Using the Aggregate Demand-Aggregate Supply (Short-Run) Model, Explain How a Reduction

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The Answer is A reduction in business taxes affects both aggregate demand and short-run aggregate supply.On the aggregate demand side, lower business taxes increase the profitability of investment.Therefore, the aggregate demand curve shifts to the right.However, lower business taxes also affect the legal-institutional setting in which firms operates by lowering per-unit production costs.As a result, the short-run aggregate supply curve also shifts to the right.The net effect of the two changes is to increase real GDP.The price level, however, may be higher or lower depending on the relative sizes of the shifts.If aggregate demand increases more than short-run aggregate supply, then the price level is higher.If short-run aggregate supply increases more than aggregate demand, then the price level is lower.

Using the Aggregate Demand-Aggregate Supply (Short-Run) Model, Explain How a Reduction

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