Answer to Question #109962 in Macroeconomics for kgothatso

Question

Assuming that the government decides to address the low level of production and employment caused by COVID-19 by cutting down taxes (personal income and corporate taxes).
Explain by the use of graphs, the impact of such fiscal policy on aggregate output. In your explanation, describe the interaction between the Money market, IS-LM and AD-AS Model

Answer 1

Expansionary fiscal policy can be used to revive the economy after the COVID 19 pandemic.These policies boosts aggregate demand, which in turn increases output and employment in the economy. In pursuing expansionary policy, the government has proposed reduced income taxes and corporate taxes. A reduction in taxes will leave more disposable income and increase consumption and savings . The increament shifts the aggregate demand curve to the right. An increase in government spending combined with a reduction in taxes will, unsurprisingly, also shift the AD curve to the right.