Suppose the Government Increases the Child Tax Credit, Which Increases

Multiple Choice

Suppose the government increases the child tax credit, which increases the after-tax income of families with children. How will this decision affect the amount of labor supplied by parents, assuming that leisure is a normal good?

A) Since the income and substitution effects move in the same direction, the amount of labor supplied will increase.
B) Since the income effect will dominate the substitution effect, the amount of labor supplied will decrease.
C) We don't know what will happen to the quantity of labor supplied, since we don't know whether the income effect or substitution effect will dominate.
D) The labor supply curve will shift right, so the quantity of labor will also increase.