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 potential output? why/why not?
2. Suppose the Central bank of a country increase its target rate of inflation. For example, instead of a target of 2 to 3%, it sets new target of 4% inflation. Explain the effect of this change on the interest rate setting on policy reaction function and Aggregate Demand.
3. an increase in population will lead to economic growth. Explain, in detail, whether you agree or disagree with this statement