MONETARY & FISCAL POLICY

Monetary & Fiscal Policy



Monetary and Fiscal Policy

Suppose the government imposes tax cuts for 95% of all households. How does this affect your firm?

Tax is a phenomenon that causes its effect in more than one ways in different economic perspective. Imposition of tax will reduce disposable personal income among individuals. The lower the per capita income, the lower would be the ability to consume essential goods or services such as health and education (Mankiw, 2002). Thus, the imposition of high tax rates, without a doubt will be reflected on the capacity factor of production and development. Since personal income is divided into two parts: personal consumption and savings, the tax will reduce the volume of consumption and the money that is saved by individuals. However, the decline in consumption and savings is not the same degree for all individuals. It is the general perception of the individuals that only an increase in tax can cause its impact on the production and demand and the income of individuals. However, this is not true. Any reduction in the tax would also cause its effect on the various economic factors. The given situation suggests that the government has reduced the tax for 95% of the household products. As a result, of this tax cut people would be having more disposable income to spend. As a result of this tax cut, the prices of the product would lower down, and people would be spending less on the products that they buy. Even after buying all the products that a consumer usually buys in a month he would be left with his or her income. As he would have more money to spend so, the demand of our product would increase as a result of this tax cut. As a result of ...