4. Why does a reduction in taxes have a smaller

multiplier effect than an increase in government

spending of an equal amount?

10. Suppose Congress enacts a tax reform law and the

average federal tax rate drops from 30 percent to

20 percent. Researchers investigate the impact of the

tax cut and find that the income subject to the tax

increases from $600 billion to $800 billion. The

theoretical explanation is that workers have

increased their work effort in response to the

incentive of lower taxes. Is this a movement along

the downward-sloping or the upward-sloping portion

of the Laffer curve?