You are having a lunch meeting with a loyal and very good customer. Over lunch you happen to mention that your application to an
1 answer:
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<u>PART A:</u>
The government has voted for budget neutral tax cut policy in order to avoid the enhancement in the deficit. Thereby, government spending will be reduced by an amount of $8 billion.
<u>PART B:</u>
The calculation for fall in GDP is as follows:
Multiply with change in government expenditure,
Thus, if the government expense is reduced by $8 billion then fall in GDP is by $53.33 billion
<u>EFFECT ON GDP DUE TO REDUCTION OF TAX:</u>
Multiply with change in tax,
Thus, when the taxes are reduced by $8 billion, then GDP shows an increase by $45.33 billion.
Therefore, change in equilibrium level of real GDP = -$8 billion ( -53.33 billion + 45.33 billion).