Please Explain

QUESTION 8 3 points Save Answer This question is about a modication of our basic AS-AD model. Many economists think that taxes impact labor supply because higher taxes eat into the incentive to work. If your average tax rate is 25% and you earn $20/hr then you only get to keep $1 Slhr. If taxes go down to 0% then your take home pay increases to $20/hr and you would probably want to work more hours due to the higher pay. Based on this logic we will suppose that labor supplied is a function of T, taxes net of transfers, according to the equation: L L(T)= T1\" Otherwise this is a standard AS-AD model with: K = 729 L = 108 )7 = K]. / 3L2 / 3 T = 256 The aggregate demand is described by Y= 105 _ T1/2 _ 2P and (short run) aggregate supply is described by our standard equation Y= 7+ \"(P_ E[P]) where E[P] =4and a: 0.5. i. What is the short run equilibrium output and price level? Show your work. ii. Now suppose taxes are cut to T = 200. What happens to output and the price level in the short run? Show your work. iii. How is the result of a tax cut in this model different from the basic AS-AD model from class? For the toolbar, press ALT+F10 (PC) or ALT+FN+F1!) (Mac). B I Q '5- Paragraph V Arial V 14px V E V E V AV iv 1; "' P O WORDS POWERED BY TINY