Suppose an economic advisor to the President recommended a personal income tax increase. Indicate the expected effects on aggregate demand and on aggregate supply.
What will be an ideal response?
The advisory would recommend this in hopes of dampening consumer demand and lessening demand-pull inflation. This should happen as consumers find themselves with less disposable income. However, at the same time there may be some less desirable effects on aggregate supply. For example, workers might demand higher wages to compensate for the higher taxes. Higher taxes may cause lessened work incentives which could cause a decline in productivity and, therefore, a rise in production costs. In other words, while raising personal taxes seems to be a correct policy for dampening demand and demand-pull inflation, it may have an offsetting effect on supply which could cause cost-push inflation.
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The shifting or returning of government economic functions to individuals and firms in the economy is known as
a. liberalization. b. intervention. c. competition. d. privatization.
When promoting average cost pricing, regulators
A) include what they consider to be a normal rate of return on investment. B) encourage firms to produce at the output level where price equals marginal cost. C) fail to consider a return to investors, so regulated firms often have a hard time raising investment funds. D) inflate costs so much that price ends up as large as would prevail under unregulated monopoly.
A fixed exchange rate
a. is a declared rate that is maintained by central bank intervention in the foreign exchange market b. is a rate that is fixed by the forces of supply and demand c. is a rate that is determined by trilateral arbitrage d. "fixes" the value of a nation's price level e. is a mechanism for eliminating a trade deficit
The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ________ rate.
A. Federal B. Fed funds C. prime D. discount