An increase in government purchases financed by an increase in the marginal tax rate on labour income, increases the quantity of labour supplied, if the:

Question

Quizplus · Accepted Answer

An increase in the marginal tax rate on labor income reduces the after-tax wage, leading to a negative substitution effect (less incentive to work). However, if the positive income effect (need to work more to maintain income) is larger, the quantity of labor supplied increases.

An Increase in Government Purchases Financed by an Increase in the Marginal