00:01
In question four, we're being asked to consider two policies.
00:04
A tax cut that will last for only one year and a tax cut that is expected to be permanent.
00:10
Which policy will stimulate a greater spending by consumers and which policy will have the greater impact on aggregate demand? well, this is a rather simple question, and to answer it, let's consider a very simple and concrete example.
00:23
Imagine that you're earning a monthly salary of, let's say, $3 ,000.
00:29
And on average, your disposable income is, let's say, $1 ,800.
00:36
All right.
00:36
So under the new tax cut, your new disposable income will be $2 ,000.
00:42
That's an increase of $200 per month.
00:44
So for this year, your disposable income would be $2 ,000, but because the government tax cut will be affected for one year only, from next year onwards, your disposable income goes back to normal, which is $1 ,800.
01:00
So from your perspective as a consumer, the expected increase in disposable income will be equal to 200 per month times 12 months, times only one year, which is equal to $2 ,400.
01:14
Well, that's not too bad.
01:16
You can use this extra money to buy some new clothes, go on a trip, buy a new guitar...