Effectiveness of policy options to meet all macroeconomic objectives: Practice Questions

Based on Laffer curve analysis, what is the most likely consequence if a government increases the marginal rate of income tax beyond the revenue-maximising tax rate?

According to the Laffer curve analysis, if a government reduces the top marginal rate of income tax at a time when the current rate is higher than the revenue-maximising rate, what are the most likely effects on the government budget deficit and Long-Run Aggregate Supply (\(LRAS\))?

A government currently operates on the efficient side of the Laffer Curve (to the left of the revenue-maximising tax rate). If the government decides to increase the marginal rate of income tax, what is the most likely outcome for tax revenue and the incentive to work?

In the context of macroeconomic policy, explain why there is often a short-run conflict between achieving a low rate of unemployment and maintaining price stability.

Explain why monetary policy may be ineffective in achieving the objective of economic growth when the economy is experiencing a liquidity trap, despite significant increases in the money supply.

A country is experiencing a period of low economic growth combined with high inflation (stagflation). The government is considering using supply-side policies to address these issues.

(a) Using a Laffer curve diagram, analyze the argument that a reduction in the marginal rate of income tax could actually lead to an increase in total tax revenue for the government. [4]
(b) Evaluate the effectiveness of using interventionist supply-side policies, such as investment in infrastructure and education, compared to contractionary monetary policy in achieving the objective of price stability in this economy. [4]