In the long run an increase in the marginal tax rate on asset income, _r, in the market clearing model:

Question

Quizplus · Accepted Answer

An increase in the marginal tax rate on asset income will decrease the return on investment and thus decrease the incentive to invest, leading to a decrease in the capital stock. A decrease in the capital stock will lead to a decrease in GDP since the economy will have less capital to produce goods and services. With a decrease in GDP and a decrease in the return on investment, consumption will also decrease. Therefore, all of the options (A, B, and C) are correct.

In the Long Run an Increase in the Marginal Tax