The personal income tax rate affects aggregate demand

Aggregate demand is the combined individual demand for all goods and services in an economy. Aggregate demand can be better explained using the aggregate demand curve. Aggregate demand is affected by some concepts like personal income taxes. With the use of aggregate demand curve, one can see that if there is a change in personal income tax rates, there will be a shift in the aggregate demand curve or the aggregate demand will increase or decrease. If there is a decrease in personal income tax rate then that would result to an increase in the individual demand.
Therefore, there will be an increase in the aggregate demand. On the other hand, if there is an increase in the personal income tax rate, then that would result to a decrease in the individual demand and also would result to a decrease in the aggregate demand (Gates, 2001). 2. Describe (in two or more sentences) the relationship illustrated by the Laffer curve. Laffer curve is the graphical representation of the effects of government tax rates to the government revenues. The Laffer curve shows that if a government tax rate is at zero then there would be no revenue.
As government tax rate increases, the government revenue also increases. However, there will be a point (peak) that further increase in tax rate will give a decrease in the government revenues (Khan, 1979). Fig 1. The Laffer Curve Kahn, H. (1979). World Economic Developement 1979 and Beyond. London Croom Helm 1979. p. 206. 3. What does it mean for a person or nation to have a comparative advantage in producing a product? The concept of comparative advantage is connected to the products and their prices.A person will have a comparative advantage over the others when one produces something at a lower cost than others. Furthermore, one does not need to be good in producing something in order to have comparative advantage over the others. David Ricardo pointed out that a person will gain from trade by specializing. Specializing means that if a country is a better producer of product X than product Y, then it will be better if resources are allocated to product X and export some of it so that the income from exporting can be use to pay the importing of product Y (World Trade Organization [WTO], 2009).
4. What will happen to the exchange rate between the euro and the U. S. dollar if U. S. interest rates increase? Many things about the exchange rate can happen whenever interest rates increase. Initially, if there is an increase in the interest rates, there will be an upward pressure to the exchange rates. If the U. S interest rates increase then the U. S dollar would appreciate. This means that the demand for U. S. dollar will increase because foreigners will decide to buy them due to the high interest rates.
This also helps attract capital from other countries (Piana, 2001). References Gates, B. (2001). Aggregate Demand and Supply. Retrieved March 20, 2009 from http://web. nps. navy. mil/~brgates/documents/macronotes/ad-as. doc Kahn, H. (1979). World Economic Development 1979 and Beyond. London Croom Helm 1979. Piana, V. (2001). Exchange Rate. Retrieved March 20, 2009 from http://www. economicswebinstitute. org/glossary/exchrate. htm World Trade Organization (WTO). (2009). Comparative Advantage. Retrieved March 20, 2009 from http://www. wto. org/english/res_e/reser_e/cadv_e. htm
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