Answer to Question #262010 in Microeconomics for Dimakatso

Question

Draw a diagram illustrating the impact of a tax cut on aggregate spending and explain how a cut innet taxes will affect households and business firms?

Answer 1

As a result of lower taxes, the aggregate demand curve is pushed out, as consumers seek more products and services with their increased disposable income. Tax cuts on the supply side are intended to boost capital formation. If the cutbacks are successful, they will change aggregate demand and supply since the price level for a supply of items will be reduced, which frequently leads to an increase in demand for such commodities. Reduced tax rates could encourage saving and investment, boosting the economy's productive capacity. People may be more motivated to work longer if income tax rates are lower. If you get to keep more of your earnings’, working overtime is more beneficial. Reduced income tax rates may entice people to relocate to that country. This is the substitution effect: lower tax rates make work more appealing.

The effect of tax cuts