Question 2

(a) State the impact of permanent tax cut and temporary tax cut on the aggregate demand.

(4 marks)

(b) If government plans to cut income tax, describe the impact on money demand and

interest rate?

(4 marks)

(c) Suppose that there is no crowding-out effect and the marginal propensity to consume

(MPC) is 0.75. If the government plans to reduce tax by RM10 billion, find the

amount that will shift the aggregate demand.

(8 marks)

(d) Identify the different between the total effect of this RM10 billion tax cut in part (c)

with the total effect of a RM10 billion increases in government purchase.

(4 marks)

(Total: 20 marks)