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Explain the effect of an increase in income tax on the equilibrium output and inflation in the AD-AS model . Carefully distinguish between the short-run

  1. Explain the effect of an increase in income tax on the equilibrium output and inflation in the AD-AS model. Carefully distinguish between the short-run and the long-run equilibrium. Would this increase in income tax affect the potential output? Why/Why not?
  2. Suppose the Central Bank of a country increases its target rate of inflation. For example, instead a target of 2-3%, it sets new target of 4% inflation. Explain the effect of this change on the interest rate setting on the policy reaction function and the Aggregate Demand.
  3. An increase in population will lead to economic growth. Explain, in detail, whether you agree or disagree with this statement

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