A reduction in the net tax rate might lead to an increase in the growth rate of potential output if
A)households are not forward looking.
B)the tax cuts stimulate private investment.
C)firms are operating at their normal capacity.
D)the marginal propensity to consume is large.
E)the simple multiplier is large.

Question

Quizplus · Accepted Answer

The reduction in net tax rate might lead to an increase in private investment which can increase the growth rate of potential output. This is because private investment can increase the capacity of firms and also stimulate technological advancements. However, choices A, C, D, and E are not necessarily related to the impact of tax cuts on potential output growth.

A Reduction in the Net Tax Rate Might Lead to an Increase