According to the Supply-Side View of Fiscal Policy, If the Impact

question 80

Multiple Choice

According to the supply-side view of fiscal policy, if the impact on tax revenues is the same, does it make any difference whether the government cuts taxes in a way that reduces marginal tax rates or in a way that does not reduce marginal tax rates?

• A)No; both actions will exert the same impact on aggregate supply and demand.
• B)Yes; only lower tax rates will increase the incentive to earn marginal income and thereby stimulate aggregate supply.
• C)No; in both cases people will increase their saving in the expectation of higher future taxes and thereby offset the stimulus effect of lower taxes.
• D)Yes; interest rates will increase if marginal tax rates are lowered, whereas they will tend to decrease if marginal tax rates are left unchanged.

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