Answer to Question #64053 in Macroeconomics for Emilie

Question

3)Suppose Congress votes to decrease corporate income tax rates. Use the AD/AS model to analyze the likely impact of the tax cuts on the macroeconomy. Show graphically and explain your reasoning. What exactly causes AD and/or AS to shift? What happens to GDP and the aggregate price level? Why?

Answer 1

The tax cuts will cause the increase in aggregate demand, because people will start to spend more, so the AG curve will shift rightward, GDP level will increase and price level will increase too as the result of this shift.