Using a Regular Labor Supply Curve Instead of a Compensated

question 20

Multiple Choice

Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:

• A)result in an accurate estimate of the excess burden.
• B)overestimate the excess burden.
• C)underestimate the excess burden.
• D)accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.

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Definitions:

Expansionary Gap

A situation where the actual output in an economy exceeds the potential output, often leading to inflation.

Cost-Push Inflation

Cost-push inflation is caused by an increase in the prices of production inputs like labour and raw materials, leading to decreased supply and increased cost of finished goods.

Potential Output

This refers to the maximum output an economy can produce without leading to inflation, assuming all resources are fully utilized.

Actual Price Level

The Actual Price Level refers to the current general level of prices for goods and services in the economy at a specific point in time.