Long-Term Effect of Tax-Funded Investments on the PS Curve
While higher taxes typically shift the price-setting (PS) curve down in the short term, they can have an opposing long-term effect. If the government invests the resulting tax revenue in public goods and services such as health, education, and infrastructure, this can boost overall labor productivity. An increase in productivity, in turn, causes the PS curve to shift upward. This potential positive effect is a key caveat, though it is expected to materialize over a longer time horizon.
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Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Introduction to Macroeconomics Course
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Effect of Higher Taxation on Structural Unemployment
Long-Term Effect of Tax-Funded Investments on the PS Curve
A government enacts a new, higher sales tax on all goods and services. Assuming that labor productivity and the intensity of competition among firms do not change, what is the direct consequence of this policy on the real wage that firms can offer, and how does this affect the price-setting curve?
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Impact of Income Tax on the Price-Setting Curve
A government increases the tax rate on corporate profits. According to the standard model where the intensity of market competition remains unchanged, this policy will cause the price-setting curve to shift upwards because firms will increase their prices to maintain their after-tax profit levels.
Learn After
A government enacts a policy that increases taxes on businesses. It then uses the entirety of this new revenue to fund a comprehensive upgrade to the nation's public education system and transportation networks over the next decade. Assuming these investments lead to a significant increase in average worker productivity, what is the most likely long-term consequence for the economy's price-setting (PS) curve?
Comparative Analysis of Fiscal Policies
Productivity Effects of Fiscal Policy
In the long run, any government policy that increases taxes on firms will inevitably lead to an upward shift in the price-setting (PS) curve.
A government increases taxes and invests the revenue in public infrastructure. Arrange the following events to show the logical long-term causal chain that leads to an upward shift in the price-setting (PS) curve.
Short-Term vs. Long-Term Effects of Taxation on the Price-Setting Curve
A government enacts a new tax on businesses. Match each distinct phase or use of the resulting revenue with its most likely effect on the economy's price-setting (PS) curve.
When a government uses tax revenue to fund public goods like education and infrastructure, the resulting long-term increase in labor ________ is the primary reason the price-setting (PS) curve may shift upward.
Evaluating Fiscal Policy Proposals
A country's government significantly increases corporate taxes and dedicates all the new revenue to building a nationwide high-speed internet network. Economists predicted this investment would boost labor productivity and cause an upward shift in the price-setting (PS) curve in the long term. However, after a decade, no such upward shift is observed. Which of the following is the most direct and fundamental explanation for this outcome within the model?