Question: President Trump has put forward a tax plan that would significantly cut personal and corporate income taxes in the U.S. Assume that Congress passes this tax cut plan and President personal Trump signs it into law.
a. What are the macroeconomic effects of this tax plan in the U.S., based on the classical IS-LMFE business cycle model? How would the tax cuts affects output, the real interest rate, the price level, saving investment, real wages, and employment? Explain fully and illustrate with the appropriate graphs.
b. What are the macroeconomic effects of this tax plan in the U.S., based on the Keynesians IS-LIM-FE business cycle model? How would the tax cuts affect output, the real interest rate, the price level, saving investment, real wages, and employment? Explain fully and illustrate with the appropriate graphs.
c. Compare the macroeconomics effects of this tax plan in the two business cycle models. What assumptions are being made in each model? Explain fully.
d. What is likely to happen to the budget deficit and the trade deficit as a result of the tax cuts? How do you know? Explain fully.