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.

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Definitions:

Break-even Sales

The amount of revenue required to cover both the fixed and variable costs of production, resulting in no net profit or loss.

Common Fixed Expenses

Expenses that remain constant regardless of the level of production or sales activities, such as rent, salaries, and insurance.

Operating Period

The span of time during which a business or a particular machinery is operational or in use.

Net Operating Income

Revenue from the primary business activities of a company, with no deductions for interest and taxes.