Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP.One disadvantage of this policy is that
A)the effect of economic shocks on government revenues becomes more volatile,while the economy becomes more stable.
B)further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
C)the level of private investment increases,which will destabilize the level of real GDP.
D)the effect of the automatic stabilizer is reduced and the economy will be more unstable.
E)the level of private investment decreases,which opens up a recessionary gap.

Question

Quizplus · Accepted Answer

A permanent reduction in the net tax rate reduces the effectiveness of the tax system as an automatic stabilizer, meaning that it will have less ability to stabilize the economy during economic downturns. This can lead to increased economic instability and volatility, making the economy more susceptible to shocks.

Suppose the Government Implements a Permanent Reduction in the Net