Aggregate Supply and Demand

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The Warwick MBA
Assignment Cover Sheet

Submitted by: 1267499
Date Sent: 15 April 2013
Module Title: Economics For Business Environment
Module Code: EBE
Date/Year of Module: 2013
Submission Deadline: 17 April 2013
Word Count: 1180
Number of Pages: 8 (including this)
Question: Mid Module Assignment for EBE

“This is to certify that the work I am submitting is my own. All external references and sources are clearly acknowledged and identified within the contents. I am aware of the University of Warwick regulation concerning plagiarism and collusion.

No substantial part(s) of the work submitted here has also been submitted by me in other assessments for accredited courses of study, and I acknowledge that if this has been done an appropriate reduction in the mark I might otherwise have received will be made.”

Mid-module assessment
Please note that this mid-module assessment counts for 20% of your final EBE module mark. 1. Use the AS/AD framework to show the separate effects on GDP, inflation and public sector borrowing on any single national economy of: a. a cut in the rate of corporation (profits) tax

b. an increase in the rate of VAT (sales tax)
c. a slowdown in the GDP growth of world trade.
Make sure that you include clear and appropriate diagrams for this question 2. Choose an economy. Analyse the main effects of a large cut in its government spending Question 1 counts for 45 marks and question 2 counts for 55 marks. The guide TOTAL word limit (for both Questions 1 and 2 inclusive) is 1,000 words. The deadline for submitting this assignment is 17th April 2013.

Answers:
A. A cut in the rate of Corporation (Profits) Tax
The reduction of Corporation tax rate on profits will enhance the reserves of the business by less liability towards the Exchequer and more reserves will be maintained for the shareholder’s equity or the growth of the business leading to increased capital spending and efficient production. Please refer to Fig 1 Below.

Impact of the above on:

a) GDP
The Aggregate demand is expected to improve thus causing a shift of the curve to shift out wards (AD1 to AD2). This will result in Production levels to improve (Y1 to Y2) and thus improving the GDP.

b) Inflation
With the Aggregate Supply to the economy remaining constant will result in increased demand (AD1 to AD2) this will shift the Economic Equilibrium and thus stimulating the price level rise from ∏1 to ∏2 which will move the inflation upwards.

c) Public Sector Borrowing
The adverse impact to the tax cuts will mainly be towards the tax revenue generation by the Government resulting in deficit towards the public spending which can cause the Public sector borrowing to increase in order to meet the regular requirement of public sector market. Refer Fig. 4 for understanding as T2 as initial collection while T1 as reduced collection.

B. An increase in the rate of VAT (sales tax)
This will have a negative impact on the consumer Market as well as it will discourage the small to medium sized industry where they might not be able to pass on the burden to the consumer – resulting in narrower profits resulting in cutting costs which would eventually effect the labor market. Impact of the above on (REF : FIG 2)

a) GDP

The impact of this change on GDP is likely to be negative (Shift from Y1 to Y2). However, this is highly dependent upon the way the additional resource will be deployed in the economic cycle as the additional spend as a result level of output from the increased economic activity against the reduction in collection of the Tax revenues. b) Inflation

The rising prices will result in higher prices and extra currency flow resulting in rising inflation.∏1 to ∏2 c) Public Sector Borrowing

The Revenue collections for the Government are expected to increase as we are assuming that the demand remains constant. Public sector borrowing is likely to reduce as...
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