Bco 104 Assessment Task 5

As per theory, Keynes model is based on the basic identity that GDP CIGNX. This is also stated as AD AS where AD CIGNX. The cut in corporate tax rates will impact on investment component of GDP. The rate cut must boost corporate output as they have to pay lesser taxes, leaving more with them as profits/ for reinvestment. This spurs more production as profits are reinvested and hopefully more jobs are created. Actual data suggests that we need at least 2-3 fall in tax rates for any impact on jobs and output. The diagram shows an upward shift in AD curve when tax rates are slashed. The new GDP is at Y2 which is higher than earlier Y1. The effect on Y(Y2-Y1)is more than the change in tax rate due to the multiplier effect. b. The multiplier effect tells us that the effect of any change in autonomous spending ( the autonomous parts of C, I , G or T) on GDP is greater than the initial change. The total change in GDP is a multiple of the change in autonomous spending. This multiple is based on propensity to consume, propensity to import, propensity to invest, among others. The