Answer to Question #199418 in Macroeconomics for John

Question

Determine the effects of a reduction in the tax rate from 0.25 to 0.2 on equilibrium income, budget and trade balance.

Answer 1

It will keep the system in balance by increasing the demand for money. Reduced taxes help to balance the budget in the long run because they increase production, which increases tax revenue, and also because they affect demand. Tax cuts boost demand by increasing disposable income and encouraging enterprises to hire and invest more, resulting in better long-term trade balance.