23. Assume that the Laffer curve begins to bend backward at a marginal tax rate

Question

23. Assume that the Laffer curve begins to bend backward at a marginal tax rate of 75%. The current marginal tax rate is 35%. what will happen to total tax revenues if the marginal tax rate is reduced by 10%? A. Tax revenues will increase by 10% B. Tax revenues will increase, but by less than 10% C. Tax revenues will stay the same D. Tax revenues will decrease by 10% E. Tax revenues will decrease, but by less than 10% 24. Supply side shock #1 is a big increase in the price of oil. Supply side shock #2 is a big decrease in the How would these two shocks affect potential GDP? quantity of oil available. A. Shock #1 causes no change in potential GDP, while shock #2 increases potential GDP B. Shock # l increases potential GDP, while shock #2 decreases potential GDP C. Shock #1 causes no change in potential GDP, while shock #2 decreases potential GDP D. Shock #1 decreases potential GDP, while shock #2 causes no change in potential GDP E. Either B or C, depending on the elasticity of demand for oil 25. In economist Phillips' original "Phillips Curve": what two things does the between? A. Aggregate supply and Aggregate demand B. Rate of wage inflation and Unemployment C. Supply and demand D. Rate of price inflation and Unemployment E. None of the above 26. Which of the following Federal Reserve actions indicates an expansionary monetary policy? A. Raising the discount rate B. Increasing the required reserve ratio C. Decreasing excess reserves D. Buying government securities on the open market E. Raising interest rate 27. Which letter represents the long-run Phillips Curve?

Explanation / Answer

The Laffer curve shows the relationship between tax rate and tax revenue of the government. It assumes a shape of inverted U. that is as tax rate rises initially the tax revenue rises. But after a threshhold tax rate the tax revenue began to decrease because more nad more people discouraged by high tax revnue began to decrease their labor supply.

In this case the threshhold limit is 75%. The current rate is below the threshold limet at 39%. Then decreasing tax rate below this level will increase the tax revenue. Then the correct option is

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The aggregate supply curve depicts the positive relationship between quantity supplied and the aggregate price level in the economy. There are two different supply curves: long run supply curve and short run supply curve. The short run supply curve given the quantity the domestic firms will supply at any given level of prices. The long run supply curve gives the potential output of the economy that can be produced given the efficient use of all its resources.

The factors that changes long run aggregate supply curve are

The factors that changes the short run aggregate supply are

The changes in supply of oil decreases the long run supply and hence the potential GDP. while the increase in price of oil has no effect on potential GDP.

Then the correct option is

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The Phillips curve relationship gives the inverse or negative relationship between rate of inflation and unemployment. In the 1950, A.W.Phillips noticed, in the data for the UK that there is a rate of change in nominal wages and the unemployment rate. This builds the foundation of the Phillips curve.

Then the correct option is

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