Question

Taxing capital will

A) decrease the expected marginal product of capital, shift the IS curve down and to the left

B) decrease tax-adjusted user cost of capital, shift the LM curve down and to the left

C) increase tax-adjusted user cost of capital, shift the IS curve up and to the right

D) increase the expected marginal product of capital, shift the LM curve up and to the right

explanations please

Answer 1

Answer : D) increase the expected marginal product of capital, shift the LM curve up and to the right is correct due to following reason

To restore equilibrium, the price level must decline, shifting the LM curve down and to the right. Since output increases and the real interest rate declines, consumption and investment increase.

There is impact on the increase the marginal product of capital due to the real wage, the real interest rate, and the price level decline; and employment, output, consumption, and investment rise.