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

Question

Quizplus · Accepted Answer

Increasing the marginal tax rate on asset income decreases the return on capital, which decreases investment and reduces the capital stock. This, in turn, reduces the productive capacity of the economy and lowers GDP. It does not increase consumption because the reduction in investment leads to a decrease in output and income, which reduces consumption.

In the Long Run an Increase in the Marginal Tax