Assume that an economy starts at long-run equilibrium, where there is no output gap. The Government...

 

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Assume that an economy starts at long-run equilibrium, where there is no output gap. The Government decides to provide a package of tax cuts to workers. Assume there is no change in labour supply. Using this scenario, answer the following questions. Questions 6.1 What do you expect to happen to aggregate demand, output, unemployment and inflation in the short-run following the tax cuts? [2 marks] 6.2 What do you expect to happen to aggregate demand, output, unemployment and inflation in the long-run following the tax cuts? [2 marks] 6.3 Why doesn't the economy immediately go to the new long-run equilibrium? In other words, why does the short-run aggregate supply curve differ from the long-run curve? Provide three explanations. [3 marks] 6.4 Explain the relationship between inflation and unemployment in both the short-run and long- run. [1 mark] 6.5 What do you expect to happen to the position of both the short-run and long-run Phillip's curves after the tax cuts are implemented? [2 marks] Assume that an economy starts at long-run equilibrium, where there is no output gap. The Government decides to provide a package of tax cuts to workers. Assume there is no change in labour supply. Using this scenario, answer the following questions. Questions 6.1 What do you expect to happen to aggregate demand, output, unemployment and inflation in the short-run following the tax cuts? [2 marks] 6.2 What do you expect to happen to aggregate demand, output, unemployment and inflation in the long-run following the tax cuts? [2 marks] 6.3 Why doesn't the economy immediately go to the new long-run equilibrium? In other words, why does the short-run aggregate supply curve differ from the long-run curve? Provide three explanations. [3 marks] 6.4 Explain the relationship between inflation and unemployment in both the short-run and long- run. [1 mark] 6.5 What do you expect to happen to the position of both the short-run and long-run Phillip's curves after the tax cuts are implemented? [2 marks]

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61 In the shortrun following the tax cuts Aggregate demand AD is expected to increase due to higher disposable income for workers leading to increased ... View the full answer