In the real economy, income taxes are generally proportional or progressive
What will be an ideal response?
that is, they increase with income levels (as discussed in Chapter 3).* In our model, the effect of a
proportional tax would be to flatten the aggregate demand curve, since it has a larger effect at higher income levels. (See Appendix A2 for a more detailed treatment of the impact of a proportional tax—we omit analysis of progressive taxes, which is a bit more complex.) This in turn will affect the multiplier, reducing it somewhat.
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According to the AS-AD model,
A) the equilibrium is where the AS curve crosses the AD curve, but the amount of real GDP at this point is not always equal to potential GDP. B) the aggregate quantity supplied is typically greater than the aggregate quantity demanded, thereby leading to unemployment. C) the aggregate quantity demanded is typically greater than the aggregate quantity supplied, thereby leading to inflation. D) changes in the amount of potential GDP is the only factor that shifts both the aggregate supply curve and the aggregate demand curve. E) the AS curve is always equal to potential GDP.
In the above figure, the curve that represents the most income equality is
A) a. B) b. C) c. D) d.