Question

The Republican tax cut has been in the news. The tax cut which, on net, is set to increase the deficit by $1.5 trillion over the next ten years is the focus of this question.

A) One important thing to keep in mind is that the economy is already essentially at potential with unemployment at 4.1%. Assume that the economy is in long run equilibrium before the tax cut. What will happen to the US economy in the short run? You need a completely labeled graph and a clear written statement that explains what is changing and what is happening to the price level and real GDP.

B) Now explain what should happen to the economy in the long run. Again you need a completely labeled graph and a clear written statement that explains what is changing and what is happening to the price level and real GDP.

C) Now suppose instead of allowing the economy to adjust “naturally” as in question 1b the Federal Reserve intervenes to fix the problem created in question 1a. Show what the Federal Reserve would do using a completely labeled graph and a clear written statement that explains what is changing and what is happening to the interest rate and why that matters.

D) Now show the effect of the Fed’s actions in 1c on the economy using the AS-AD model. You need a completely labeled graph and a clear written statement that explains what is changing and what is happening to the price level and real GDP.

E) What effect will the increase in the deficit have on the market for loanable funds? Would this make the Fed’s job easier or more difficult? Again you need a completely labeled graph and a clear written statement that explains what is changing and what is happening to the interest rate. You also need a spate sentence or two explaining how this helps/doesn’t help the Fed.

F) Suppose the republicans cut taxes by $500 this year with their tax cut bill. Suppose people in the US consume 90% of their income. What will the total economic impact of the tax cuts be?

Answer 1

Answeer:

It is difficult to infer that the Republican proposition is tied in with anything other than that thin fragment. Republicans appear to trust that the best remedy to address the country's ills is to slice some $50,000 from the assessments of individuals acquiring a million or more. The bequest duty could produce $1 trillion over 10 years just by raising the rate and slicing the exclusions to where they were in the 1970s. Raising the exception on the home expense to $11 million, as Republicans propose, will help just a thin fragment of ultrarich Americans. On the off chance that it succeeds, it will change the United States from a low-charge nation to a lower-assess one. Furthermore, the riddle will persevere: In cutting assessments as children kick the bucket and grown-ups squander away in habit, what do Americans mean by country?