In a model with income taxes, assume that autonomous investment decreases.Which of the following will be TRUE?

Question

Quizplus · Accepted Answer

Autonomous investment refers to investment that is not influenced by changes in income or interest rates. Decrease in autonomous investment will lead to a decrease in economic activity and lower tax revenues. As a result, the actual budget surplus will decrease. Also, since the decrease in economic activity is likely to lead to a recession, the cyclical component of the budget surplus (the part that is related to changes in the economy) will also decrease. Therefore, both B and C are true. The full-employment budget surplus (the surplus that would exist if the economy were at full-employment level) might also decrease, but this is not a certain outcome.

In a Model with Income Taxes, Assume That Autonomous Investment