Question 1
The Economic Recovery Tax Act of 1981 allowed firms to depreciate their capital at a very rapid rate for tax purposes. This
◦ increased the tax liability of firms and discouraged them from investing.
◦ decreased tax liability and encouraged investment.
◦ increased the tax liability of firms and encouraged them to invest.
◦ decreased tax liability and discouraged investment.
Question 2
The implicit assumption behind the Economic Recovery Tax Act of 1981, which cut the individual income tax rate by 25% over three years, was that
◦ the economy was on the negatively sloped portion of the Laffer curve.
◦ the economy was on the positively sloped portion of the Laffer curve.
◦ tax rate reductions will stimulate demand in the economy and move the economy to full employment.
◦ tax rate reductions will decrease supply in the economy and therefore choke off the high rate of inflation that the economy was experiencing.
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