Question

In December 2017, the US senate passed the tax cuts and jobs act of 2017. The act is effectively altering the rate of taxation for individuals and businessss. Describe the potential effects of this major tax reform on the US further economic growth. Use markets for loanabke funds and foreign currency exchange in your answer.

Answer 1

In December 2017, the US senate passed the tax cuts and jobs act of 2017. The act is effectively altering the rate of taxation for individuals and businesses. The alteration of taxation will increase the GDP leading economic growth to increase. It will create different effects on markets for loanable funds and foreign currency exchange.

Effect of tax cut on loanable fund market: the tax cut makes loanable fund market more active because tax cut increases income with individuals and businesses so they increase their investments to earn more profits. The cash flow increases in the loanable fund market. The increased movement of loanable fund market and increased investments leads to higher economic growth.

Effect of tax cut on foreign currency exchange: the tax cut leads to depreciation of the value of currency in the international market because reduction in taxes increases money supply in the economy and leads to decrease in value of money. The tax cut leads to foreign trade towards deficit which depreciates value of domestic currency. It affects the economic growth negatively by reducing GDP of the country