If taxes fall and foreign income falls, what will happen to output, ceteris paribus?
A) It will rise.
B) It will stay the same.
C) It will fall.
D) It is uncertain what will happen.

Question

Quizplus · Accepted Answer

The effect on output is uncertain because a fall in taxes can increase domestic consumption and investment, potentially raising output, while a fall in foreign income can reduce exports, potentially lowering output. The net effect depends on the relative magnitudes of these changes.

If Taxes Fall and Foreign Income Falls, What Will Happen