Congress proposes to stimulate the economy by cutting taxes for middle income families but raising taxes for wealthier tax payers. The effect will be the same net taxes collected, but most tax payers would pay less in taxes. According to which of the following economic theories would this stimulate the economy?
I. fiscal policy -
II. supply-side -
III. monetary policy -
Click on the arrows to vote for the correct answer
A. B. C. D. E. F.Explanation
Since there was no net reduction in taxes, the tax plan would not create a fiscal stimulus. Marginal tax rates have effectively increased under this plan, implying a negative supply-side impact. Monetary policy involves changing the money supply, which is not applicable here.