6. Changes in taxes The following graph shows the aggregate demand curve. Shift the aggregate demand...

6. Changes in taxes

The following graph shows the aggregate demand curve.

Shift the aggregate demand curve on the graph to show the impact of a tax cut.

130 Aggregate Demand 120 110 100 02 90 Aggregate Demand 80 70 40 50 60 30 OUTPUT 10 20

Suppose the governments of two different economies, economy X and economy Y, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy X is 0.75 and the MPC in economy Y is 0.8. The economies are identical in all other respects.

The tax cut will have a larger impact on aggregate demand in the economy with the (larger MPC/ smaller MPC)

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Expert Solution

Rahul Sunny answered 2 years ago

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