Suppose That a Reduction in the Tax Rate Were Expected

question 1

Multiple Choice

Suppose that a reduction in the tax rate were expected to increase the after- tax income of all citizens by a total of $10 billion. Suppose further that this money were to be transferred in one payment in April. We should expect

• A) GDP to climb by less than $10 billion because the stimulus would certainly increase interest rates enough to dampen investment.
• B) GDP to climb by more than $10 billion as long as interest rates did not climb too severely.
• C) GDP to climb by exactly $10 billion if interest rates were to hold steady.
• D) GDP to be unaffected, since most people would put such a lump sum windfall tax savings in the bank "for a rainy day."
• E) none of the above.

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Definitions:

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