Question

Susan lives in the fictional country of Lieber, which raises government revenue by taxing everyone the same amount. The government of Lieber has just implemented a tax cut that reduces annual taxes by $2,000 per person. However, government spending has not changed, nor is it likely change in the future.

The tax cut has raised Susan's income by $2,000. If Susan acts according to the prediction of new classical economics (and doesn't plan to leave Lieber), her saving is likely to increase by________.
Suppose that instead of cutting taxes while keeping its spending the same, the government did the oppo it increased its spending by $2,000 per person while keeping taxes the same. If everyone in Lieber acted like Karen, the likely increase in aggregate demand would be_______per person.

Answer 1

Answer: $2,000; $0

Step-by-step explanation:

Classical Economists do not believe that Fiscal Policy is effective in changing economic conditions in a country. They believe that people think of the Government budget when taxes are cut and believe that the government will have to replenish it sometime.

For this reason, when the Government announced a tax cut, Susan will not spend that money but rather save it in anticipation of paying taxes on future to balance off the tax cut in the present. SUSAN WILL SAVE THE $2,000

In the same vein, when the Government increases spending, the public will anticipate that they will have to pay for this through a future increase in taxes and so WILL NOT SPEND the income but rather save it to be able to pay the taxes in future.