Tax Cuts and Jobs Act

1. Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act was a bill passed in December 2017 that provided income tax cuts for households, as well as tax cuts on corporate profits for firms. You are more than welcome to look up additional details about the bill if you would like some context, but the specifics of it are not necessary to answer the questions.

Prior to the bill passing:

A) What was the current GDP, Unemployment and Inflation in December 2017? You’ll need to look these up.

• 19.49 trillion USD (current GDP)
• Unemployment rate was 4.1 in december 2017
• 2.1 percent Consumer Price Index

B) Based on the data, where would you estimate the economy was relative to its potential? Explain.

C) Use an AS/AD graph to illustrate the state of the economy. Label the equilibrium “A.”

Starting from “A” after the TCJA is passed:

D) Illustrate what you think will happen on the AS/AD graph in the “short run.”
Label the result “B.”

E) Provide a thorough explanation of what you think will happen and why. This should include referencing your answer to D but also be more than an explanation of the graph.

F) Illustrate what you think will happen on the AS/AD graph in the “long run.”
Label the result “C.”

G) Provide a thorough explanation of what you think will happen and why. This should include referencing your answer to F but also be more than an explanation of the graph.

H) Based on your analysis would you argue for or against implementing the TCJA? Explain.

2. Short Run vs Long Run

A) In two sentences, provide an explanation of what determines the economy in the short run vs the long run. Explain as if you were talking to a friend that has never taken this class.

B) They say monetary policy is neutral in the long run. Explain why monetary policy has an impact in the short run but is considered neutral in the long run.

C) Why isn’t fiscal policy considered neutral in the long run?