How can tax cuts help revive the economy?
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How can tax cuts help revive the economy?

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In order to revive the economy, one path that the government can take is that of an expansionary fiscal policy (Abel, Bernanke, Croushore, 2008). An expansionary fiscal policy is anything that increases the size of the government budget deficit G-T, i.e. either decreasing T or increasing G (Abel, Bernanke, Croushore, 2008). According to the Keynesians, a tax cut helps stimulate the economy via the aggregate demand channel. Aggregate demand is given byA decrease in taxes results in an increment in the disposable income that causes an increase in consumption. This increase in C leads to an increase in AD and causes the AD curve to shift rightwards. As the graph depicts, this leads to higher output at each given price level (Abel, Bernanke, Croushore, 2008). This higher output or increase

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