What happens to consumption and investment in the medium run

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Aggregate demand shocks and the medium run

Suppose the economy begins with output equal to its natural level. Then, there is a reduction in income taxes.

a. Using the AS-AD model developed in this chapter, show the effects of a reduction in income taxes on the position of the AD, AS, IS, and LM curves in the medium run.

b. What happens to output, the interest rate, and the price level in the medium run? What happens to consumption and investment in the medium run?

Reference no: EM131145816

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