Problem:
Taxes are a hot topic in the campaign. Many candidates are arguing for tax cuts, whereas others are arguing that the government cannot afford to reduce taxes at the current time.
You must now prepare a summary of the issues; specifically, how a change in the tax policy will affect government spending, aggregate demand, and equilibrium output and prices.
For this assignment you will write a 500- to 700-word memo to the economic adviser. Be sure to do the following:
• Identify and describe the effect of changing the tax rate on disposable income and consumption, as well as the post-tax multiplier. You should use the formulas discussed in the Reading pages and the text to describe the effects of the changing tax rate on disposable income, consumption, and the multiplier.
• Describe the likely changes to equilibrium output and price levels resulting from the change in the tax rates. Begin by describing the effects on aggregate supply and/or demand to fully demonstrate the connection between the tax rate change and equilibrium.
• Describe the change in tax revenues for the government in the new equilibrium, in both the short and longer terms.