Definition of Total Consumption
Total Consumption: this refers to the total expenditures of a person (or entity) and consumption of specific goods incurred by households.
Disposable Income: This is the income available for spending or saving after deduction of mandatory charges and taxes.
Autonomous Consumption: Graham and Seldon (2013) define autonomous consumption as “the minimum level of spending that must occur when the targeted consumer does not have a disposable income” (p. 17).
Income Dependent Consumption: this refers to the consumption dictated by an individual’s disposable income (Graham & Seldon 2013). This means individuals with higher disposable incomes will spend more. The term explains why the level of spending rises whenever a person’s income increases.
Effects of tax cut on both aggregate demand and aggregate supply
Monetary and fiscal tools have been widely used to fix the macro-economy. Tax cuts can play a significant role towards dictating the performance of the economy. However, tax cuts can affect both aggregate supply (AS) and aggregate demand (AD). Aggregate demand denotes the services and goods required by an economy at a given period (Dutt & Skott 2005). The value outlines the total amount of services and goods that should be purchased. On the other hand, aggregate supply (AS) is the total supply of services and goods that are put on sale by companies within a specified period (Graham & Seldon 2013).
The “aggregate demand-aggregate supply model explains output and price level through the association of aggregate supply and aggregate demand” (Graham & Seldon 2013, p. 31). According to the model, supply usually dictates the nature of demand. That being the case, the contemporary AS-AD graph indicates that aggregate supply curve is always vertical. The graph below summarizes the AS-AD model.
Fiscal policies are mostly used by the federal government to dictate the performance of the macro economy. Any effort to reduce taxes will encourage people to consume more services and goods. The level of disposable income will increase significantly thereby encouraging more people to save money (Graham & Seldon 2013). That being the case, the aggregate demand curve will definitely shift to the right (see fig 2). The use of tax cuts is thus identified as an expansionary approach.
Three steps of Federated Government to stimulate the economy
The federated government executes various initiatives in an attempt to stimulate the economy. This goal is achieved using a number of distinct steps. The first step entails the use of monetary policy. This policy is used widely by Federated Governments to influence various economic activities. For instance, the government can use the policy to reduce interest rates (Dutt & Skott 2005). The strategy will boost AD because of the reduced cost of borrowing. The move increases consumer investment and spending. The policy will eventually increase the level of disposable incomes.
The second method used by the Federated Government to boost the economy is the fiscal policy (Dutt & Skott 2005). As mentioned earlier, the strategy makes it easier for the government to increase spending or reduce tax. Increased government spending creates new jobs and increase disposable income. The level of consumer spending also increases.
The third step used by the federated government is known as quantitative easing. This method is embraced whenever there is a liquidity trap (Graham & Seldon 2013). The government can achieve this goal by increasing financial supply. The move boosts economic activity and investment (see fig 5). However, the strategy can result in inflation.
Dutt, A & Skott, P 2005, ‘Keynesian theory and the ad-as framework: a reconsideration’, Working Paper, vol. 1, no. 1, pp. 1-35.
Graham, A & Seldon, A 2013, Government and economies in the postwar world, Routledge, New York.