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Based on Your Understanding of the Aggregate Supply and Aggregate

question 38

Essay

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect a tax increase will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.


Definitions:

Money Supply

The combined economic financial resources at a given time in an economy.

Interest Rate

The part of a loan that is added as interest for the borrower, normally expressed as an annual percentage of the existing loan balance.

Reserve Ratio

The reserve ratio is the fraction of total deposits that a bank is required to hold in reserve and not loan out, acting as a regulatory tool to ensure the stability of the banking system.

Bank Reserves

Funds that banks hold to meet immediate withdrawal demands and regulatory requirements.

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