Distribution of income (1 Viewer)

[red802]

hey, im doing this assignment and i was just wondering if this fact is true, if tax cuts occur, and people will have a increase in income, would it cause inflation due to the fact that more people are spending. If so , please explain

 

[Riviet]

The tax cuts means consumers have a little more disposable income, so theoretically there will be upward pressures on inflation, caused by the increase in aggregate demand for goods and services.

 

[ScottyG]

The tax cuts means consumers have a little more disposable income, so theoretically there will be upward pressures on inflation, caused by the increase in aggregate demand for goods and services.

Yeah essentially, as long as the tax cuts are across all tax brackets. Tax cuts in higher tax brackets won't cause as a greater rise in aggregate demand per person than tax cuts in a lower tax bracket, since those on lower incomes tend to spend a greater proportion of their income than do high income earners.

 

[red802]

kool, thanks guys, one more question, how can inflation increase and how can it decrease

 

[Tess653]

inflation increases when demand is greater than supply, causing an increase in prices (demand pull inflation).

it also increases when a cost of production goes up, so companies increase prices to cover the cost (cost push inflation)

generally, inflation is higher when there is high economic growth, because people have more money. it decreases when they have less money, ie because of interest rates

 

[Sparcod]

hey, im doing this assignment and i was just wondering if this fact is true, if tax cuts occur, and people will have a increase in income, would it cause inflation due to the fact that more people are spending. If so , please explain

Don't know what this has to do with distribution of income.

Inflation is caused by the folllowing factors:
-Demand-pull (buyers bid up prices for scarce goods and firms want higher profit margins)

-Cost-push
-imported inflation (cost of imports rise)
-govt policies (GST)


Effects of inflation are:
Pros
-Borrowers on fixed interest loans win (creditors lose)
-people with real incomes growing.

Cons
-wealthier people choose to speculate in fast-rising assets rather than on production
-fixed income earners lose
-Savers in money form lose.

Inflation can be controlled by monetary policy to curtail spending or even protectionist policies.