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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 8, Problem 5CQQ
Textbook Problem
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The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the

a. deadweight loss.

b. government’s tax revenue.

c. equilibrium quantity.

d. price paid by consumers.

To determine
The Laffer curve.

Explanation of Solution

The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on the public expenditure of the government. The main types of taxes include the income tax, wealth tax and the professional tax. When there is a tax, it will lead to fall in the consumer surplus as well as in the producer surplus. As a result, the total surplus which is the summation of the consumer surplus and the producer surplus will fall and this fall will occur in the total surplus due to taxation which is known as the deadweight loss due to tax.

The Laffer curve is used to illustrate the relationship between the tax rate of the economy and the amount of tax revenue collected from the economy. The shape of the Laffer curve is parabolic and the curve explains that more the activity of production taxed, the less will be the revenue generated through the tax.

Option (b):

The Laffer curve is used to illustrate the relationship between the tax rate of the economy and the amount of tax revenue collected from the economy. Thus, when the government has to increase the tax revenue collected by the government, it should reduce the tax rate...

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