1. <<<<<< Average price level driven upwards A decrease in taxes can lead to an Increased Inflation Rate in the short run Less taxes to pay, firms can invest more in quality and quality improvements Effects of a Decrease in Direct Taxation On Inflation Increase in Aggregate Demand Less taxes to pay, consumers and firms keep more of their income -> more $ to spend A decrease in taxes could increase the PPC which can help combat inflation in the long run Firms undertake equipment and/or Technology improvements Results in Lower marginal costs of production Results in Increase potential RO Results in Demand- pull inflation If consumer confidence is low, the decrease in taxes could have little immediate effect on AD Reduced Supply-Side investment by the Government could offset any PPC potential generated by individuals or firms <<<<<< Less taxes means less govt revenue which could result in fewer Supply- side investments

2. Increased incentive to work can create an increase in quality of the work produced <<<<<< Firms respond by increasing production A decrease in taxes can lead to increased employment Less taxes to pay, workers essentially keep more of their earnings  incentive to work Effects of a Decrease in Direct Taxation On Unemployment Increase in Aggregate Demand Less taxes to pay, consumers and firms keep more of their income -> more $ to spend Increased incentive to work can reduce equilibrium unemployment Could create an increase in PPC in the long term People may be more willing than before to take the available jobs Higher revenues and higher production results in the need for additional labor If firms are concerned about the future (low confidence) they may resist hiring even if AD starts to increase There may still exist people who are willing but unable to take available jobs

3. Increased foreign ownership of domestic financial assets  financial account surplus <<<<<< Higher APL creates decreased demand for exports A decrease in taxes can lead to an increased DEFICIT in the current account Less taxes to pay  incentivize direct investment by foreign firms Effects of a Decrease in Direct Taxation On BOP Increase in AD  starts to push prices up Less taxes to pay, consumers and firms keep more of their income -> more $ to spend Multinational firms buy or invest in local businesses BOP: money leaving the country is greater than money coming in  current account deficit Higher real income and higher domestic prices create Increase in Demand for Imports A decrease in taxes can lead to an increased SURPLUS in the financial account