Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Macroeconomics Expert

A group of big-business CEOs is rolling out some ideas which could shape the coming debate on the overhauling tax system.

The Business Roundtable suggests in a news paper that it’s time to consider shifting the focus of U.S. business-tax policy away from targeted subsidies which plan to boost investment in plant and equipment. Rather, the U.S. must consider lowering overall corporate tax rates in order to attract all the sorts of new investment and profits, the BRT recommends in comments to the House Ways and Means Committee.

Please answer the given problems.

problem:

a) In this part you are to elucidate exactly how lowering the effective tax rate on capital (τ) will work (in theory) its way via the economy in order to "attract all sorts of new investment and profits." In this discussion, you require to differentiate among the short- run and long-run. In the space below, elucidate, with graphical analysis, how lowering the effective tax rate on capital will persuade real economic variables in the short run (hint, it’s a demand side story). Draw 4 diagrams (label them 1 through 4), with 1) a user cost; desired capital (K*) diagram, followed through 2) a closed economy desired saving; desired investment diagram, followed through 3) an IS – LM diagram followed through 4) an aggregate supply; aggregate demand diagram.

Begin at an initial equilibrium and label as point A in all diagrams, with all the associated market clearing variables represented by subscript A.  For illustration, in your IS – LM diagram, the interest rate which clears the goods and money market is labeled as rA with the associated output at YA. Note that YA, our initial equilibrium output, is beneath full employment output = YB (we are in a recession, read on).  Now let the effective tax rate on capital fall (similar as a fall in τ) and exhibit how all your graphs are affected.  In specific, locate point B as the new short-run equilibrium in all graphs (suppose the standard; that is, let output rise to YB = full employment Y) while holding the general price level fixed at PA = PB. Make sure you refer to each and every diagram individually describing how and why we get to point B (that is, provide intuitive economic reasoning starting with how a lower τ effects K* and why)!).

b) Now we are going to focus on the idea which in the longer run, the influence of the decrease in the effective tax rate on capital will have ‘supply-side’ effects.  In specific, argue that this new investment, spurred on by the lower effective tax rate on capital, will outcome in a positive productivity shock resulting in a higher “A and K" who will outcome in a shift upward in the production function (through increasing the MPKf and MPN!) In the space beneath draw a production function with the labor market diagram below it and illustrate what is going on in this longer run. That is, locate the corresponding point B (from above), and then show the longer run influence as point C in these two (supply – side) diagrams. What happens to N* and w*=W/P? describe in detail. Are such results in the labor market consistent with the business cycle facts?  Now describe why output has changed, give two specific reasons. Note, in this part of the problem, do not worry regarding identifying point A in the labor market diagram and production function diagram as point A doesn’t exist given the supposition that labor markets always clear at full employment (that is, a weakness of the classical model). Be sure to label your graphs completely or points will be taken off.

c) Now show how graphs 1) via 4) are affected by this longer-run development. Note again that we suppose that before such longer run developments take hold, the FE line in graph 3) and the LRAS in graph 4) are set at YB. Now let such longer run developments take hold, that is, such supply side effects, and label this final equilibrium as point C. Again, please make sure you refer to each and every diagram individually describing how and why we get to point C (that is, provide intuitive economic reasoning!).

d) In space below, discuss how new classical economists (hint, island) addressed the business fact which money and output are positively correlated. In this portion, be extremely specific in the model that was developed (tell a story) and relate the suppositions in the model to the empirical fact above. Comprise a completely labeled AS – AD diagram in your answer and be sure to elucidate why output changes, given a change in the money stock. Be sure to elucidate exactly why the firm changes their output, by using the terms: relative shock and aggregate shock. Feel free to utilize the bread making illustration that we employed in class making sure you identify clearly, the asymmetry with regard to the real wage the firm pays and the real wage the worker receives. In the last part of your essay, discuss what recognizes the power of monetary policy (in terms of changing output) in this model, what determines how long the short run is, and whether or not you believe that this model is a solid basis for conducting countercyclical monetary policy. Finish the essay by commenting on the given: This model was developed back in the year of 1960s and 1970s and it is now 2010.  Do you believe the model is more relevant or less relevant nowadays relative to when it was written? Describe.

e) We discussed the 'hey day' of Keynesian economics whenever during the year 1960s, many economists and politicians alike firmly believed in a permanent (structural) trade-off among unemployment and inflation. Thus, it was up to the policy maker to select a point on the Phillips curve (as in a policy menu). Draw a Phillip's curve diagram that is representative of the of the 1960s (the entire decade) with point A representing the conditions in the starting of the decade (use data from 1961), point B representing conditions in the middle of the decade (use data from 1966) and point C representing conditions at the end of decade (use data from 1969). Compare the slope of your constructed Phillips curve among points A and B and among points B and C.  describe why (exactly) we would anticipate the slope of the Phillips curve from points A to B to be different from B to C. Make sure you give an aggregate supply and aggregate demand diagram which comprises the corresponding points A, B, and C to support your arguments.  There is a lot to discuss here!

f) Edmund Phelps and Milton Friedman argued that there was not a permanent tradeoff among unemployment and inflation. In particular, they believed that in the long run, the Phillips curve was vertical. Describe why they felt that the Phillips curve was vertical in the long run and discuss the policy implications if the Phillips curve is vertical in the long run in the context of the misery index. How is vertical long-run Phillips curve associated to a vertical long-run aggregate supply curve? Are these policy implications consistent with the behavior of central banks across the world including the Federal Reserve?  Finish your answer as to what would happen to the misery index in the long run if a Keynesian ( a 'dove' from the 1960s) was conducting policy which still believed there was a permanent tradeoff among unemployment and inflation even though there was not.

g) Finally, let's pretend you are a diehard Keynesian. Give strong arguments as to why the President must follow your policy prescription (that is, the lower T and higher G approach - the tails problem) and not the supply-sider approach (cutting the effective tax rate on capital). Make sure you ‘trash’ the supply-sider approach while supporting that Keynesian position (make Keynes proud!).  Draw and refer to the effective demand curve for labor to support your reply. 

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9151

Have any Question? 


Related Questions in Macroeconomics

Assume the reserve requirement is 16 if the fed increases

Assume the reserve requirement is 16%. If the Fed increases reserves by $20 billion, what is the total increase in the money supply?

Suppose consumer a has a utility function uxy x3y consumer

Suppose Consumer A has a utility function U(X,Y)= X+3Y. Consumer B's utility function is U(X,Y)= X*Y. Also there are a total of 18 units of good X and 9 total units of good Y. Using the Edgeworth Box, construct a contrac ...

Question 1suppose you are given the following information

Question 1: Suppose you are given the following information about an industry: Q D = 8000 - 100p; Q S SR = 20 + 700p; c(q) = 20 + q 2 /20. where q and c (q) stand for a firm's quantity supplied and cost function; Q SR S ...

Please provide a comprehensive answer to the following two

Please provide a comprehensive answer to the following two questions: 1) Which were the main causes of the Great Depression? 2) Why did the Great Depression last so long? Indications: - To answer these questions, please ...

The baypoint group tbg needs your help with a presentation

The Baypoint Group (TBG) needs your help with a presentation for Academic Computing Services (ACS), a nationwide organization that assists colleges and universities with technology issues. ACS needs more information abou ...

Using an is-lm model under a flexible exchange rate regime

Using an IS-LM model, under a flexible exchange rate regime, show how the domestic economy reacts to a decrease in foreign income. Is there a real response in the economy in terms of output levels?

Paper instructionstopic can governemet interventions

Paper instructions: Topic: CAN GOVERNEMET INTERVENTIONS CONTROL OR CONTRIBUTE TO MARKET FAILURES? Market economic activities sometimes result in undesirable outcomes. Cite examples / case studies where government interve ...

Discussnbspwith your learning team the configurations

Discuss  with your Learning Team the configurations needed to resolve the problems outlined in this lab exercise. The configurations that have been applied to the devices within this lab have a number of incorrect settin ...

Discuss a scenario in which the use of leading indicators

Discuss a scenario in which the use of leading indicators for your industry or firm (or an industry or firm of your choosing, could be fictitious or general) might improve performance and promote better decision making. ...

Why do we need microeconomicswhat makes perfect competitive

Why do we need microeconomics? What makes Perfect competitive firm efficient market? Explain the elasticity of demand and taxes. Explain increase demand and increase in quantity demanded. What makes pure monopoly an inef ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro