Which of the following is more likely to be effective in increasing the growth rate of real GDP?

A.

permanent cuts in business taxes

B.

temporary cuts in income taxes

C.

a

oneminus-time

personal income tax rebate

D.

All cuts in taxes are equally likely to increase the growth rate of real GDP.

A. permanent cuts in business taxes

Explanation:

Cutting taxes is a government fiscal policy that aims at increasing aggregate demand, thereby stimulating growth. Real GDP is the total value of a country production adjusted for inflation. A cut in business taxes reduces the cost of production. Sellers can offer goods to customers at a lower price. A reduction in prices has similar effects to an increase in incomes. With an increase in purchasing power, individuals will have the ability to buy more, leading to an increase in demand.

Manufacturers react to an increase in demand by producing more goods. An increase in production is an increase in real GDP. Therefore, a permanent cut in taxes will lead to an increase in real GDP. Real GDP is calculated per financial year. A temporal tax cut may lead to a term short term rise in demand.