Economics

Order Description Write an academic essay (maximum 1,000 words). The Autumn Statement 2016 set out policies to support the UK economy in the transition that sees the country leaving the European Union. A key priority is to enhance investment to improve productivity, in which central steps are a cut in corporate tax and a raise in the personal allowance1. To study the impact of such policies, consider a simplified closed economy (with 0% natural growth rate of output). Suppose that the economy was initially in a long-run equilibrium and that no other policy has been introduced nor other shocks have occurred during the considered time interval. Adopting a simplified picture describing the policies as a cut in corporate tax and a cut in personal income tax introduced in 2017, use the AD-AS model (including its foundations in the IS-LM model and considering an upward sloping SRAS curve) to interpret the behaviour of the main macroeconomic variables, in the short-run and the long-run, depicted in the figures below (with predictions extrapolated until 2030). Explain and illustrate your answer graphically. Hint: The cut in corporate tax is to be taken as incentivising investment. 1 The personal allowance is the amount of income individuals can earn before starting paying income tax. In effect, a raise in the allowance reduces the overall personal income tax, so we treat it as a personal income tax cut. You can also consult the data in the table below (numbers rounded). Year Real interest rate Real GDP Real GDP growth rate Unemployment rate Price level 2016 2.00 100.00 0 4 100.00 2017 2.38 100.62 0.615 3.69 101.36 2018 2.43 100.57 -0.047 3.72 101.52 2019 2.48 100.52 -0.043 3.74 101.66 2020 2.52 100.48 -0.040 3.76 101.79 2021 2.55 100.45 -0.037 3.78 101.90 2022 2.59 100.41 -0.034 3.79 102.01 2023 2.62 100.38 -0.032 3.81 102.10 2024 2.65 100.35 -0.029 3.82 102.19 2025 2.68 100.32 -0.027 3.83 102.26 2026 2.70 100.30 -0.025 3.85 102.33 2027 2.72 100.28 -0.023 3.86 102.40 2028 2.75 100.26 -0.021 3.87 102.46 2029 2.77 100.24 -0.020 3.88 102.51 2030 2.78 100.22 -0.018 3.89 102.55