Song earns $132,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $26,400 of tax). Answer the questions below assuming that Congress increases the income tax rate such that Song's average tax rate increases from 20 percent to 25 percent. a. What will happen to the governments tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and therefore earns only $99,000 in taxable income?

• Government's tax revenues would decrease by $1650

• Government's tax revenues would increase by $1650

• Government's tax revenues would decrease by $1900

• Government's tax revenues would increase by $1900

• Government's tax revenues would remain unchanged

b. What is the term that describes this type of reaction to a tax rate increase?

• Income effect

• Endowment effect

• Substitution effect

• Budget constraint