Suppose Congress enacts a tax reform law, and the average federal tax rate drops from 30% to 10%. Researchers investigate the impact of the tax cut and find that the income subject to the tax increases from $600 billion to $700 billion. The theoretical explanation is that workers have increased their work effort in response to the incentive of lower taxes. On the following graph, use the green point (triangle symbol) to plot the point corresponding to the income of $600 billion. Then use the orange point (square symbol) to plot the point corresponding to the income of $700 billion. FEDERAL TAX REVENUE (Billions of dollars) 220 200 180 160 140 - 120 - 100 80 S 60 40 20 0 0 10 20 O True 30 40 50 60 70 80 FEDERAL TAX RATE (Percent) O False 90 Laffer Curve 100 110 A Income $800 O Income $700 True or False: The change in income is represented by a movement along the upward-sloping portion of the Laffer curve. (?)

Suppose Congress enacts a tax reform law, and the average federal tax rate drops from 30% to 10%. Researchers investigate the impact of the tax cut and find that the income subject to the tax increases from $600 billion to $700 billion. The theoretical explanation is that workers have increased their work effort in response to the incentive of lower taxes. On the following graph, use the green point (triangle symbol) to plot the point corresponding to the income of $600 billion. Then use the orange point (square symbol) to plot the point corresponding to the income of $700 billion. FEDERAL TAX REVENUE (Billions of dollars) 220 200 180 160 140 - 120 - 100 80 S 60 40 20 0 0 10 20 O True 30 40 50 60 70 80 FEDERAL TAX RATE (Percent) O False 90 Laffer Curve 100 110 A Income $800 O Income $700 True or False: The change in income is represented by a movement along the upward-sloping portion of the Laffer curve. (?)

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter8: Aggregate Demand And The Powerful Consumer

Section: Chapter Questions

Problem 4TY

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