Current cut in taxes implies a budget deficit, but households myopic

1

• Current cut in taxes implies a budget deficit,
  but households myopic
• C up, AD up
• Goods market eqm at GDP2 and P2 (no unplanned
  changes in inventories so ADASGDP)
• w/p is too low at L2 (below OC of leisure) so
  demand w increase
• Move along Ld back to L, costs up at any GDP so
  AS shift up

LRAS
w/p
P
AS1
Ls
P3
L up mpl down (dim returns) w/p down (perfect
comp)
At P1 ADgtAS Invent fall, firms Want GDP up L up
P2
w1/p1
P1
P1
As w up
AD2
w1/p2
AS2
AD1
Ld
GDP
GDP2
GDP
L
L
L2
As P up, X fall and M up, move along AD
w1/p1w3/p3
LL, GDPGDP and w and P are higher
Assume wages adjust after prices do, as L up GDP
and P rise gtmove along AS
2

• MFP growth increases Ld shifts up (mpl up at any
  L as MFP and K increase)
• C up as MFP up (lifetime disp income up)
• I up as MFP up (mpk up at any Id) so K up
• C up and I up means AD up
• MFP, K and L up means AS and LRAS up

LRAS1
LRAS2
LsgtLd at temp so L up Mpl down (dim returns)
P
w/p
AS1
AS2
Ls
temp
P? w/p up L up GDP up
As K And MFP up
W2/p2
(w/p)1
P1
Ld2
AD2
Ld1
AD1
GDP1
L
GDP2f(MFP2, K2, L2)
L2
L1