Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.

1) The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.

2) The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.

3) The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.

4) The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

Expert Solution

If the federal government enacts a cut in the personal income tax rates, people's disposable income will increase. This will increase the Consumption spending. Increase in Consumption increases aggregate demand, shifting the AD curve rightward. However, the aggregate supply curve will remain unchanged. As a result, both equilibrium price level and real GDP increase.

Answer: option 3

Rahul Sunny answered 2 years ago

Using the Aggregate Demand-Aggregate Supply graphical analysis, show what happens in the short and long-run if...

Using the Aggregate Demand-Aggregate Supply graphical analysis, show what happens in the short and long-run if the fiscal policy authorities increase government spending. Start your analysis in long-run equilibrium and label this point A. Does crowding out happen here? Explain.

Using the aggregate supply and demand model, illustrate what will happen in the short run and...

Using the aggregate supply and demand model, illustrate what will happen in the short run and long run when the economy suffers a supply shock.

Draw an aggregate demand/aggregate supply model of the economy to predict what happens to GDP, price,...

Draw an aggregate demand/aggregate supply model of the economy to predict what happens to GDP, price, and unemployment levels when households increase credit card debt or usage. Label graph.

Explain using the equation for aggregate demand what happens when the Federal Reserve increases the money supply.

1. Using the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply...

1. Using the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply (LRAS) curves, briefly explain how an open market purchase will affect the equilibrium price level (P) and real output (Y) in the short run. Assume the economy is initially in a recession. 2. Using the quantity equation (the equation of exchange) briefly explain the quantity theory of money. Specifically, how the quantity theory of money explains why inflation occurs.

Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which...

Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following government policies will move the economy from one long-run macroeconomic equilibrium to another. Illustrate with diagrams. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output? There is an increase in taxes on households. There is an increase in the quantity of money. There is an increase in government spending.

Using Aggregate Demand and Aggregate Supply depict what will happen should the government lower the personal...

Using Aggregate Demand and Aggregate Supply depict what will happen should the government lower the personal income tax rate. Using Aggregate Demand and Aggregate Supply depict what will happen should the Bank of Canada buy bonds in the open market. Using Aggregate Demand and Aggregate Supply depict what will happen should the government increase corporate income tax rates. Using Aggregate Demand and Aggregate Supply depict what will happen should the Bank of Canada lower the Bank Rate. (Rationalize and depict...

2. [Monetary Policy] (a) Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run...

2. [Monetary Policy] (a) Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of a decrease in the money supply. (b) Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of a temporary negative supply shock.

Use the model of aggregate demand and short-run aggregate supply to explain how each of the...

Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run. a. A decrease in government purchases b. A major improvement in technology c. A trade surplus d. A decrease in Labor

Use the aggregate demand–aggregate supply model to illustrate graphically the impact in the short run and...

Use the aggregate demand–aggregate supply model to illustrate graphically the impact in the short run and the long run of the following changes. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. Also, state in words what happens to prices and output in the short run and the long run. ii) Climate change causes an increase in...

Question