Improve long term GDP (2009 AM)

[June06]

Jusitiy if below can help improve long term trend of GDP.
- A broad increase in taxes to fund programs that provide support for low-income families;
I’m thinking tax may interrupt the economy but low-income families may be able to contribute more longer term. Could someone please advise? Thanks.

 

[Enemyofmyenemy]

Yeah, I found this shock to be least clear, of all the shocks I’ve seen in the past exams, in terms of impact on long-run GDP growth. When in doubt, I have used this generalization of the CFA Institue’s stand on economic policy (take it for what it’s worth):
Higher Taxes = bad for growth
More Gov’t intervention = bad for growth
Freer markets = good for growth

 

[daharmattan1]

That’s a good framework–remember that transfer payments like in this situation always incur costs (and from an economic perspective, a deadweight loss).
I agree that’s a double-sided question. My feeling is the exam would not be that nitpicky.