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Suppose that the government decides to reduce taxes. In the basic model used in this chapter,...

Suppose that the government decides to reduce taxes. In the basic model used in this chapter, determine the effects this will have an aggregate output, consumption, employment, and the real wage, and explain your results.

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A fall in personal tax will increase disposable income, thus increasing consumption demand. A fall in business tax will increase profitability, thus increasing business investment demand. Therefore, higher consumption and/or investment demand will increase aggregate demand, increasing aggregate output. Higher output will increase employment and demand for labor. As labor demand rises, real wage rate will increase.

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