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:

Conditioned Stimulus

A once-neutral trigger that, upon association with an unconditioned stimulus, in time provokes a conditioned response.

Extinction

In psychology, the gradual weakening and disappearance of a conditioned response when the conditioned stimulus is no longer paired with the unconditioned stimulus.

Discrimination

The unjust or prejudicial treatment of different categories of people, especially on the grounds of race, age, sex, or disability.

Adaptive Value

The extent to which a trait or behavior increases the odds of survival and reproduction for an organism in its environment.