Assume a person is attempting to maximize utility which depends on spending towards consumption and hours towards leisure subject to a budget constraint that expenditure on consumption cannot exceed labor earnings and a time constraint that hours towards leisure and towards working cannot exceed 24 hours. Suppose labor earnings is subject to a baseline marginal tax rate structure and new legislation proposes decreasing these marginal tax rates. Under these assumptions, what are some testable hypotheses on consumption and the decision to work at a macroeconomic-level? a. Generally speaking, a decrease in marginal tax rates is predicted to increase consumption, so GDP is expected to rise, and to increase hours working, so unemployment is expected to fall. b. Generally speaking, a decrease in marginal tax rates is predicted to decrease consumption, so GDP is expected to fall, and to increase hours working, so unemployment is expected to fall. c. Generally speaking, a decrease in marginal tax rates is predicted to increase consumption, so GDP is expected to rise, and to decrease hours working, so unemployment is expected to rise. d. Generally speaking, a decrease in marginal tax rates is predicted to decrease consumption, so GDP is expected to fall, and to decrease hours working, so unemployment is expected to rise

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume a person is attempting to maximize utility which depends on spending towards consumption and hours towards leisure subject to a budget constraint that expenditure on consumption cannot exceed labor earnings and a time constraint that hours towards leisure and towards working cannot exceed 24 hours. Suppose labor earnings is subject to a baseline marginal tax rate structure and new legislation proposes decreasing these marginal tax rates. Under these assumptions, what are some testable hypotheses on consumption and the decision to work at a macroeconomic-level?

a. Generally speaking, a decrease in marginal tax rates is predicted to increase consumption, so GDP is expected to rise, and to increase hours working, so unemployment is expected to fall.

b. Generally speaking, a decrease in marginal tax rates is predicted to decrease consumption, so GDP is expected to fall, and to increase hours working, so unemployment is expected to fall.

c. Generally speaking, a decrease in marginal tax rates is predicted to increase consumption, so GDP is expected to rise, and to decrease hours working, so unemployment is expected to rise.

d. Generally speaking, a decrease in marginal tax rates is predicted to decrease consumption, so GDP is expected to fall, and to decrease hours working, so unemployment is expected to rise.

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