Suppose the economy is initially in long-run equilibrium and the government reduces the marginal tax rate. LO5

a. Use a graph like Figure 14.7 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 long-run aggregate supply.

b. How would your conclusions in part a be affected if the effects of the tax cuts are stronger on long-run aggregate supply than on aggregate demand?

Explain using a graph like Figure 14.7.