One Form of Economic Stimulus That State Governments Can Use

question 30

Multiple Choice

One form of economic stimulus that state governments can use is to exempt certain types of purchases from state sales tax. For example, a law that permanently exempts business equipment from state sales tax may stimulate purchases of these goods because the law effectively reduces the price of the equipment. Business equipment such as computers or vehicles are durable goods, so should we expect the tax exemption program to have more impact on equipment demand in the short run or long run?

• A) More impact in the long run because business equipment demand becomes more income elastic in the long run
• B) More impact in the long run because business equipment demand becomes more price elastic in the long run
• C) More impact in the short run because business equipment demand becomes more income elastic in the long run
• D) More impact in the short run because business equipment demand becomes more price inelastic in the long run

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Definitions:

Required Reserve Ratio

The fraction of deposits that banks are required to keep on hand as reserves, determined by central banks to influence money supply and lending.

U.S. Treasury Securities

Debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation.

Money Supply Curve

A representation showing the relationship between the money supply and the interest rate, inverting the money demand curve's concept.

Planned Investment

Investments that businesses intend to make in the future, often based on projected economic conditions or expected returns.