Question

Explain how the given federal government policy headline relates to long-run economic growth and produce a graph showing the effects of the government policy on Long-Run Aggregate Supply, the General Price Level, and output.

Federal Government Policy Headline: Congress Approves $250 Billion in Tax Breaks for Construction Equipment Upgrades

Answer 1

When the Federal Government wishes to improve a sector or to give some relief to it due to economic situations or the type of people attached to the same or to avoid industrial issues, it provides this through the help of tax reliefs, grants, subsidies etc. One such issue is the topic of discussion for us in this case study.

When the government approves tax breaks, it means that the availability of capital for corporate houses increases. This is due to the fact that their payments towards taxes are retained in business. As a result, the additional money goes towards increasing the investment levels in the economy and the prices of the goods and services available in a country decline rapidly.

This can be explained in the form of a graph which is as follows:-

Here we see that the price level changes from P to P-1 as the Long Run aggregate curve moves towards the right due to increase in production capacity this increase is caused due to the easy availability of capital to the firm. The output increase has also been indicated and the difference can be calculated by the difference between the old and new Long Run Average Supply Curve respectively.

Please feel free to ask your doubts in the comments section.