The effects on the economy, if the government lowers the income tax rate.

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Chapter 32, Problem 7MCQ

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The effects on the economy, if the government lowers the income tax rate.

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OilPatch is a mineral rich economy in which the government gets most of its tax revenue from oil royalties. Table 1 describes the labor market in OilPatch and Table 2 describes the economy's production function. Initially, the government introduces an income tax of $2 per hour worked. Then it doubles its income tax to $4 an hour. Following the implementation of the $4 an hour income tax, what is the level of employment, the real wage rate paid by employers, and the after-tax real wage rate received by workers? What is potential GDP? The level of employment is 2000 hours. The real wage rate paid by employers is $ 14 an hour and the after-tax real wage rate received by workers is $ 10 an hour. Potential GDP is $ 6 million. C Table 1 Real wage rate (dollars per hour) 10 11 Table 2 12 13 14 15 Employment (thousands of hours) 2 134567 Quantity of labor demanded supplied (thousands of hours) 2 6 5 4 3 2 1 Real GDP (millions of dollars) 6 11 15 18 34567 20 21

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