Concep Test
In early 2017, the Trump administration instituted the Tax Cuts and Jobs Act (TCJA) which lowered taxes on both individuals and businesses.Discuss this policy below.
Assuming the US was producing at the full-employment level of output, also known as potential GDP (YP).
- Draw an aggregate expenditure function, which will represent the US economy. Label the initial equilibrium as point A.
- Taxes decrease as mentioned above. Assuming this was the only change in the economy (meaning GDP has not adjusted), explain below and show above how this affects your diagram in part a. Label this new point as point B.
- Holding all else constant, do we see an unplanned increase, unplanned decrease, or no change to inventories?
- According to your answer in part c, what do you expect to happen to the economy in the future due to this decrease in taxes? Where will the economy move towards? Show this ending spot as point C.