Could you draw the supporting graphs for these, I want to see if i did them correctly

Question 3

Suppose a goverment seeks to cut taxes in response to a current recession, but due

to delays in passing the necessary legislation through parliament the tax cut is not

put into place for 18 months. Assuming the government's objective is to stablise

output and inflation, use the AD-AS model to show how this policy action might be

counter-productive.

Answer:

In a long-run equilibrium with output equal to potential output and stable inflation, where

the AD curve intersects the short run and long run aggregate supply lines. The fall in

consumption spending will lead to a left inward shift in the AD curve and the economy

moves to a lower new short run equilibrium output level at the same inflation rate. The shift

in AD creates a recessionary gap since Y is now less than Y*. If government cut taxes in

response to the recessionary gap, this will increase the incentive of people to spend. Thus,

the AD curve will shift outwards in response to that policy. AD curve will shift outwards from

AD to AD1 which will results to a higher output. This will make Y is more than Y* and create

an expansionary gap. However, the expansionary gap will lead to a general increase in the

inflation rate in the economy and SRAS will begin to shift upwards. Thus, SRAS will shift

upwards from SRAS to SRAS1 which creates a new higher equilibrium, making inflation rate

will rise too. The new long run equilibrium features a permanently higher rate of inflation. As

a result, government's objective which to stabilise the output and inflation may be

counterproductive to the effect of cutting taxes. Thus, it may be difficult to achieve complete

stabilisation of the economy against AD shocks.