1. The government cuts the income tax rate. Explain the effects of this action on the supply of labor, demand for labor, equilibrium employment, the real wage rate, and potential GDP.

2. What is the true income tax rate on interest income if the nominal interest rate is 8 percent a year, the inflation rate is 5 percent a year, and the tax rate on nominal interest is 25 percent?

3. If the government cuts its outlays but tax revenue is unchanged, explain the effects on saving, investment, the real interest rate, and the growth rate of real GDP.