Answer to Question #95244 in Macroeconomics for komal

Question

10. 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

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.