Which of the Following Statements About the Income and Substitution

question 61

Multiple Choice

Which of the following statements about the income and substitution effects of an income tax rate increase is true?

• A) The income and substitution effects are contradictory behavioral reactions.
• B) From the government's perspective, the substitution effect is more desirable than the income effect.
• C) Faith in the income effect is the foundation for supply-side economic theory.
• D) Dynamic forecasts of incremental tax revenues must consider the potential income effect but not the potential substitution effect of a rate increase.

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Definitions:

Residual Dividend Policy

A strategy where a company pays dividends out of the residual or leftover equity only after all project capital needs are met.

Dividend Payout Ratio

Amount of cash paid out to shareholders divided by net income.

Ex-dividend Date

The date on which a stock begins trading without the right to receive the next declared dividend, effectively setting the cut-off for new investors to benefit from the upcoming dividend payment.

Date Of Record

The date set by a corporation on which the shareholders must be registered to be eligible to receive dividend payments.