1. On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was passed, cutting the tax rates for corporations very significantly from 35% to 21%.
(a) Using the IS-MP framework, describe what happens to investment and short-run output when there is a large cut in corporate taxes.
(a) The FRED database contains data for Real Gross Private Domestic Investment showing the change in investment year-on-year. Use the FRED database and download the time series. Use quarterly frequency.
(b) In general, has the investment become more or less volatile since 1950?
(c) The TCJ Act kicked in on January 1, 2018. Do you think the response of investment for the years 2018 and 2019 (scroll over the lines to get the percentage change for that year) is significantly greater than in 2017?
(d) Why do you think investment has responded (or not) the way it did in view of the large size of the tax cut?