What role does permanent income model play in explanation

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Reference no: EM134001020

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Graph short-run models and consumption behavior to compare the effects of the two following fiscal policies on short-run output, interest rates, and inflation. Government expenditures do not change.

a) Policy 1: Income taxes are reduced by cutting tax rates for top brackets. The 20% of households with highest incomes realize a benefit. Decide how this policy should affect aggregate demand and explain your reasoning. What role does the permanent income model play in your explanation?

b) Policy 2: Taxes are reduced for low income households by increasing earned income credits and child tax credits. Decide how this policy should affect aggregate demand and explain your reasoning. Do borrowing constraints play a role in your explanation?

c) Use the short-run model to compare or contrast the effect of these different policies on output, interest rates, and inflation. Do they affect the government deficit similarly?

Reference no: EM134001020

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