1) What would happen to inflation, GDP, unemployment, and economic growth if we
ID: 1112550 • Letter: 1
Question
1) What would happen to inflation, GDP, unemployment, and economic growth if we cut income taxes for the rich by $100 billion and their marginal propensity to consume (MPC) is equal to .75? Make sure to include the appropriate equation that shows the magnitude that this would change aggregate demand (AD). 2) What would happen to inflation, GDP, unemployment, and economic growth if we increase income taxes for the poor by $100 billion and their marginal propensity to consume (MPC) is equal to .9? Make sure to include the appropriate equation that shows the magnitude that this would change aggregate demand (AD). 3) Make sure to include an analysis and comparison of the impacts of (C) consumption, I (investment), (G) government spending, (NX) net exports, (AD) aggregate demand, (AS) aggregate supply, (P) price, (Q) quantity, inflation and economic growth in the short-run and long-run for both the rich and poor. 4) How would this tax increase (or increase in income taxes) impact the National Budget and the National Debt? 5) Would you support such a tax increase and for whom should we impose the tax increase? 6) What would happen to the variables and the AD/AS graph if we had a corporate tax increase of $100 billion instead? What are 4 policies that the supply side model supports?
Explanation / Answer
(1) What would happen to inflation, GDP, unemployment, and economic growth if we cut income taxes for the rich by $100 billion and their marginal propensity to consume (MPC) is equal to .75? Make sure to include the appropriate equation that shows the magnitude that this would change aggregate demand (AD).
The marginal propensity to consume (MPC) is equal to C / Y, where C is change in consumption, and Y is change in income.
INFLATION:
With the income taxes for rich goes down then the consumption will go up as the disposable income will go up which will increase the inflation as the prices of the products need to be increased to meet with the increase in demand.
GDP:
With the increase in demand in the economy, the productivity goes up as the consumption increases. With the increase in the consumption of the economy, the gross production go up too.
UNEMPLOYMENT:
With the increase in the consumption and productivity in the economy, the employment rate of the economy will go up as the requirement for more people will be needed in the economy for the increase in productivity. This will thus, decrease the unemployment rate.
ECONOMIC GROWTH:
The economic growth of the economy will go up obviously as the demand, productivity and consumption will see an increase.
(2) What would happen to inflation, GDP, unemployment, and economic growth if we increase income taxes for the poor by $100 billion and their marginal propensity to consume (MPC) is equal to .9? Make sure to include the appropriate equation that shows the magnitude that this would change aggregate demand (AD).
INFLATION:
With the increase in income taxes for the poor the disposable income will obviously reduce as the people will not have enough money to maintain the consumption as before. This will decrease the consumption of goods and hence, the inflation will decrease as the prices will fall.
GDP:
With the increase in the taxes, the productivity of the economy will take a hit as the consumption of the economy will reduce. This will reduce the GDP.
UNEMPLOYMENT:
With the increase in the taxes, the inflation will go up with the demand of the economy taking a hit. In this situation, the unemployment of the economy will increase as with the fall in productivity, the firms will face difficulty in maintaining the minimum wages and therefore, might push out the workers from their daily jobs.
ECONOMIC GROWTH:
The economic growth of the economy will go down as the demand, productivity and consumption will see s fall.
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