If the government simultaneously increases marginal income tax rates and unemployment compensation, the:
A. incentive to work will increase.
B. incentive to work will diminish.
C. effect on the incentive to work cannot be predicted.
D. incentive to work will not change.
Answer: B
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If employees and employers always accurately predict inflation, what is the shape of the Phillips curve?
a. It is horizontal in the short and long run. b. It is vertical in the short and long run. c. It is vertical in the short run and upward sloping in the long run. d. It is downward sloping in the short run and vertical in the long run.
If the Fed's policy reaction function equals r = .02 + p, where r is the real interest rate, p is the inflation rate. When the inflation rate is zero, then the real interest rate will:
A. set to equal 2%. B. set equal zero too. C. set to equal 4% D. be below the target value for the real interest rate.