A cut in marginal tax rates would: increase the price level and real GDP in the
ID: 1162547 • Letter: A
Question
A cut in marginal tax rates would:
increase the price level and real GDP in the short run if it has no effect on short-run aggregate supply.
increase the price level and real GDP in the short run, even if possible aggregate supply effects are included.
increase real GDP in the short run, but there is an indeterminate effect on the price level if there is no supply-side effect on aggregate supply.
increase real GDP in the short run, but there is an indeterminate effect on the price level if supply-side effects on aggregate supply are included.
A.increase the price level and real GDP in the short run if it has no effect on short-run aggregate supply.
B.increase the price level and real GDP in the short run, even if possible aggregate supply effects are included.
C.increase real GDP in the short run, but there is an indeterminate effect on the price level if there is no supply-side effect on aggregate supply.
D.increase real GDP in the short run, but there is an indeterminate effect on the price level if supply-side effects on aggregate supply are included.
Explanation / Answer
1. A marginal tax cut means, increase in consumption. So there will be icrease in GDP and as there is no effect in supply curve in short run, that means supply or production have not increased in response to demand, so price level will also rise. So, the statement is true.
2.Even if we include aggregte supply curve effects, than increase in demand due to decrease in tax rates will be responded by increase in production, so price level will not increase. So the second statement is false.
3.Due to tax cut, dmand will be increased due to increased consumption and also price level will be effected in case there is no aggrgate supply curve effect. But there will be not indeterminant effect on price level. Price level will increase only to how much consumer is demanding at particular income level. So, price level will be effected in response to marginal propensity to consume. So the third statement is incorrect.
4. Now, if there is supply effect also working with demand increas, than also price will not change substantially. So, this statement is also incorrect.
HOPE THIS HELPS.
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