If the real marginal tax rate, _w, increases in the market clearing model then:

Question

Quizplus · Accepted Answer

An increase in the marginal tax rate reduces the incentive to work and earn income since more of each additional dollar earned goes towards taxes. This leads to a decrease in the supply of labor (choice A). As a result, the cost of labor increases, causing a decrease in the demand for capital as firms are less able to afford or justify investments in capital goods (choice B). The combination of these effects leads to a decrease in real output, Y (choice C). Therefore, all of the above options are correct.

If the Real Marginal Tax Rate, w, Increases in the Market

If the Real Marginal Tax Rate, _w, Increases in the Market