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

Question

Quizplus · Accepted Answer

In a market clearing model, an increase in the real marginal tax rate would decrease the incentive for individuals to work, which would lead to a decrease in the supply of labor. Additionally, an increase in the real marginal tax rate would decrease the return on capital, which would decrease the demand for capital. As a result, the equilibrium level of output, Y, would decline. Therefore, the correct answer is C, as none of the other options are a likely outcome in this scenario.

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

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