Suppose the Government Implements a Permanent Reduction in the Net

question 128

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)private investment is crowded out,which may reduce the future growth rate of potential output.
• D)the effect of the automatic stabilizer is reduced and the economy will be more unstable.
• E)both C and D are correct.