A tax cut that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.
A)increase; increases
B)increase; decreases
C)increase; may increase, decrease, or remain unchanged
D)decrease; decrease

Question

Quizplus · Accepted Answer

A tax cut can increase aggregate demand by boosting consumption and investment, potentially increasing output. However, its effect on inflation is uncertain as it depends on various factors like the economy's initial state and supply-side responses.

A Tax Cut That Affects Both Aggregate Demand and Potential