economy? Draw an Aggregate Supply and Aggregate Demand graph to show how Keynesi
ID: 1127521 • Letter: E
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economy? Draw an Aggregate Supply and Aggregate Demand graph to show how Keynesians interpret this event. Be specific in explaining what occurred to impact Aggregate Demand. 26. If the economy is currently near full employment and prices are relatively stable for the time being, explain from a Keynesian perspective what will happen in the economy if the Trump tax plan is implemented. What will happen to our economy? Do the same from the Supply- Side perspective. Which do you believe is more likely to happen? 27. The Republicans are predicting that their new tax cut plan will not result in further deficits. Using the Laffer Curve, explain how cutting business taxes and taxes to the rich will not result in higher deficits. 28. Explain the role of Moral Hazard and too big to fail had on causing the Great Recession. 29 Why should government place greater restrictions on the financial industry then other industry? Why is the financial industry so important to the economy? Do you think we should repeal the Dodd Frank legislation and get rid of the Consumer Financial Protection Bureau?Explanation / Answer
26) Keynesian economics is based on demand side policies shifting the aggregate demand while supply side policies are based on aggregate supply shifts. A tax cut implemented in near future, is going to shift the aggregate demand curve to the right as consumption and investment are expected to increase. This may increase the output level and the price level, considering usual AS-AD diagram.
A supply side prespective is that labor supply will increase with a tax cut so firms experience a fall in the real wage rate. This increases hiring of labor and more production so that aggregate supply curve shifts to the right. This will increase output but will reduce price level.
Supply side policies have been observed to be less effective because the tax cuts rarely increase labor supply so quickly and so they are more sort of long term polices and may not show any change in the short run.
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