Utilize the aggregate demand ad and aggregate supply as

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Reference no: EM13389685

Use an aggregate demand (AD) and aggregate supply (AS) model (short run model) to analyze this problem. Do not use a different model. Use AD & AS.

A. Represent an initial equilibrium price and output level with the economy operating at or near full capacity (Hint: think about the shape of the AS curve and what this means for where AD crosses along the AS curve).

Label the following: each axis, the AD curve, the AS curve, the equilibrium output level and the equilibrium price level.

B. Suppose there is a tax cut, holding constant government purchases and all other factors affecting the AD curve. Illustrate the short run effects on output and the price level and LABEL them.

C. Give a 2 -4 sentence explanation and include why the initial state of the economy matters in your explanation.

Reference no: EM13389685

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