Will consumption taxes lead to more savings? Why or why not?
What will be an ideal response?
Consumption taxes have the effect of increasing the return from savings. This has both a substitution and an income effect; the substitution effect is positive, in that the higher returns from savings will cause people to save more. The income effect is negative because the higher returns make people feel better off and so they spend more instead of saving. Determining whether savings increases or decreases when tax rates are cut ultimately must be settled by careful research.
You might also like to view...
Which of the following happens when an economy's labor demand curve shifts to the left without any change in its labor supply curve assuming all else equal?
A) The equilibrium wage rate rises. B) The output of the economy rises. C) The aggregate price level falls. D) The unemployment rate rises.
At the market equilibrium
a. quantity exceeds price b. excess demand equals excess supply (and both are zero) c. price and quantity are equal d. each seller produces at full capacity e. everyone who is represented along the demand curve buys the good