E the stock market has gone up significantly since

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e) The stock market has gone up significantly since the election of Donald Trump. One of his main campaign promises was a reduction in taxes on corporations’ profits. This was passed in December 2017, by which time the stock market had already gone up significantly relative to the time of the election. Discuss intuitively how stock prices relate to firm profits and why we should not be surprised to have seen stock market values rise even before tax reform was passed.
f) Our consumption model predicts that permanent changes in taxes should tend to have larger immediate effects on consumption than changes in taxes that are expected to be temporary. Explain intuitively why this would be the case.
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7 Equations for Midterm 1: National Income Accounting Identity:𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋Private Saving: 𝑆= 𝑌 − 𝑇 − 𝐶Government Saving: 𝑆= 𝑇 − 𝐺Aggregate Saving: 𝑆 = 𝑆+ 𝑆Aggregate Consumption Function: 𝐶 = 𝐶(𝐶𝑆, 𝑌 − 𝑇, 𝑟)Aggregate Investment Function: 𝐼 = 𝐼(𝑆𝑃, 𝑟)Aggregate Savings Function: 𝑆 = 𝑆(𝑌, 𝑇, 𝐺, 𝐶𝑆, 𝑟)Money Demand: = 𝐿(𝑌, 𝑀𝑇, 𝑟)IS Curve: 𝐼𝑆(𝑇, 𝐺, 𝐶𝑆, 𝑆𝑃)LM Curve: 𝐿𝑀(𝑀, 𝑃, 𝑀𝑇)Aggregate Demand Curve: 𝐴𝐷(𝑀, 𝑀𝑇, 𝐶𝑆, 𝑆𝑃, 𝑇, 𝐺)Marginal Product of Capital: 𝑀𝑃= 𝛼𝐴𝐾ఈିଵ𝑁ଵିఈMarginal Revenue: 𝑀𝑅 = ቀଵାఓቁ 𝑃Marginal Product of Labor: 𝑀𝑃= (1 − 𝛼)𝐴𝐾𝑁ିఈMarginal Cost of Production: 𝑀𝐶 =ெ௉ಿ=(ଵିఈ)஺௄షഀLabor Demand: =ெ௉ಿ(ଵାఓ)=(ଵିఈ)(ଵାఓ)𝐴𝐾𝑁ିఈLabor Supply: =𝑧Natural Level of Output: 𝑌= 𝐴ଵ/ఈ𝐾 ቂଵିఈ௭(ଵାఓ)భషഀUnemployment Rate: 𝑈 =௅ିே= 1 −Natural Rate of Unemployment: 𝑈= 1 − ቂ(ଵିఈ)௭(ଵାఓ)ଵ/ఈ𝐴ଵ/ఈShort-Run Aggregate Supply Curve: 𝑆𝑅𝐴𝑆(𝐴, 𝐾, 𝜇, 𝑧, 𝑃)Long-Run Aggregate Supply Curve: 𝐿𝑅𝐴𝑆(𝐴, 𝐾, 𝜇, 𝑧)

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