Answer to Question #272371 in Macroeconomics for Saman Khalil

Question

Within the classical model, analyze the effects of an increase in the marginal

income tax rate. Explain how output, employment, and the price level are affected.

Consider cases in which the increased revenue produced by the tax increase

results in a decline in bond sales to the public and in which it results in lower

money creation.

Answer 1

The marginal tax fee is the incremental tax paid on incremental earnings. If a family have been to earn an additional $10,000 in wages on which they paid $1,530 of payroll tax and $1,500 of earnings tax, the family's marginal tax fee could be 30.3%.

An increase in the marginal income tax rate will decrease output, decrease employment, and decrease the price level. In some cases the increased revenue produced by the tax increase results in a decline in bond sales to the public or lower money creation.