A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is
A)small and an increase in private saving tends to have a small impact on the capital stock.
B)small and an increase in private saving tends to have a large impact on the capital stock.
C)large and an increase in private saving tends to have a small impact on the capital stock.
D)large and an increase in private saving tends to have a large impact on the capital stock.

Question

Quizplus · Accepted Answer

A decrease in the tax rate can increase disposable income, leading to more private saving. If this saving significantly boosts the capital stock, it can enhance productivity and thus the standard of living. A small income effect means that changes in interest rates don't significantly alter consumption, allowing more saving to be directed towards investment.

A Decrease in the Tax Rate Is More Likely to Increase