Question: Which of the following statements (a) are true under conditions of ceteris paribus, (b) represent the fallacy of composition, (c) represent the fallacy of ‘‘ergo,'' (d) cannot be determined without further information?
(A) In the later stages of business cycle expansions, it is observed that interest rates rise, and the ratio of capital spending to GDP also rises. That is because higher interest rates lead to an increase in capital spending.
(B) If someone decides to save 10% of his income instead of 5%, his personal saving will increase. Thus if everyone in the economy decides to save 10% of their income instead of 5%, the national saving rate will rise.
(C) A reduction in the capital gains tax rate will boost stock prices. That in turn will increase the growth rate, sending stock prices still higher. As a result, personal and corporate income tax receipts will rise enough to offset the decline in capital gains tax revenue, so the tax cut will ‘‘pay for itself.''
(D) An increase in the money supply will initially boost the real growth rate, but in the long run will leave the growth rate unchanged but raise the inflation rate.
(E) An increase in the minimum wage will boost real growth because the lowest paid workers will have more to spend, hence raising total consumption.
(F) A decrease in the top marginal tax rate bracket will boost real growth because consumers with the highest income will have more to spend, hence raising total consumption.
(G) A decrease in the corporate income tax rate will boost real growth because that will stimulate corporate earnings, hence boosting investment and total GDP.
(H) During recessions, imports decline because of the reduction in purchasing power. That improves the trade balance, which strengthens the value of the dollar the following year.