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.

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Definitions:

Lower Unemployment

A situation or condition where there is a decrease in the number of people who are actively seeking work but are unable to find employment.

Higher Education

Education provided by universities and other institutions that award academic degrees, such as colleges and vocational schools.

Grade Inflation

The tendency over time for academic grades to become progressively higher, often without a corresponding increase in learning or achievement.

Assortative Mating

Occurs when marriage partners are selected so that spouses are similar on various criteria of social rank.