According to supply-side theory, an increase in marginal tax rates will
Answer(s): A
Increasing marginal tax rates reduces the incentive to work since individuals keep a smaller percentage of their earnings. Additionally, increased marginal tax rates divert resources away from productive roles to roles designed to "shelter" capital owners from taxation. The final consequence is that efficiency is reduced since individuals choose deductible (and less desirable) goods over nondeductible goods. Efficiency is compromised because although the non-deductible goods are affordable and preferable to deductible goods, they are not consumed.
Which of the following statements about expected inflation are true?
Answer(s): E
Market participants will compensate for expected inflation. For example, when lenders make loans, they will price a certain inflation rate into the interest rate. If inflation is as expected, then the rate will adequately compensate the lender for lost purchasing power. Inflation is generally assumed to impact all prices, including wages, equally, therefore workers will demand wage increases in line with inflation.
Which of the following is an integral part of the Keynesian view of the business cycle?
Answer(s): B
The multiplier effect causes small changes in aggregate expenditures to result in much larger changes in income, leading to economic instability. This effect applies to all components of the aggregate expenditure model, and therefore none of the four components can be called "the major source of economic stability."
The period between the trough of the business cycle and the next peak is called the
After a downturn reaches bottom and economic conditions begin to improve, the economy enters the expansion phase of the cycle. Here business sales rise, GDP grows rapidly and the rate of unemployment declines. The expansion eventually blossoms into another business peak.
An unanticipated decrease in short-run aggregate supply will lead to a
Answer(s): D
An unanticipated reduction in short run aggregate supply will cause the price level to rise as the short run aggregate supply curve shifts left. Since people will believe that their lower incomes are temporary, households will reduce their current saving level to maintain current consumption at a level more consistent with their longer term perceived opportunities. This reduction in the supply of loanable funds causes the interest rate to increase.
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