A tax cut has just been announced. Congressman Growth states that its effect will be on the supply side. Congressman Stable states that its effect will be on the demand side.

a. Demonstrate graphically the effect of the tax cut on the price level and output in the standard AS/AD model. Which of the two congressmen's views better fits the model?

b. Demonstrate the effect graphically of the tax cut on the price level and output if the other congressman is correct.

c. In the short run, which of the two congressmen is more likely correct?

d. How might the existence of significant crowding out change your answer to c? Review question