Book2 Flashcards
Q1: How does reducing the marginal rate of income tax affect the economy?
Lowering the marginal rate of income tax increases the incentive for individuals to work harder, as they get to keep a larger portion of their earnings. This leads to increased productivity of labor. Additionally, lower income taxes provide an incentive for inactive individuals to enter the labor force and take available jobs. These factors contribute to an increase in both the quantity and quality of the labor force, shifting LAS from LRAS1 to LRAS2.
Q2: What is the impact of reducing corporation tax on the economy?
By reducing corporation tax, firms are provided with increased incentives to invest. This leads to greater spending on development and innovation, improving the quantity and quality of the capital stock in the economy. As a result, the productive efficiency of the economy improves, shifting LAS from LRAS1 to LRAS2.
Evaluation Q1: What are the potential limitations of reducing income tax?
Evaluation: One potential limitation of reducing income tax is the loss of government revenue, which may need to be compensated for through alternative sources, such as increased taxes elsewhere or reduced government spending. Additionally, the effectiveness of this policy may vary depending on the elasticity of labor supply and the overall responsiveness of individuals to changes in income tax rates.
Q3: How does reducing the power of trade unions impact the economy?
By reducing the power of trade unions, the costs of production for firms are lowered. Trade unions often negotiate for higher wages, longer breaks, extended holidays, and increased leave entitlements, which can increase production costs. Limiting these actions improves efficiency in the labor market, leading to enhanced productive efficiency in the economy. Consequently, LAS shifts from LRAS1 to LRAS2.
Evaluation Q3: What are the potential drawbacks of reducing trade union power?
Evaluation: One potential drawback of reducing trade union power is that it may lead to lower wages and decreased worker protections. This could result in a decline in workers’ welfare and bargaining power. Additionally, the impact of reducing trade union power on overall productivity and efficiency may vary depending on the specific dynamics of the labor market and the extent to which unions influence economic outcomes.
