On Tax Cuts

Cutting tax rates means increasing the spending power of consumers, this would lead to an increase in aggregate demand, leading to economic growth and possibly inflation. On the supply side, a tax cut increases the incentives to work, leading to higher productivity.

One impact of a tax cut is increased consumption. Workers will see an increase in their discretionary income. As AD = C + I + G + X -M, there will be a shift in aggregate demand from AD1 to AD2.

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