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The Effect of Cutting Tax Rate on Aggregate Expenditure

Discuss about the Cutting Tax Rate and Evaluation of investment.

Cutting tax rate is an instrument government’s expansionary fiscal policy. During recession the economy experiences a decline in output, employment, price level and other necessary variables. Government through fiscal or monetary policy instrument aims to stimulate output and other important variables (Mankiw 2014). The effect of a cut in tax can be understood using the aggregate expenditure model.

Real GDP in the aggregate expenditure model. AE1 curve shows the aggregate expenditure which is sum of all the planned expenditure. The 450   line, passing through the origin is the locus of all the points where aggregate spending equals real GDP. The intersection of these two line determine equilibrium level of real GDP. M is the stable equilibrium with stable output of Ye. A decrease is tax has a positive influence on aggregate expenditure and hence, shifts the aggregate expenditure curve upward (Johnson 2017). The aggregate expenditure however cannot shift to the full extent of tax cut. It is discounted by the fraction of marginal propensity to consume. The AE curve thus shifts by less than $20 billion leading to an output expansion to Y1.

Given that marginal propensity to save is 0.2. The marginal propensity to consume is thus obtained as (1 – MPC) = (1 – 0.2) = 0.8.

Therefore, a $20 billion cut in tax shifts the aggregate expenditure curve leftward by (0.8* $20 billion) = $16 billion.

From the multiplier effect, real GDP would then increase by

Investment is an important component of aggregate demand. Change in investment expenditure thus causes a change in aggregate demand. A decline in investment in the long run has a direct impact on aggregate demand and shifts the aggregate demand curve inward. The effect on real GDP however depend on the position of aggregate demand and aggregate supply curve. The long run aggregate supply curve is vertical at the level of corresponding to potential level, as indicated as Y* (Dosi et al. 2016). A contraction of investment in the long run shifts the aggregate demand curve from AD to AD2. In the long run the decline in investment does not have any impact on real GDP, which stays at Y*. The entire effect is on price level that sets to a lower level.

The low price in the short run leads to a lower aggregate supply shifting the short run aggregate supply (SRAS) curve to the left. This then increase the price level. An increased price level encourages producers. The adjustment continues unless the economy reaches to the long run equilibrium.

Evaluation of Investment in the Long Run

The aggregate supply curve in the shirt is positively sloped. As there is opportunity to explore resources more, aggregate supply increases with increase in price level. In the figure below AS curve signifies initial supply curve and AD1 is the initial aggregate demand curve (Buiter 2014). Following a decline in investment, aggregate demand curve shifts leftward to AD2. Under this situation the equilibrium shifts from e to e1.  The resulted output and price is set at a lower level as compared to that in previous scenario.

The central bank need to adapt policy that can stimulate investment. The bank should lower the interest rate to encourage investors to borrow from banks. This needs to be done through increasing money supply in the economy. When supply of money increases then equilibrium interest rate falls (Bernanke, Antonovics and Frank 2015). Central bank can inject money in the economy thorough purchasing financial assets or corporate bonds.

Economists, in the contemporary period, with increase in the domestic as well as national economic and commercial activities across the globe, play different roles of key importance and the number of scopes in the professional domain of economists have been increasing with time. In this aspect, the primary types of jobs which attract me is that of the role of accountant in public organizations. Keeping this into consider, after completion of my degree I want to pursue for a career of an accountant in one of the most prestigious banking institutions in the country, which is the National Australia Bank.

The job of an accountant is primarily to maintain all the financial accounts of transactions of the organization on which the working and the overall profitability of the organization as well as the sustainability of the same in the long run depends. The customer satisfaction also depends considerably on how efficiently and transparently an organization performs, the attribute being even more significant in financial institutions, in doing which the accountants play a crucial role.

Thus, to be eligible for this post, it is of immense importance for the candidates to have extensive analytical abilities to empirically as well as intuitively analyse the situations, which as a student of economics and as a person passionate about the wellbeing of the people of my country, is present within me. The primary responsibilities and roles of an accountant involves the following tasks:

  • Preparation of the financial records and ledger of the organizations and maintenance of the same at regular intervals
  • Preparation of the different financial statements and statements of different tax returns as well as of that of the different transactions made by the organizations in its business operations
  • Dissection, collation and arrangement of the confidential client data and maintenance of the records, by maintaining their confidentiality and transparency such that the trust of the clients is not broken and the objectives of the organizations are also fulfilled
  • Monitoring liaison and ATO on client matters

For fulfilling these roles, an extensive analytical and accounting knowledge is required as an accountant along with the basic knowledge of different statistical and other tools of computer like that of MS Office and Excel. Dealing with huge numerical data and huge information bases requires organized as well as energetic attitudes along with the presence of the virtue of punctuality. Personally, I feel that I possess these skills which are extremely essential for the role of accountant in a bank of such a huge stature like National Australia Bank.

Evaluation of Investment in the Short Run

According to the self-awareness test, the primary traits of my personality are the presence of investigative abilities, realism, enterprising abilities and my primary ability is that of solving problems especially linked to people and data. Keeping this into consideration, I find myself to be appropriate for the job of an accountant:

Values- I believe in working for a cause and can work relentlessly if I am attracted by the values

Interests- I specifically feel interested in handling, arranging, analysing and interpreting data

Personality- I have an investigative personality which may help in my role of an accountant

Skills- My problem-solving skills and abilities to analyse data and financial records can be helpful for accountant.  

From the video of that of Anjali Suriyakumaran, it can be seen that she views the scopes of economists to be huge. Anjali, being a graduate in  economics and currently working as an analyst in ACCC, emphasizes on several important aspects which may be found to be relevant for the aspiring economists for the purpose of building their future career. The primary interesting aspect of the interview is that Anjali talks about her engagements in different non-academic social activities, which she emphasizes to be an integral part of student life.

Anjali, who pursued a full-time internship in the summer break of her academic span, asserts that gaining such experiences before looking for full time jobs are important as the same helps the students in learning about different crucial aspects like time management, work load handling and organizing capabilities in the professional domains, even before they enter the professional life. She also suggests the students to take guidance of seniors who have already done such internships.

I have already acquired considerable amount of accounting skills as well as information regarding the types of roles which I may need to play in my professional domain provided I get my dream job. However, I need to gain some professional experience in my term break in order to be ready and more eligible for jobs once I complete my degree. I also need to improve my English as I may need to communicate a lot in my professional domains. I plan to take accounting management as my subject and also plan to participate in MWL201 Community based volunteering. I plan to enroll in Certified Practicing Accountants Program, while searching for internships.

References

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Buiter, W.H., 2014. Temporary Equilibrium and Long-Run Equilibrium (Routledge Revivals). Routledge.

Dosi, G., Napoletano, M., Roventini, A. and Treibich, T., 2016. The short-and long-run damages of fiscal austerity: Keynes beyond Schumpeter. In Contemporary Issues in  Macroeconomics (pp. 79-100). Palgrave Macmillan, London.

Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

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