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Economics 121 B & C |
Quiz 10 - Answers |
Prof. A. D. Becker |
It was reported last week that (labor) unemployment reached 4.6%, the lowest rate since October 1973.
At the same time, Mr. Clinton and Congress are considering a tax cut as part of next year's federal budget.
Using and aggregate supply - aggregate demand model, explain what the likely effects of the tax cut will be on inflation, GDP, and unemployment given the current situation. Use a graph to support your answers.
It is likely that a tax cut in this situation would be inflationary and would not raise GDP much. Unemployment is already low and will likely not drop further. In the present situation, it appears that the U.S. economy is operating close to potential (full-employment) GDP. Using an AS-AD model, the effect of the tax cut might be as follows: