Suppose the government reduces taxes by $20 billion, there is no crowding out effect, and the marginal
Question:
a) What is the initial effect of the tax reduction on aggregate demand (AD)?
b) What follow-on effects ensue after this initial effect? What is the total effect of a the tax cut on AD?
c) How does the total effect of a $20 billion tax reduction compare to the total effect of a $20 billion increase in government spending? Why this difference?
d) Based on your answer to (C), is there a way the government can increase AD in the short-run without changing the government's budget balance?
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a Ad will rise by 7520 15 initially b The tax cut will stimulate consumption in the first rou...View the full answer
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