Explain how tax cuts can impact both aggregate demand and aggregate supply. Give an example of each
A tax cut can increase consumption or investment or both and can thus increase aggregate demand. For example, a cut in personal income taxes will give households more disposable income to spend.
In addition, when the marginal tax rates are cut, people will have an incentive to work more. As resources shift away from leisure toward work, short-run aggregate supply increases. If the lower marginal tax rates are permanent, most economists predict that both the short-run and the long-run AS curves will shift rightward.
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The short-run aggregate supply curve
A) is vertical. B) shows the impact changes in the price level have on the quantity of real GDP when resource prices are constant. C) illustrates the level of potential real GDP. D) shifts whenever the price level changes.
In the monetary small open-economy model with a fixed exchange rate, the domestic
A) government loses control over the level of domestic government spending. B) government loses control over the level of domestic taxes. C) government loses control over the level of domestic government spending and domestic taxes. D) central bank loses control over the domestic stock of money.
What do trade policies do to the standard of living?
Which of the following shifts short-run aggregate supply left?
a. an increase in price expectations b. an increase in the actual price level c. a decrease in the money supply d. a decrease in the price of oil