Question

Instructions:

5 sentences or more! It needs to be as detailed as possible please this is for Macroeconomics. Should be substantial, and answer the question(s) in detail. Proper grammar and sentence structure are expected.

Discussion Topic:

Suppose Congress votes to decrease corporate income tax rates. Use the AD/AS model to analyze the likely impact of the tax cuts on the macroeconomy. Show graphically and explain your reasoning. What exactly causes AD and/or AS to shift? What happens to GDP and the aggregate price level? Why?

Answer 1

A decrease in the corporate income tax it is a part of a fiscal expansionary policy. This is likely to increase the corporate income. Therefore, a cut in the corporate income tax stimulates the aggregate spending because expenditure by businesses in the form of investment is a part of aggregate spending. With appropriate spending multiplier in the economy, the aggregate demand curve is expected to shift to the right. In the short run, this will increase the level of GDP and the aggregate price level. Here we are assuming that short run aggregate supply curve is upward sloping.