Analysis of Price Effect and Employment Effect of Government Tax Reduction

Abstract

Under the influence of today's pandemic, it has led to the stagnation of production and business operations in various industries and the shutdown of enterprises, bringing serious disasters to the global economy. In order to mitigate the loss, governments are adopting policies to ensure the economic development of their countries, such as reducing taxes and fees, issuing national bonds, etc. In this paper, we will assume a closed economy and use Keynesian model to study the effect of government tax cuts on price level and labor employment. Through the rigorous logical analysis and theoretical derivation of this paper, it is found that in a closed economy, if the government reduces taxes, the employment of a country will be increased accordingly, and the price level will have a restraining effect to curb inflation. At the same time, this study can allow the government to formulate and improve policies more scientifically, bring reference and reference to the market, and help enterprises adapt to the market, understand the information and make the proper decisions.