willingness to save and raise the supply of loanable funds. This will lower the interest rate and encourage firms to purchase new capital. This increases the capital stock and aggregate supply.
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The reasons why a competitive firm's short-run supply curve is upward sloping are
A) the law of diminishing marginal returns and profit maximization. B) constant returns to scale and profit maximization. C) decreasing returns to scale and profit maximization. D) Both B and C.
The money price of a good is also known as its
A) relative price. B) case price. C) absolute price. D) subjective price.
Which tax system requires all taxpayers to pay the same percentage of their income in taxes?
a. a regressive tax b. a proportional tax c. a progressive tax d. a horizontal equity tax
Suppose at the current level of labor used, MRP = $100 and MFC = $50. To maximize profits, the firm should
A) hire more labor. B) reduce the level of labor. C) maintain the current level of labor. D) shut down.