Question

At its simplest level, Keynesian macroeconomics suggests there may be a role for government policy when it comes to the success of the macroeconomy. With this in mind, President Donald Trump passed the “Tax Cuts and Jobs Act of 2017” (TCJA) which went essentially into effect on January 1, 2018. A large part of the long run impact of this policy change depends on the multiplier which in turn depends on the marginal propensity to consume (MPC). As it turns out, you have the most recent and up to date estimates of the MPC and so Donald Trump has sent an aide to interview you about this and your thoughts on the policy change as well.

1. Youre an econometric expert when it comes to the MPC but we have only spent a small time talking about the "TCJA". Explain what it is and what the key provisions are (despite popular belief, Wikipedia seems like a fine source for this).

Answer 1

Tax Cuts and Jobs Act of 2017 helps in boosting the economy to a great extent. But it majorly depends on Marginal Propensity to consume. Due to tax cuts, there would high amount of disposable income in the hands of the consumer and thus leads to high level of spendings on the personal consumption. Marginal Propensity to consume is the how much level of additional income is spent on personal consumption of the individuals. If the MPC is high, high level of expenditure would be done on personal consumption as the disposable income of the individual rises due to tax cuts.

Increased level of spending leads to high demand of the commodities, thus high level of production by the manufacturers and thus increased GDP level and thus high level of employment. This in turn rises the standard of living of the individuals and thus the growth of the economy. Jobs Act leading to high level of employment amongst the citizens also improve the standard of living of the individuals , leading to high demand and thus the overall economy grows.