Question

In: Economics

Use IS-LM-PC framework to answer this question. Assume the country is in equilibrium, with output at...

Use IS-LM-PC framework to answer this question. Assume the country is in equilibrium, with output at potential and inflation stable. Suppose the Government decides to provide tax concessions for businesses to support the economic growth. What will happen in the medium term to inflation, output and investment?

Solutions

Expert Solution

When government give tax concession it means that there is reduction in tax rate. Reduction in tax rate means that the disposal income of the people increases. When disposal income of the people increases people spend more on their consumption and investment also rises because the saving of the people increases due to increase in disposal income.

The consumption and investment in the economy it affect the IS Curve and IS Curve shift right ward. When IS curve shift right ward it due to which Output level increases, investment level increases and inflation rate is also increases due to generation of more output and employment in the economy. But this inflation rate is adjusted in the economy and it is benefical for the economy to the generation of more employment in the medium term.

So we can say that due to government tax concession the output, investment and inflation rate increases in the medium term.


Related Solutions

This question is about the IS-LM-FX model. Assume Home and Foreign are in an initial equilibrium...
This question is about the IS-LM-FX model. Assume Home and Foreign are in an initial equilibrium with a fixed exchange rate. Then the Home government decides to lower government spending, G. Describe the initial impact of this policy on the Home nominal interest rate, exchange rate, money supply and real output, holding Foreign interest rates and real output constant. You do not need to provide the graph in your solution, but you may find it useful to draw for yourself....
Use the IS-LM-PC model to explain how the economy adjusts to an increase in taxes in...
Use the IS-LM-PC model to explain how the economy adjusts to an increase in taxes in the medium run. Assume that the economy starts at a medium run equilibrium No graph necessary. Be sure to specify which curve shifts in the medium run. State how output, inflation, and the real interest rate change relative to the initial point where the economy started. Make sure that you state how inflation evolves differently under anchored expectations and under backward-looking expectations.
Using the Keynesian Framework, answer the following question. Assume that there are rigidities in the price/wage...
Using the Keynesian Framework, answer the following question. Assume that there are rigidities in the price/wage so that we have an upward sloping AS curve. A. Using the IS-LM and AS-AD models, show the effects of a decline in business investment. What are the effects on Income/Output, interest rates, and prices? B. Using the IS-LM and AS-AD models, show the effects of an increase in the price of raw material inputs. What are the effects on Income/Output, interest rates, and...
Assume the Canadian economy is at the equilibrium with output ?? and price ?? and then...
Assume the Canadian economy is at the equilibrium with output ?? and price ?? and then the COVID-19 shock hits the economy. Study the possible impacts of this shock on the following cases of the economy: Demand Side (AD): (1.5 points) a) What is the effect of COVID-19 shock on the IS curve (Note: start with the impacts on the Keynesian cross and then explain the impact of the shock on the IS curve.) Support your analysis with corresponding graphs....
1. This question is based on our lectures on the IS-LM framework. Consider the economy given...
1. This question is based on our lectures on the IS-LM framework. Consider the economy given by the following equations: C = 0:8(1 t)Y t = 0:25 I = 900 50r G = 800 L(r; Y ) = 0:25Y 62:5r M P = 500 (a) What is general deÖnition of the IS curve? Derive the IS curve from the above equations. (b) What is general deÖnition of the LM curve? Derive the LM curve from the above equations. (c) Describe...
a) Use the IS/LM/FE framework to identify the macroeconomic effects of a wave of investor pessimism...
a) Use the IS/LM/FE framework to identify the macroeconomic effects of a wave of investor pessimism about the future profitability of capital investments. b) Discuss policy tools that are available for the government to help with the situation in (a) and identify the pros and cons of the different tools. c) Provide your policy recommendation and carefully support your recommendation for this case.
2 LM model: thought experiment: Use money market equilibrium to graphically show how LM curve shift...
2 LM model: thought experiment: Use money market equilibrium to graphically show how LM curve shift in following cases: (1) the Fed decide to sell government bonds this year; (2) the public’s inflation expection rises because one of the Fed officials told the media that the Fed will increase the money supply significantly next year in 2019. (3) real GDP increases because technology improves.
Consider an economy that begins in long-run equilibrium. Use the IS-LM diagram and the aggregate supply...
Consider an economy that begins in long-run equilibrium. Use the IS-LM diagram and the aggregate supply - aggregate demand diagram to explain how a decrease in the money supply (Ms∆<0) will affect the equilibrium values of GDP, the price level, interest rates, consumption, investment, and the supply of real money in both the short and the long run. (Note: You only need to present and discuss the IS-LM and AS-AD diagrams; you do not need to present analysis in any...
Assume that the IS-LM-BP model is an accurate abstraction of a real economy, and use the...
Assume that the IS-LM-BP model is an accurate abstraction of a real economy, and use the model to describe how the macroeconomic effects of a tightening of monetary policy differ between a closed economy and an open economy. Hint: be sure to first describe the IS-LM-BP model, and then show how fiscal policy shifts the curves and the economy reached a new equilibrium.
Explain the general equilibrium analysis of a Tariff in large country by the use of the...
Explain the general equilibrium analysis of a Tariff in large country by the use of the free trade offer curves: a) Illustrate the effects of tariff in a large country b) What is the meaning of the optimum tariff and retaliation
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT