Question

The Romer and Romer 2010 paper in the American Economic Review found that tax changes that are made to promote long-run growth or to reduce an inherited budget deficit tend to result in ___.

Answer 1

Group of answer choices:

A) An uncertain correlation between taxes and output GDP.

B) A strong negative relationship between taxes and output GDP.

C) A strong positive relationship between taxes and output GDP.

D) A weak positive relationship between taxes and output GDP.

Answer:

The correct answer is letter "C": A strong positive relationship between taxes and output GDP.

Explanation:

According to "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks" published by Christina and David Romer in 2010 tax increases are highly contractionary causing relevant-robust effects in the overall economy, positively affecting the Gross Domestic Product (GDP) output level.