Answer to Question #209699 in Macroeconomics for Pappu

Question

(a)   If the government decrease taxes by 10%, calculate the effect of the change on :

(i)              Savings                       

(ii)            Consumption                           

(Iii)National income equilibrium       

Answer 1

If government decreases tax by 10%, A tax cut increases disposable income. The households then increase their consumption and saving. Tax cuts affect national income through consumption effects and investment. Tax cuts lead to increased consumption and decreased investment; thus, the increment of national income is zero. Tax and consumption rise at the same rate of tax.