Monday, April 29, 2019

Macro Essay Example | Topics and Well Written Essays - 1250 words - 2

Macro - Essay Example asseverate that the equilibrium output has fallen to Y2 implying recession and the price level has increased to P2 implying inflation.2. The immediate match of a reduction in taxes is an increase in mix planned consumption expenditure, a component of aggregate demand. Thus, aggregate demand increases implying a rightward shift in the AD curve. However, whether this would lead to a substantial economic expansion (growth) or inflation with some minor growth depends upon where the economy is turn up on the bank line cycle when the policy is undertaken. We shall consider two cases (a) when the economy is in recession and (b) during a boom.As is obvious from the diagram above, the tax cuts take to the AD curve moving from AD1 to AD2 which in turn leads to an expansion of Y from Y1 to Y2. There is a negligibly small increase in the prices from P1 to P2. Thus, during recession or during the phase of recovery, tax cuts set up yield substantial growth.During a pe riod of economic expansion or the boom phase of the avocation cycle, the tax cut on the other hand can have a harmful impact on the economy. This is shown in the diagram above. Observe that now the outward shift in AD has led to a substantial rise in the price level eyepatch the increase in documentary output has been small. The closer the economy gets to the full employment equilibrium, the less effective does the tax cut fit in stimulating growth and most of the impact of the leading climb demand is reflected instead in rising prices.Essentially, during recession the economy is located far out from its full employment equilibrium and thus has lavishness unused capacities. So, when the aggregate demand rises, the capacity utilization rises and so employment and output rise while prices stay more or less the same. However when the economy is in a boom and is located close to its full employment equilibrium, there are no unused capacities. As a result

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