Answer to Question #95926 in Macroeconomics for komal

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

An increase in the marginal income tax rate will increase output in the short run, but decrease employment and the price level in the long run.