Assume the economy is currently at potential output.Then,Congress lowers taxeswhilegovernment purchases remain the same.

1. Use the Aggregate Supply and Demand model to analyze theshort-run impactthat this new policy will have on real GDP and the price level.Is the new short-run level of real GDP higher or lower than potential output?Shock...
2. Assuming no other changes in policy, describe how this policy will affect real GDP and the price level in the long-run.Start with your answer to part b), anddescribe how the economy moves to its new long-run equilibrium.Be sure to be thorough and describe theeconomicsbehind any changes in these variables. Response, New Equilibrium.