Author Question: Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have ... (Read 46 times)

asan beg

  • Hero Member
  • *****
  • Posts: 570
Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?
 
  What will be an ideal response?

Question 2

Suppose Political Party A proposes a tax cut on business income to stimulate the economy. Political Party B opposes the tax cut on business income asserting that it would only help businesses, not the average working man and woman.
 
  If you were hired as an economist for Political Party A, explain how the tax cut on business income would help the average working man and woman.



frre432

  • Sr. Member
  • ****
  • Posts: 347
Answer to Question 1

The tax rate affects how much of the additional income that results from the initial increase in government purchases is available to be consumed. A higher tax rate decreases the amount of disposable income that can be consumed at each round of the multiplier process.

Answer to Question 2

The multiplier effect would spread the effect of the tax cut in business income across average working men and women. First, the business income tax cut would increase the after-tax expected profitability of capital investment, leading businesses to purchase more capital goods, like factories, computers, and machine tools. These capital goods are produced by businesses that employ average working men and women. Second, the increase in income to the owners and workers of the businesses that produce the capital goods would lead to additional spending across many other businesses, increasing the income of these owners and workers. Their increase in income would lead to still more spending and the multiplier effect would spread across businesses and average working men and women.



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Acetaminophen (Tylenol) in overdose can seriously damage the liver. It should never be taken by people who use alcohol heavily; it can result in severe liver damage and even a condition requiring a liver transplant.

Did you know?

Earwax has antimicrobial properties that reduce the viability of bacteria and fungus in the human ear.

Did you know?

The first war in which wide-scale use of anesthetics occurred was the Civil War, and 80% of all wounds were in the extremities.

Did you know?

Complications of influenza include: bacterial pneumonia, ear and sinus infections, dehydration, and worsening of chronic conditions such as asthma, congestive heart failure, or diabetes.

Did you know?

Cyanide works by making the human body unable to use oxygen.

For a complete list of videos, visit our video library