Individual income taxes directly affect personal disposable incomes which in turn affect the domestic demand for goods and services. Production costs depend substantially on oil prices. Market expectations are: (1) income taxes in the U.S. will increase substantially and (2) oil prices will remain relatively unchanged.

Using market expectations, what do you expect the U.S. output and prices in the coming years? Assume we are moving from the old equilibrium to a new equilibrium. Please state clearly your assumptions and include a graph to support your answer.