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

Question

Quizplus · Accepted Answer

According to the market clearing model, an increase in the real marginal tax rate decreases the after-tax earnings of individuals, reduces their incentive to work, and thus decreases the supply of labour. The demand for capital is not directly affected by changes in the real marginal tax rate, and the effect on real output depends on the relative magnitudes of the changes in labour supply and capital demand. Therefore, choice A is the best answer.

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

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