Question

Suppose the new government passes a tax cut of Rs. 90. How does it change the Investment and National savings in each of the following scenarios?
1- people keep all of the tax cut under their mattress.
2- people spend all of the tax cut on Marvel universe paraphernalia.
3- people use half the money to buy junk food and cars, and they keep the rest under their pillows.

e. What happens to the economy when people spend some of the tax cut? Explain this phenomenon carefully, outlining the implications for the economy.

f. What is the effect of the tax cut in society in each case? Calculate your answer.

GDP= $900
Consumption =$540
Govt spending=$225
Tax=$180

Answer 1

tax cut reduces the real income of the government and increases the real income of people