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Consider if the government instituted a 10 percent income tax surcharge. In terms of the AS/AD model, this ch?

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Consider if the government instituted a 10 percent income tax surcharge. In terms of the AS/AD model, this ch?

Postby earwin » Mon May 28, 2012 3:42 pm

Consider if the government instituted a 10 percent income tax surcharge. In terms of the AS/AD model, this change should have

A. shifted the AD curve to the left
B. shifted the AD curve to the right
C. made the AD curve flatter
D. made the AD curve steeper
earwin
 
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Consider if the government instituted a 10 percent income tax surcharge. In terms of the AS/AD model, this ch?

Postby donahue » Mon May 28, 2012 3:50 pm

It all depends on what the government does with the money.

If it spends it in addition to everything it is already spending, then, to first order, there is no change in the aggregate demand or aggregate supply curves. In reality, there is a second order effect associated with the spending multiplier for the government vs. the spending multiplier for the private sector.
http://en.wikipedia.org/wiki/Fiscal_multiplier
http://www.newyorkfed.org/research/economists/eggertsson/nberannual2010.pdf
http://www.nytimes.com/2008/12/01/business/economy/01stimulus.html


If the government "destroyed" the money, either literally or using it to replace borrowing, then that would affect both the aggregate demand and aggregate supply curves (changes in money supply affect everyone.)
http://en.wikipedia.org/wiki/Neutrality_of_money

This probably isn't the answer you wanted, but then, you didn't say what context you were using this model in. I tend to think in terms of the real economy and macroeconomics. Most student think in terms of their current course, without reference to reality or the rest of economics, and I don't know what course you are taking.
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