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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

If Congress cuts taxes at the same time that businesses become more pessimistic about the economy, what is the combined effect on output, the price level, and employment using the AD/AS diagram?

To determine

Impact on output level, price level and employment rate due to tax cut is to be determined.

Explanation

If Congress government implements policy which leads to tax cut, it implies more disposable income with the consumers. As disposable income increases, it means consumption will increase. Tax-cut will also increase investment by firms. Thus, either increase in consumption or investment will shift AD curve to the right.

If firms are pessimistic about the future, which means economy is not stable, this will; lead to decrease in productivity, thus aggregate supply...

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