Problem
Consider the Aggregate demand - Aggregate Supply model, suppose the economy begins in a short run equilibrium with output equal to potential output.
- Illustrate this scenario in an AS-AD diagram. What is the initial level of cyclical unemployment?
- Suppose that the government in this economy decides to cut exogenous taxes. What effect will this have upon our AD-AS diagram? Make sure to label all the objects in your diagram correctly. What happens to output and inflation in the short run equilibrium? What happens to our long run equilibrium? Explain your reasoning.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.