Suppose the Government Implements a Permanent Reduction in the Net

question 77

Multiple Choice

Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP.One disadvantage of this policy is that

• A)the effect of economic shocks on government revenues becomes more volatile,while the economy becomes more stable.
• B)further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
• C)the level of private investment increases,which will destabilize the level of real GDP.
• D)the effect of the automatic stabilizer is reduced and the economy will be more unstable.
• E)the level of private investment decreases,which opens up a recessionary gap.