3 The stock market is booming and everyone is making money w

3. The stock market is booming and everyone is making money with their stock portfolios. At the same time, all business taxes have been increased by 20% as the government tries to reduce their deficit. Using the required underlying graphs, illustrate these two economic developments and then using the Aggregate Expenditures model illustrate the net impact on the GDP and AE.

Solution

AS curve is upward rising 45degree line and AD line is upward rising line as govt. expenditure and investment is autonomous. If govt. tax raises then, disposable income reduces and AD shifts downwards as fall in disposable income will reduce the income via multiplier model.