Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $10 billion. Using your AD-AS model, illustrate (draw) what happens to this economy after the tax credit was repealed. Suppose the MPC for this economy is 0.8. (10 points)
A. Are they experiencing a recessionary or expansionary gap?
B. Will the aggregate demand or aggregate supply change and by how much?
C. If the government established full employment using only tax policies, by how much would they have to change taxes?
D. When drawing your graph, start off in long-run equilibrium and show how the economy changes due to the investment tax credit being repealed. Label your graph and explain each step.

  • CreatedJuly 26, 2013
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