Question

Find an example of fiscal policy in your life.

1) Describe the policy tool.

2) Explain how it impacts your life using a current policy that is in effect.

3) Explain how it impacts the macro-economy. Use as many economic principles and the AD/AS or the expenditure function model to illustrate the impacts.

Answer 1

a) Taxes are the policy tool that affect us the most.

b) Taxes are deducted or people in the economy have to pay taxes that reduce the gross income of the cosnumers and reduce the aggregate demand in the market.

c) Taxes in the market reduce the disposable income in the market, if taxes are increased then the aggregate demand curve in the market will shift to the left and the new equilibrium will be at a lower price and lower output, if the taxes are decreased then AD curve will shift to the right and new equilibrium will be at a higher price and higher level of output.