Question

1.

A) What are the four ways in which G↑ can be financed?

B) Of these four, which do you think will have the smallest effect on Z? The largest? Explain your reasoning.

C) Give an example of a tax cut that lowers aggregate demand.

Answer 1

A The four ways in which business can financed:

a) Get a loan from bank:Starting up any business we can get a loan from bank.The banks provide a loan on a minimal interest rate which hepls in incorporating in business.

b) Use a credit card: Any entreprenuer can finance his business by using credit card and he can pay afterwards.

c) Raise money from friends and family:One can also raise money from friends and family for commencement of any business.

d)Take micro loan: Seeing your credit history bank might not give a proper loan.A micro loan ranging from $500 to $35000.

B.The smallest effect on Z will be raising money from family and friends because it does not have any time limit to repay.The largest will be taking loan from bank because it has to be repaid from time to time.

C.Example of tax cut that lowers aggregate demand is tax cuts financed by spending cuts.Suppose the government offered £5 billion of income tax cuts, but at the same time cut £6 billion from agriculture spending. In other words, the tax cut is financed by cuts in government spending. In this case, we will see a decrease in aggregate demand because some people are better off from the tax cut, but others will cut their spending due to lower agriculture payments.