Explain Why Proponents of Supply-Side Effects of Tax Rate Variations

question 146

Essay

Explain why proponents of supply-side effects of tax rate variations who also believe that tax-rate changes influence aggregate demand might claim that cuts in marginal income tax rates can potentially push up real Gross Domestic Product (GDP) without generating inflation.

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Definitions:

Classical Conditioning

a learning process that occurs when two stimuli are repeatedly paired; a response that is initially elicited by the second stimulus is eventually elicited by the first stimulus alone.

Extinction

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

CS (Conditioned Stimulus)

An initially neutral stimulus that, after being associated with an unconditioned stimulus, eventually comes to trigger a conditioned response.

UCS (Unconditioned Stimulus)

An unconditioned stimulus is something that naturally and automatically triggers a response without any learning needed (e.g., food causing salivation in dogs).