Question

Use the following information to answer questions 17 and 18: Suppose Congress cuts personal income tax rates 17. Draw a simple supply and demand graph to show how this would affect the market for refrigerators. 18. Why does this shift occur? How does that affect the equilibrium price and quantity? Explain.

Answer 1

Ans 17) if congress cut personal interest rate tax that means consumers has more purchasing power to purchase product. If consumers has more Power to spend that increase demand in market. With the increase in demand, demand curves moves right ward.

In case of refrigerator, refrigerator are normal goods, demand for refrigerator rises and demand curve moves right

(Normal goods are those goods which demand increases with increase in income.)

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Ans 18) if congress cut personal interest rate tax that affect on both demand and supply curve

Demand curve move right from D to D1

And supply curve move right from S to S1

reduction in taxes price increase demand and supply of goods because consumers has more purchasing power to purchase.(incentive to work increase) and effect of incentives is very small that shift supply curve.

Initially the economy is in equilibrium at point E

Price(p1)

Quantity (Q1)

After cutting personal interest rate

Economy is in equilibrium with E1

Price(p2)

Quantity (q2)