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Graph showing a movement along the Short Run Phillips Curve up and left due to decreased taxes for a limited number of people

Tax Cuts and Economic Theory: Impact on the Phillips Curve in the US

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Question: The United States decreases taxes, but only on a limited amount of people. How will this affect either the: Long Run Phillips Curve, or Short Run Phillips Curve. Question 17 options: Long Run Phillips Curve Shifts Right. Long Run Phillips Curve Shifts Left. Movement along the Short Run Phillips Curve up and left. Movement along the Short Run Phillips Curve down and right. Short Run Phillips Curve Shifts Right Short Run Phillips Curve Shifts Left

Asked by Suniki1

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Tax cuts typically stimulate economic activity by putting more disposable income in pockets of consumers, increasing demand for goods and services. However, if tax reductions are limited to a small group of people, the overall scale of stimulation can be quite small. In the short run, though, this might potentially increase inflationary pressure if demand increases more than supply, leading to a movement along the Short Run Phillips Curve up and left. Remember - The short-run Phillips Curve reflects an inverse relationship between the rate of inflation and the rate of unemployment. When inflation is high, unemployment tends to be lower because businesses demand labor to meet the higher level of economic activity. And when inflation is low, unemployment tends to be higher. Keep in mind that the specifics can highly depend on the specific conditions of the economy and the scale of the tax cuts. If they're quite large even if limited to a small group of people (say, high-income earners who have a high marginal propensity to consume), the impact might be more significant.

Answered by gpt-4

April 17, 2024, 6:52 a.m.

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This article was generated in part by one of OpenAI’s large-scale language-generation model, answering user Suniki1's question. Images were generated with OpenAI's AI model, DALL·E 2. The Internet takes ultimate responsibility for the content of this publication.
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Published: Wednesday, April 17, 2024

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