Category: Microeconomics

Glenn Proposes Tax Reforms to Aid Economic Growth

Photo of the Internal Revenue Service building in Washington, DC from the Associated Press via the Wall Street Journal

The following op-ed by Glenn first appeared in the Wall Street Journal.

The GOP Tax Bill Could Solve the Tariff Problem

The economy and financial markets nervously await the July 8 end of the 90-day pause of the Trump administration’s “reciprocal” tariffs. But four days earlier, Republicans can allay those fears with a pro-growth policy that advances President Trump’s Made in America agenda without tariffs. The fix: tax reform.

July 4 is the date that Treasury Secretary Bessent has predicted Congress and the White House will have ready a 2.0 version of the landmark Tax Cut and Jobs Act of 2017, or TCJA. Without congressional action, some of these reforms will expire at the end of 2025, killing changes that still benefit the economy. Corporate tax changes, in particular, boosted investment and growth. These should remain the focal point of this next tax bill—for many reasons. Done right, corporate tax reform could advance President Trump’s goal to bring investment to American production without using economy-roiling tariffs. Call it TCJA+.

Renewing some parts of the original TCJA will help investment in the U.S. The 2017 reform offered incentives for investment in new businesses by allowing them to expense the cost of assets, rather than writing them off over time. But these benefits were set to be phased out from 2023 to 2026, removing a key pro-growth element of the earlier law.

Then there are two new provisions Republicans should add to secure Mr. Trump’s goal to have more made in America. Both were in the original 2016 House Republican tax reform blueprint.

First, Congress should change business taxation from the current income tax to a cash-flow tax, which taxes a firm’s revenue, minus all its expenses, including investment. Long championed by economists and tax-law experts, a cash-flow tax would allow businesses to expense investment immediately. It would also disallow nonfinancial companies from making interest deductions, because unlike an income tax, a cash-flow tax treats debt and equity the same. This removes an important tax incentive for firms to allow themselves to be leveraged. A cash-flow tax is also much simpler than a corporate income tax, which requires complex depreciation schedules. Most important, the reform would stimulate business investment.

Second, legislators should add a border adjustment to corporate taxes. That would deny companies a tax deduction for expenses of inputs imported from abroad, while exempting U.S. exports from taxation. As the Trump administration has observed, other countries already use border adjustments in their value-added taxes on consumption. America uses a similar mechanism in state and local retail taxes, too. If you buy a kitchen appliance in New York, you pay New York sales tax, even if it was made in Ohio. Sales tax applies only where the good is sold, not where it originates.

Though distinct from tariffs, border adjustments can promote domestic production. Adding a border adjustment to the federal corporate tax would eliminate any extra tax businesses suffer now simply as a consequence of producing in the U.S. Though the 2017 law made the U.S. tax system more globally competitive by lowering the corporate income tax rate from 35% to 21%, it’s still higher than in many other countries, which attract production with low cost. A border adjustment would remove this incentive for American firms to locate profits or activities abroad, while increasing incentives for non-U.S. firms to locate activities within our borders.

As with the original pro-investment features in the 2017 law, this TCJA+ reform would increase investment and incomes—and thereby revenue. For the original TCJA, when the Congressional Budget Office included the macroeconomic effects of higher incomes buoyed by the reforms’ pro-growth elements, the CBO reduced the estimated revenue loss from the tax cuts by almost 30%. Changing the corporate income tax to a cash-flow levy would similarly increase revenue by removing taxes on what economists call the “normal return” on investment, or the cost of capital. Companies would instead pay only on profits above this amount. A border adjustment can likewise raise substantial revenue over the next decade because imports (which would receive no deduction) are larger than exports (which would no longer be taxed).

The higher revenue these two TCJA+ provisions promise could be used to lower the tax rate on business cash flow or to fund other tax-policy objectives. Importantly, that revenue can replace revenue raised from the tariffs the Trump administration had planned to implement on July 8. These two tax provisions would accomplish the president’s America-first and revenue objectives without destabilizing businesses with whipsawing tariffs.

Finally, TCJA+ would offer another big benefit: It would move the U.S. toward independence from political meddling in the economy via targeted protection or subsidies. This added predictability and breathing room for investment would be one more reason to produce in America. Pluses indeed.

Glenn Discusses Tariffs on Firing Line

Image created by ChatGTP-4o

Recently, Glenn appeared on the Firing Line program to discuss tariffs. Coincidentally, Margaret Hoover, the host of the program, is the great-granddaughter of Herbert Hoover. Herbert Hoover was the president who signed the Smoot-Hawley Tariff bill in 1930. We discussed the Smoot-Hawley Tariff in a recent blog post.

A Disagreement between Fed Chair Powell and Fed Governor Waller over Monetary Policy, and Can President Trump Replace Powell?

In this photo of a Federal Open Market Committee meeting, Fed Chair Jerome Powell is on the far left and Fed Governor Christopher Waller is the third person to Powell’s left. (Photo from federalreserve.gov)

This post discusses two developments this week that involve the Federal Reserve. First, we discuss the apparent disagreement between Fed Chair Jerome Powell and Fed Governor Christopher Waller over the best way to respond to the Trump Administration’s tariff increases. As we discuss in this blog post and in this podcast, in terms of the aggregate demand and aggregate supply model, a large unexpected increase in tariffs results in an aggregate supply shock to the economy, shifting the short-run aggregate supply curve (SRAS) to the left. The following is Figure 13.7 from Macroeconomics (Figure 23.7 from Economics) and illustrates the effects of an aggregate supply shock on short-run macroeconomic equilibrium.

Although the figure shows the effects of an aggregate supply shock that results from an unexpected increase in oil prices, using this model, the result is the same for an aggregate supply shock caused by an unexpected increase in tariffs. Two-thirds of U.S. imports are raw materials, intermediate goods, or capital goods, all of which are used as inputs by U.S. firms. So, in both the case of an increase in oil prices and in the case of an increase in tariffs, the result of the supply shock is an increase in U.S. firms’ production costs. This increase in costs reduces the quantity of goods firms will supply at every price level, shifting the SRAS curve to the left, as shown in panel (a) of the figure. In the new macroeconomic equilibrium, point B in panel (a), the price level increases and the level of real GDP declines. The decline in real GDP will likely result in an increase in the unemployment rate.

An aggregate supply shock poses a policy dilemma for the Fed’s policymaking Federal Open Market Committee (FOMC). If the FOMC responds to the decline n real GDP and the increase in the unemployment rate with an expansionary monetary policy of lowering the target for the federal funds rate, the result is likely to be a further increase in the price level. Using a contractionary monetary policy of increasing the target for the federla funds rate to deal with the rising price level can cause real GDP to fall further, possibly pushing the economy into a recession. One way to avoid the policy dilemma from an aggregate supply shock caused by an increase in tariffs is for the FOMC to “look through”—that is, not respond—to the increase in tariffs. As panel (b) in the figure shows, if the FOMC looks through the tariff increase, the effect of the aggregate supply shock can be transitory as the economy absorbs the one-time increase in the price level. In time, real GDP will return to equilibrium at potential real GDP and the unemployment rate will fall back to the natural rate of unemployment.

On Monday (April 14), Fed Governor Christopher Waller in a speech to the Certified Financial Analysts Society of St. Louis made the argument for either looking through the macroeconomic effects of the tariff increase—even if the tariff increase turns out to be large, which at this time is unclear—or responding to the negative effects of the tariffs increases on real GDP and unemployment:

“I am saying that I expect that elevated inflation would be temporary, and ‘temporary’ is another word for ‘transitory.’ Despite the fact that the last surge of inflation beginning in 2021 lasted longer than I and other policymakers initially expected, my best judgment is that higher inflation from tariffs will be temporary…. While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy. If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC’s policy rate sooner, and to a greater extent than I had previously thought.”

In a press conference after the last FOMC meeting on March 19, Fed Chair Jerome Powell took a similar position, arguing that: “If there’s an inflation that’s going to go away on its own, it’s not the correct response to tighten policy.” But in a speech yesterday (April 16) at the Economic Club of Chicago, Powell indicated that looking through the increase in the price level resulting from a tariff increase might be a mistake:

“The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. Both survey- and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs…. Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent…. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”

In a discussion following his speech, Powell argued that tariff increases may disrupt global supply chains for some U.S. industries, such as automobiles, in way that could be similar to the disruptions caused by the Covid pandemic of 2020. As a result: “When you think about supply disruptions, that is the kind of thing that can take time to resolve and it can lead what would’ve been a one-time inflation shock to be extended, perhaps more persistent.” Whereas Waller seemed to indicate that as a result of the tariff increases the FOMC might be led to cut its target for the federal funds sooner or to larger extent in order to meet the maximum employment part of its dual mandate, Powell seemed to indicate that the FOMC might keep its target unchanged longer in order to meet the price stability part of the dual mandate.

Powell’s speech caught the notice of President Donald Trump who has been pushing the FOMC to cut its target for the federal funds rate sooner. An article in the Wall Street Journal, quoted Trump as posting to social media that: “Powell’s termination cannot come fast enough!” Powell’s term as Fed chair is scheduled to end in May 2026. Does Trump have the legal authority to replace Powell earlier than that? As we discuss in Macroeconomics, Chapter 27 (Economics Chapter 17), according to the Federal Reserve Act, once a Fed chair is notimated to a four-year term by the president (President Trump first nominated Powell to be chair in 2017 and Powell took office in 2018) and confirmed by the Senate, the president cannot remove the Fed chair except “for cause.” Most legal scholars argue that a president cannot remove a Fed chair due to a disagreement over monetary policy.

Article I, Section II of the Constitution of the United States states that: “The executive Power shall be vested in a President of the United States of America.” The ability of Congress to limit the president’s power to appoint and remove heads of commissions, agencies, and other bodies in the executive branch of government—such as the Federal Reserve—is not clearly specified in the Constitution. In 1935, a unanimous Supreme Court ruled in the case of Humphrey’s Executor v. United States that President Franklin Roosevelt couldn’t remove a member of the Federal Trade Commission (FTC) because in creating the FTC, Congress specified that members could only be removed for cause. Legal scholars have presumed that the ruling in this case would also bar attempts by a president to remove members of the Fed’s Board of Governors because of a disagreement over monetary policy.

The Trump Administration recently fired a member of the National Labor Relations Board and a member of the Merit Systems Protection Board. The members sued and the Supreme Court is considering the case. The Trump Adminstration is asking the Court to overturn the Humphrey’s Executor decision as having been wrongly decided because the decision infringed on the executive power given to the president by the Constitution. If the Court agrees with the administration and overturns the precdent established by Humphrey’s Executor, would President Trump be free to fire Chair Powell before Powell’s term ends? (An overview of the issues involved in this Court case can be found in this article from the Associated Press.)

The answer isn’t clear because, as we’ve noted in Macroeconomics, Chapter 14, Section 14.4, Congress gave the Fed an unusual hybrid public-private structure and the ability to fund its own operations without needing appropriations from Congress. It’s possible that the Court would rule that in overturning Humphrey’s Executor—if the Court should decide to do that—it wasn’t authorizing the president to replace the Fed chair at will. In response to a question following his speech yesterday, Powell seemed to indicate that the Fed’s unique structure might shield it from the effects of the Court’s decision.

If the Court were to overturn its ruling in Humphrey’s Executor and indicate that the ruling did authorize the president to remove the Fed chair, the Fed’s ability to conduce monetary policy independently of the president would be seriously undermined. In Macroeconomics, Chapter 17, Section 17.4 we review the arguments for and against Fed independence. It’s unclear at this point when the Court might rule on the case.

Solved Problem: Congestion Pricing and the Price Elasticity of Demand

Supports: Microeconomics and Economics, Chapter 6, and Essentials of Economics, Chapter 7, Section 7.5-7.7

ChatGTP-4o image of cars in the Lincoln Tunnel, which connects New Jersey with midtown Manhattan.

In January 2025, New York City began enforcing congestion pricing in the borough of Manhattan south of 60th Street—the congestion relief zone. The Metropolitan Transportation Authority (MTA) in New York collects a toll from a vehicle entering that zone either automatically using the vehicle’s E-ZPass transponder or by reading the vehicle’s license plate and mailing a bill to the vehicle’s owner. Nobel Laureate William Vickrey of Columbia University first proposed congestion pricing in the 1950s as a way to deal with the negative externalities from traffic congestion. Congestion pricing acts as a Pigovian tax that internalizes the external costs drivers generate by using streets in congested areas. (We discuss Pigovian taxes in Microeconomics and Economics, Chapter 5, Section 5.3, and in Essentials of Economics, Chapter 4, Section 4.3.)

The New York City congestion toll is somewhat complex, varying according to the type of vehicle and how the vehicle enters the area in which the toll applies. The congestion toll fora car entering Manhattan through the Lincoln Tunnel on a weekday between 5 am and 9 pm is $6.00 on top of the existing toll of $16.06. In January 2025, the volume of cars driving through the Lincoln Tunnel declined by 8 percent during the weekday hours of 5 am to 9 pm. According to an article in Crain’s New York Business, the number of vehicles entering the congestion relief zone compared with the same month in the previous year declined by 8 percent in January, 12 percent in February, and 13 percent in March.

  1. From the information given, can we determine the price elasticity of demand for entering Manhattan by driving though the Lincoln Tunnel during weekdays from 5am to 9am? Briefly explain.
  2. Suppose someone makes the following claim: “Because the quantity of cars using the Lincoln Tunnel has declined by 8 percent, we know that the MTA must have collected less revenue from cars using the tunnel than before the congestion toll was imposed.” Briefly explain whether you agree.
  3. Is the pattern of increasing percentage declines in vehicle traffic in the congestion relief zone each month from January to March what we would expect? Be sure your answer refers to concepts related to the price elasticity of demand.

Step 1: Review the chapter material. This problem is about the price elasticity of demand, so you may want to review Chapter 6, Sections 6.1-6.4. 

Step 2: Answer part (a) by explaining whether from the information given we can determine the price elasticity of demand for entering Manhattan by driving through the Lincoln Tunnel. We do have sufficient information to determine the price elasticity, provided that nothing else that would affect the demand for driving through the Lincoln Tunnel changed during January. We’re told the percentage change in the quantity demand, so we need only to calculate the percentage change in the price to determine the price elasticity. The change in the price is the $6 congestion toll. The average of the price before and the price after the toll is imposed is ($16.06 + $22.06) = $19.06. Therefore, the percentage change in the price is ($6/$19.06) × 100 = 31.5 percent. The price elasticity of demand is equal to the percentage change in quantity dmanded divided by the percentage change in price: –6%/31.5% = –0.3. Because this value is less than 1 in absolute value, we can conclude that the demand for driving through the Lincoln Tunnel is price inelastic.

Step 3: Answer part (b) by explaining whether because the quantity of cars driving through the Lincoln Tunnel has declined the MTA must have collected less revenue from cars using the tunnel. As shown in Section 6.3 of the textbook, total revenue received will fall after a price increase only if demand is price elastic. In this case, demand is price inelastic, so the total revenue the MTA collects from cars using the Lincoln Tunnel will rise, not fall.

Step 3: Answer part (c) by explaining whether the pattern of increasing percentage declines in vehicle traffic in the congestion relief zone is one we would expect. In Section 6.2, we see that the passage of time is one of the determinants of the price elasticity of demand. The more time that passes, the more price elastic the demand for a product becomes. In other words, the longer the time that people have to adjust to the congestion toll—by, for instance, taking a bus rather than driving through the Lincoln Tunnel in a car—the more likely it is that people will decide not to drive into the congestion relief zone. So, it is not surprising that the number of vehicles entering the congestion relief zone declined by a greater percentage each month from January to March.

The U.S.-China Trade War Illustrated in Two Graphs from the Peterson Institute

Photo of U.S. President Donald Trump and China President Xi Jinping from Reuters.

The tit-for-tat tariff increases the U.S. and Chinese governments have levied on each other’s imports have reached dizzying heights today (April 11). The United States has imposed a tariff rate of 134.7 percent on imports from China, while China has imposed a tariff rate of 147.6 percent on imports from the United States. On all other countries—the rest of the world (ROW)—the United States imposes an average tariff rate of 10.5 percent, which is a sharp increase reflecting the Trump Administration’s imposition of a tariff of at least 10 percent on all countries. The government of China imposes a tariff rate of 6.5 percent on the ROW.

The Peterson Institute for International Economics (PIIE) is a think tank located in Washington, DC. Chad Brown, a senior fellow at PIIE, has created two charts that dramatically illustrate the current state of the U.S.-China trade war. The first chart shows the changes since the beginning of the first Trump Administration in 2017 in the tariff rates the countries have imposed on each other’s imports.

The second chart shows the percentage of each country’s exports to the other country that have been subject to tariffs. As of today, 100 percent of each country’s exports are subject to the other country’s tariffs.

Finally, we repeat a figure from an earlier blog post showing changes over time in the average tariff rate the United States levies on imports. The value for 2025 of 16.5 percent is an estimate by the Tax Foundation and assumes that the tariff rates that the Trump Administration announced on April 2 go into force, although the rates are currently suspended for 90 days—apart from those imposed on China. (An average tariff rate of 16.5 percent would be the highest levied by the United States since 1937.)

Thanks to Fernando Quijano for preparing this figure.

Solved Problem: Mickey v. Cost Curves

Supports: Microeconomics and Economics, Chapter 11, Section 11.5, and Essentials of Economics, Chapter 8, Section 8.5

Image generated by ChatGTP-4o showing the costs of inputs to a factory.

Mickey, the Econ Pup, sometimes struggles with drawing and interpreting cost curves. Examine the cost curves shown in images a. and b. and let Mickey know if you find any errors.

a.

b.

Solving the Problem
Step 1: Review the chapter material. This problem is about drawing and interpreting cost curves, so you may want to review Chapter 11, Section 11.5, “Graphing Cost Curves.”

Step 2: Answer part a. by explaining whether there are any errors in the cost curves shown in the image in a. No wonder Mickey is confused! This figure has multiple errors:

  1. It’s an error to have the ATC and AVC curves cross. The unlabeled curve at the bottom is supposed to be AFC. We know that if a firm has fixed costs, then the ATC and AVC curves will get closer and closer as the quantity increases and AFC becomes smaller and smaller. But because AFC will never decline to zero, ATC and AVC can’t be equal at any quantity.
  2. The second error is related to the first error. We know that the MC and ATC curves should intersect at the quantity at which ATC is at a minimum. In this figure, the MC curve intersects the ATC curve at a quantity that is larger than the quantity at which ATC recaches a minimum.
  3. The third error is related to the first two errors. The relationship between the three average cost curves should be ATC = AVC + AFC at every quantity. In this figure the relationship doesn’t hold at any quantity.
  4. Finally, there is a dotted line from the point where the (unlabeled) AFC curve intersects with the MC curve down to the Q-axis. But that point has no economic significance.

Step 3: Answer part b. by explaining whether there are any errors in the cost curves shown in image b. Mickey can rest easy with these cost curve because, although the figure seems to be only partially finished, all of the cost curves are correctly drawn. The MC curve correctly intersects the AVC curve at the quantity at which the AVC curve is at a minimum. The instructor could finish the figure by labeling the bottom curve as AFC and by drawing an ATC curve above the AVC curve, with the ATC curve intersecting the MC curve at the quantity at which the ATC curve is at a minimum.

What Happened after Smoot-Hawley?

Congressman Willis Hawley of Oregon and Senator Reed Smoot of Utah (Photo from the U.S. Library of Congress via the Wall Street Journal)

Until last week, the most famous example of the United States dramatically increasing tariffs on foreign imports was the Smoot-Hawley Tariff, which was passed by Congress and signed into law by President Herbet Hoover in June 1930. The website of the U.S. Senate describes the bill as “among the most catastrophic acts in congressional history.”

Did the Smoot-Hawley Tariff cause the Great Depression? According to the National Bureau of Economic Research’s business cycle dates, the Great Depression began in August 1929, well before the passage of Smoot-Hawley. By June 1930, industrial production had already declined in the United States by more than 17 percent. So, even if the downturn had ended at that point it would still have been severe. The contraction phase of the Depression continued until March 1933, by which time industrial production had declined more than 51 percent. That was the largest decline in U.S. history

If Smoot-Hawley didn’t cause the Depression, did it contribute to the Depression’s length and severity? Most economists believe that it did by contributing to the collapse of the global trading system, thereby reducing U.S. exports, aggregate demand, and production and employment.

Some years ago, Tony wrote an overview of Smoot-Hawley that discusses its causes and effects in more detail. A key question in assessing the effects of Smoot-Hawley is the extent to which key trading partners of the United States raised their tariffs in retaliation. The clearest case is Canada, which in 1930 was the leading trading partner of the United States. Canadian Prime Minister William Lyon Mackenzie King and the Liberal Party significantly raised tariffs on U.S. imports in explicit retaliation for Smoot-Hawley. This journal article that Tony co-wrote with two Lehigh colleagues discusses the empirical evidence for this conclusion. (The link takes you to the Jstor site. You may be able to read or download the whole article by clicking on the link on that page and entering the name of your college or university.)

The Trump Administration seems to be attempting a major reordering of the global trading system. A Canadian prime minister in the 1930s tried something similar. Richard Bedford Bennett became prime minister after his Conservative Party defeated Mackenzie King’s Liberal Party in the 1935 Canadian election. Bennett hoped to replace the U.S. market with the markets in England and other countries in the British Commonwealth. He argued that, taken together, the Commonwealth countries had sufficient resources to be largely self-sufficient and need not rely on trade with non-Commonwealth countries. In the end, Bennett was unsuccessful for reasons that Tony and a Lehigh colleague explore in this journal article.

Douglas Irwin on Tariffs

Image generated by ChatGTP-4o illustrating tariffs.

Douglas Irwin, a professor of economics at Dartmouth College, may be the leading historian of international trade in the United States today. Irwin has posted at this link a useful overview of the economics of tariffs.

Irwin’s feed on X offers day-to-day commentary on current developments in the Trump Administration’s rapidly changing tariff policies. At the top of his X feed, you can find a free download of Clashing over Commerce, his 2019 history of U.S. foreign trade policy. At 862 pages, the book is the most thorough and comprehensive account available of the long-running political disputes in the United States over foreign trade.

Trump Administration Implements Historically Large Tariff Increases … and a Related Solved Problem

Image generated by ChatGTP-4o of new cars on a dealer’s lot.

This afternoon (April 2), President Donald Trump announced a sweeping increase in tariff rates on imported goods. The increases were by far the largest since the Smoot-Hawley Tariff of 1930. The United States will impose 10 percent across-the-board tariff on all imports, with higher tariffs being imposed on individual countries. Taking into account earlier tariffs, Chinese imports will be subject to a 54 percent tariff. Imports from Vietnam will be subject to a 46 percent tariff, and imports from the countries in the European Union will be subject to a 20 percent tariff.

President Trump’s objectives in imposing the tariffs aren’t entirely clear because he and his advisers have emphasized different goals at different times. The most common objectives the president and his advisers have offered for the tariff increases are these three:

  1. To increase the size of the U.S. manufacturing sector by raising the prices of imported manufactured goods.
  2. To retaliate against barriers that other countries have raised against U.S. exports.
  3. To raise revenue for the federal government.

The effects of the tariffs on the U.S. economy depend in part on whether foreign countries retaliate by raising their tariffs on imports from the United States and on whether, in the future, the president reduces tariffs in exchange for other countries reducing barriers to U.S. imports. For a background discussion of tariffs, see this post. Glenn and Tony discuss tariffs in this podcast, which was recorded on Friday afternoon (March 28). A discussion of the Smoot-Hawley Tariff can be found here.

The following Solved Problem looks at one aspect of the effects of a tariff increase.

Supports: Microeconomics and Economics, Chapter 6, Section 6.3.

Nearly every automobile assembled in the United States contains at least some imported parts. An article on axis.com made the following statement about the effect on U.S. automobile manufacturers of an increase in the tariff on imported auto parts: “If car prices [in the United States] go up, Americans will buy fewer of them, meaning less revenue ….” What assumption is the author of this article making about the demand for new automobiles in the United States?

Solving the Problem

Step 1: Review the chapter material. This problem is about the effect of price increases on a firm’s revenue, so you may want to review the section “The Relationship between Price Elasticity of Demand and Total Revenue.”

Step 2: Answer the question by explaining what must be true of the demand for new automobiles in the United States if an increase in automobile prices results in a decline in the revenue received by automobile producers. This section of Chapter 6 explains how the price elasticity of demand affects the revenue a firm receives following a price increase. A price increase, holding everything else constant that affects the demand for a good, always causes a decline in the quantity demanded. If demand is price inelastic, an increase in price will result in an increase in revenue because the percentage decline in quantity demanded will be smaller than the percentage increase in the price. If demand is price elastic, an increase in price will result in a decrease in revenue because the percentage decline in the quantity demanded will be larger than the percentage increase in price. We can conclude that the author of the article must be assuming that the demand for new automobiles in the United States is price elastic.

03/29/25 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss the impact of tariffs on monetary policy & the Fed.

Please listen to a podcast discussion recorded just this past Friday between Glenn Hubbard and Tony O’Brien as they discuss tariffs and it’s impact on monetary policy. Also, check out the regular blog posts while on the site! So much has been happening and these posts helps both instructors and students integrate this discussion into their classroom.

Join authors Glenn Hubbard and Tony O’Brien as they discuss the impact of new tariff policies on trade but also on the larger economy. They delve into the Fed, monetary policy, and the impact on inflation. They also discuss some of the history back to when tariffs used to be a high proportion of government revenue and analyze the mix of products that are imported & exported by the US. Should the Fed change its current behavior due to the tariff environment?

https://on.soundcloud.com/PNi5sLLkC4GikoX1A