Question

what are the short term and long term effects of tax reductions?

Answer 1

IN the short run,a decrease in the taxes will increase the disposable income and that will lead to a higher demand in the market. it will shift the aggregate demand curve to the right and the new equilibrium will be at a higher output and higher price. it will decrease the unemployment and increase the investment in the market.

IN the long run, As the price have increased, the real wages will fall and that wlll force the labor to increase there wages. This increase in wages will lead to a decrease in the supply and that will shift the supply curve to the left. the new equilibrium will be at a higher price and lower level of output. this will increase the unemployment and decrease the investment. the output will be at the same level as before but the price will be higher.