Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 15, Problem 5E
(a)
To determine
Impact of decline in the value-added tax on the labor market.
(b)
To determine
Impact of permanent reduction in the value-added tax.
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Which of the following will necessarily result in an increase in output?
a. Decrease in the population wealth and increase of taxes
b. Increase in government spending and sharp increase in input prices
C.
Decrease in the population wealth and sharp increase in input prices
d. Increase in government spending and the development of new more
efficient technologies
Discuss the impact of the increase in government taxes on investment in the long run.
INTEREST RATE (Percent)
Supply
LOANABLE FUNDS (Billions of dollars)
Demand
Demand
Supply
(?)
Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks.
Initially, the interest income earned on bonds or deposits is taxed at a rate of 18%. Now suppose
there is an increase in the tax rate on interest income, from 18% to 22%.
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of interest income from saving causes the equilibrium interest
rate in the market for loanable funds to ▼ and the level of investment spending to
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new
capital within some relevant time period. Suppose the government implements a new investment
tax credit.
Shift the appropriate curve on the graph to reflect this change.
The implementation of the new tax credit causes the interest rate to and the level of saving
to
I
Scenario 3: Initially, the…
Chapter 15 Solutions
Macroeconomics (Fourth Edition)
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