Question

What is the consequence of an increase in the income tax (that is paid out of...

What is the consequence of an increase in the income tax (that is paid out of wages) in the classical model? How would you expect such a change to affect output, employment, and the real wage?

Homework Answers

Answer #1

The classical model assumes that Income Tax increase will reduce the after tax real wages. This will result in a decrease in the labour supply. The labour supply curve will shift to the left and it will reduce the level of employment in the nation. The aggregate supply curve shifts to the left and there is a reduction in the level of output and an increase in the level of prices.

Therefore output will fall employment will fall and real wage will also fall when income tax is increased.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
According to the real intertemporal model, suppose there is an increase in the current capital stock....
According to the real intertemporal model, suppose there is an increase in the current capital stock. If so, we would expect A. real wages to rise and real interest rates to fall. B. real wages to fall and real interest rates to rise. C. real wages and real interest rates to both rise. D. real wages and real interest rates to both fall. According to the real intertemporal model, suppose there is a decrease in current total factor productivity. If...
Suppose that you have the following production function: Y=9K0.5N0.5. With this production function the marginal product...
Suppose that you have the following production function: Y=9K0.5N0.5. With this production function the marginal product of labor is MPN=4.5K0.5N-0.5 (hint: firms pay workers MPN so this equals w). The capital stock is K=25. The labor supply curve is NS=100[(1-t)]w]2 , where w is the real wage, t is the tax on income, and hence (1-t)w is the after-tax real wage rate. a) Graphically draw (a rough sketch is fine) of the labor market and production function. Show graphically the...
Suppose that unexpectedly rapid growth in real income abroad leads to a sharp increase in the...
Suppose that unexpectedly rapid growth in real income abroad leads to a sharp increase in the demand for American exports. What impact will this change have on the price level, output, and employment in the long run in the United States? -Output and employment will increase exerting modest upward pressure on the price level. -The price level will increase, with no change in output and employment.
If a tax cut does not impact the economy’s ability to produce, it will nonetheless tend...
If a tax cut does not impact the economy’s ability to produce, it will nonetheless tend to have some effects. Present an analysis of how a tax cut will impact the economy using the tools presented in class (i.e., a labor market, the IS-LM framework, and an AS-AD diagram) and the Classical perspective. In particular, predict the impacts on employment, the nominal wage level, the real wage level, the output level, the price level, and the real interest rate level.
How does an economy that experiences a contractionary real shock in autonomous consumption spending (increase in...
How does an economy that experiences a contractionary real shock in autonomous consumption spending (increase in real savings) adjust to full-employment equilibrium under the classical model?  While an anticipated change in the money supply is assumed to be neutral, an increase in the money supply that is unanticipated is assumed to be expansionary. Carefully explain why unanticipated money supply changes have effects while anticipated changes are neutral in terms of affecting real variables in the classical model.
Question 1 Consider the employment search model (in Macroeconomics) If the matching function is given by:...
Question 1 Consider the employment search model (in Macroeconomics) If the matching function is given by: M=5·A^0.25·Q^0.75 And the following values: a=.5, Z=50, b=20, K =15 Find the unemployment rate. Find the real wage. Find GDP. Question 2 Suppose the government introduces a benefit of $10,000 to be paid to every adult, regardless of whether or not they seek employment. Using the search model, carefully explain how this will affect the equilibrium wage rate, the unemployment rate, and GDP. How...
Question 1 Consider the employment search model (in Macroeconomics) If the matching function is given by:...
Question 1 Consider the employment search model (in Macroeconomics) If the matching function is given by: M=5·A^0.25·Q^0.75 And the following values: a=.5, Z=50, b=20, K =15 Find the unemployment rate. Find the real wage. Find GDP. Question 2 Suppose the government introduces a benefit of $10,000 to be paid to every adult, regardless of whether or not they seek employment. Using the search model, carefully explain how this will affect the equilibrium wage rate, the unemployment rate, and GDP. How...
Suppose the government introduces a benefit of $10,000 to be paid to every adult, regardless of...
Suppose the government introduces a benefit of $10,000 to be paid to every adult, regardless of whether or not they seek employment. Using the employment search model, A, Carefully explain how this will affect the equilibrium wage rate, the unemployment rate, and GDP. B, How is this policy different than an increase in unemployment benefits?
In the classical model, what is the effect of an increase in government spending that is...
In the classical model, what is the effect of an increase in government spending that is not financed by an increase in taxes (an increase in the deficit)? How do prices, real GDP, consumption, saving, investment spending, and real interest rates change as a result of the increase in government spending? Explain and show graphically. (Hint: Use the market for loanable funds model.)
1. According to classical macroeconomic theory, money supply shocks are “neutral.” a.Explain what this means. b.Based...
1. According to classical macroeconomic theory, money supply shocks are “neutral.” a.Explain what this means. b.Based on that theory, how would a 5% increase in a nation’s money supply affect its real 
wage rate (W/P), all else equal (up, down, or no change, and by how much)? 
 c. According to the quantity theory of money, how would a 5% increase in the money supply 
affect the price of goods and services (P), all else equal (up, down, or no change,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT