In 1981-1983, the Reagan administration applied a fiscal policy that reduced taxes and increased government spending.

a-Explain why this policy would tend to increase aggregate demand.

Show the impact on production and prices, assuming only one displacement

of aggregate demand.

b- The supply-side school maintains that tax cuts would affect aggregate supply, mainly by increasing potential production. If Reagan's fiscal measures are assumed to have affected aggregate supply and aggregate demand, show the impact on production and the price level. Explain why the impact of Reagan's fiscal policies on production is clear, while the impact on prices is uncertain.