Question

. T-Mobile Wi-Fi 11%D 1:42 PM Today 1:38 PM Edit 1. What effect would each of the following government actions have on the steady-state growth rate of the standard of living? (increase, decrease, no impact) an increase in income tax rates a growing budget deficit an increase in funding for research and development at public universities h a doubling of the capital gains tax

Answer 1

1. An increase in the income tax will decrease the steady growth rate of standard of living

When income tax increases, the disposable Inc me may falls which leads to a reduction in the aggregate demand for goods and services.as a result supply will come down, unemployment will increase. It adversely affects the standard of living in a steady state.

2. Growing budget deficit will increase the standard of living of the people in the short run.in the long run in order to pay off the deficit or debt, govt take away funds from the people in the form of increase in tax, issuing of bonds etc.

During the economic prosperity period, we have increased tax revenue, increased domestic production, lower unemployment. So that government spending is not essential. But when government budget deficit(expenduture>revenue) increases during recession , we need to repay it in the future on the one side .on the other side, the income of the people as well as demand for goods and services also increases. As a consequence, production increases and the standard of living also increases.

3. An increase in funding in R& D can increase the steady growth rate of standard of living. Because a country's standard of living is determined by the access of education. Here government spend huge amount in R and D which helps to improve our GDP per capita thereby economic growth. stands of living will be better off due to government spending in R&D in public universities.

4. Doubling of the capital gain will decrease our standard of living. Because when tax is imposed on the capital gain, entrepreneurs drive away from the production process. As result GDP will reduce and the standard of living may go down.