Suppose the economy is initially in long-run equilibrium and the government reduces the marginal tax rate. a.
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a. Use a graph like Figure 25.5 to illustrate and explain what will happen to output and inflation in both the short run and the long run if the effects of the tax cuts are stronger on aggregate demand than on aggregate supply.
b. How would your conclusions in part a be affected if the effects of the tax cuts are stronger on aggregate supply than on aggregate demand? Explain using a graph like Figure 25.5.
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Effects of reduced marginal tax rates on aggregate demand and potential GDP a See graph below In th...View the full answer
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