Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose a government decides to reduce spending and (lump-sum) income taxes BY THE SAME AMOUNT. Using the long-run model of the economy, graphically illustrate the

Suppose a government decides to reduce spending and (lump-sum) income taxes BY THE SAME AMOUNT. Using the long-run model of the economy, graphically illustrate the impact of the equal reductions in spending and taxes. Be sure to label the axes, the curves, the initial equilibrium values, the direction that the curves shift, and the terminal equilibrium values.

State in words what happens to the real interest rate, national saving, investment, consumption, and output.

Note: I've seen multiple answers online where the savings supply curve is shifted right, is that correct? Doesn't reducing taxes decrease savings? I thought if it's the same amount then the curve wouldn't move from equilibrium.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Bank Management

Authors: Timothy W Koch, Steven Scott MacDonald, S Scott MacDonald

6th Edition

0324289278, 9780324289275

More Books

Students also viewed these Economics questions