Question

In December, 2017 the President signed a major tax cut. How would this be explained in...

In December, 2017 the President signed a major tax cut. How would this be explained in our AD and SRAS graph? Which of the following would occur?

P rises
P falls
Y rises
Y falls
disposable income rises
disposable income falls
production rises
production falls

Homework Answers

Answer #1

Disposable income rises.

A tax cut raises the disposable income of the people. The disposable income is the income after the taxations so if the government introduces a significant tax that would rise the disposable income of the people and this in turn leads to the increase in the aggreagte demand. Due to the higher aggregate demand the firms needs to hire more workers to expand the production in the economy. The aggregate demand curve would shift to the right.

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