Foundations of Economics (8th Edition)
Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 26, Problem 6SPPA
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On a graph, the effects of a decrease in government budget surpluses if there is no Ricardo-Barro effect. And explaining the difference in the effects of a decrease in government budget surplus if there is partial Ricardo-Barro effect.

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Suppose Congress enacts a tax reform law, and the average federal tax rate drops from 30 per- cent to 20 percent. Researchers investigate the impact of the tax cut and find that the income subject to the tax increases from $600 billion to $800 billion. The theoretical explanation is that workers have increased their work effort in response to the incentive of lower taxes. Is this a movement along the downward-sloping or the upward-sloping portion of the Laffer curve?
What is meant by dynamic inconsistency? Give at least two examples of policies that are dynamically inconsistent.  
Suppose policy makers decide to reduce the tax rate. Show this in an IS-LM(policy rule) graph.
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