macro economics?

Question

Explain what happens to consumption, investment and interest rate when the government introduces a big tax cut; also make diagram to support your answer

Answer 1

After a big tax cut, consumers will remain with more disposable income. There is increased liquidity in the economy. Part of this disposable income is spent (consistent with the economy's marginal propensity to consume) and part of it is saved (consistent with the marginal propensity to save) and used as investment. Thus consumption and investment expenditure increases. The increased liquidity means that the supply of money is increased and, consistent with the laws of demand and supply, the price of money - that is, the interest rate - will fall.

(You really don't expect us to draw a diagram here, do you?)

Answer 2

Shouldnt you open your text book instead?

This is a good book on that subject:

Economics by John Sloman.