Essay 4 (Question only) - Essay Question 4(Lecture 4 Discuss the mechanism through which the following event translate into demand shocks a An increase

Essay 4 (Question only) - Essay Question 4(Lecture 4...

This preview shows page 1 - 2 out of 2 pages.

Essay Question 4 (Lecture 4)Discuss the mechanism through which the following event translate into demand shocks:a)An increase in income taxesAn increase in income taxes will reduce the disposable income of consumers, and will make them cut back their expenditure on goods and services (reduce C). This will lead to a negative demand shock. Consider a country with stamp duty on car purchases (stamp duty is a tax that the buyer pays proportional to the value of the transaction). The government announces a decrease in stamp duty.b)How does the tax change impact aggregate demand? Explain your reasoning.The tax change will increase demand for cars hence aggregate demand in the economy. A decrease in stamp duty means that buyer pays less proportion of tax for each value of the transaction. This will increase their disposable income of consumers and will make them increase consumption of cars and of other goods.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture