Figure 10.7 A Reduction in the Proportional Tax Rate
What will be an ideal response?
In the case of a proportional tax, a
tax cut reduces the tax rate t, which
increases the slope of the AD curve
and raises equilibrium income from
Y0 to Y1.
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Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium
What are the effects of each of the following on output, the expected real interest rate, and the current price level? (a) a temporary increase in taxes (b) a reduction in the effective tax rate on capital (c) an increase in expected inflation
The Coase theorem states that, in the presence of cost externalities, an optimal equilibrium can be attained
A) with government taxation. B) by prohibiting production. C) by correctly defining property rights and through negotiation between the parties. D) None of the above