Consider the expectations augmented aggregate private expenditure function: IS :
ID: 1130045 • Letter: C
Question
Consider the expectations augmented aggregate private expenditure function:
IS : Y = A(Y+, T-, r-, Ye+, Te-, re-, v-, itc+, De+, ie-) + G Where
v = the corporate profit tax rate
itc = investment tax credits De = future dividends from equities
a. Briefly explain the intuition behind the exogenous determinants in expenditure function. Include a graph with your answer using only the IS curve.
b. Assume the Central Bank follows an interest rate policy target. Explain and show graphically how a cut in personal and household income taxes will affect consumption demand, investment demand, income, and monetary policy. Assume there is no cut in government spending.
c. Individuals and households know that the income tax cut will be reversed in five years. How would this knowledge influence your answers in part a. Why? Show and explain.
Explanation / Answer
A. Iintution behind the exogenous determinats is V.
B. It should be cut in personal and household income taxes.
C. For five years the income tax should be cut and it takes by the government.