Policymakers Want to Collect 10% More in Sales Tax Revenue

Multiple Choice

Policymakers want to collect 10% more in sales tax revenue next year, and so they raise the sales tax rate by 10% from 5% to 5.5%. Which of the following assessments would be consistent with rational expectations? Next year, sales tax revenue will:

A) increase by 10%.
B) increase by more than 10%.
C) change by some amount that is less than a 10% increase.
D) rise by a small amount and then escalate rapidly.