Suppose the government of a particular state has a large surplus, so the state's policymakers want to provide a large one-time tax cut (i.e., a decrease in taxes) sometime soon. In parts a.) - c.), show ( on a different graph for each part), how the tax cut under the given conditions would affect the equilibrium Price Level and GDP in the state (in parts b.) and c.), include any changes caused by the Self-Correcting Mechanism- i.e., assume the tax cut happens first, followed by any changes caused by the Self-Correcting Mechanism). a.) A tax cut when the economy exhibits a Recessionary Gap ( assume that the tax cut gets the economy back to the "Natural Rate of Output". So there will be no changes caused by the Self-Correcting Mechanism in this part) (1) b.) A tax cut when the economy is operating at the "Natural Rate of Output”. (1) c.) A tax cut when the economy exhibits an Inflationary Gap. (1) d.) In which of the 3 cases above does the macroeconomy have the LEAST inflation (just list the part: a.), b.), or c.))? (1)
Suppose the government of a particular state has a large surplus, so the state's policymakers want to provide a large one-time tax cut (i.e., a decrease in taxes) sometime soon. In parts a.) - c.), show ( on a different graph for each part), how the tax cut under the given conditions would affect the equilibrium Price Level and GDP in the state (in parts b.) and c.), include any changes caused by the Self-Correcting Mechanism- i.e., assume the tax cut happens first, followed by any changes caused by the Self-Correcting Mechanism). a.) A tax cut when the economy exhibits a Recessionary Gap ( assume that the tax cut gets the economy back to the "Natural Rate of Output". So there will be no changes caused by the Self-Correcting Mechanism in this part) (1) b.) A tax cut when the economy is operating at the "Natural Rate of Output”. (1) c.) A tax cut when the economy exhibits an Inflationary Gap. (1) d.) In which of the 3 cases above does the macroeconomy have the LEAST inflation (just list the part: a.), b.), or c.))? (1)
Chapter24: Fiscal Policy
Section: Chapter Questions
Problem 5P
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Transcribed Image Text:Suppose the government of a particular state has a large surplus, so the state's
policymakers want to provide a large one-time tax cut (i.e., a decrease in taxes)
sometime soon. In parts a.) - c.), show ( on a different graph for each part), how
the tax cut under the given conditions would affect the equilibrium Price Level
and GDP in the state (in parts b.) and c.), include any changes caused by the
Self-Correcting Mechanism- i.e., assume the tax cut happens first, followed by
any changes caused by the Self-Correcting Mechanism).
a.) A tax cut when the economy exhibits a Recessionary Gap ( assume that the
tax cut gets the economy back to the "Natural Rate of Output". So there
will be no changes caused by the Self-Correcting Mechanism in this part) (1)
b.) A tax cut when the economy is operating at the "Natural Rate of Output”. (1)
c.) A tax cut when the economy exhibits an Inflationary Gap. (1)
d.) In which of the 3 cases above does the macroeconomy have the LEAST
inflation (just list the part: a.), b.), or c.))? (1)
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