Refer to the graph above. If the economy is initially at equilibrium at the intersection of AD₁ and AS₁ and there is a tax cut, then, from a skeptical mainstream perspective, the immediate impact is that aggregate: A) Demand would increase to AD₂ and aggregate supply would increase to AS₂ B) Demand would increase to AD₂ and aggregate supply would remain at AS₁ C) Supply would increase to AS₂ and aggregate demand would remain at AD₁ D) Demand would remain at AD₁ and aggregate supply would remain at AS₁

Question

Quizplus · Accepted Answer

A tax cut would increase disposable income, leading to an increase in consumer spending and therefore an increase in aggregate demand. However, this increase in demand would not necessarily lead to an increase in supply, as firms may not immediately be able to increase production to meet the higher demand. Therefore, aggregate supply would likely remain at the same level in the short run, represented by the intersecting point of the original AS and AD curves. Option B represents this scenario, with the new AD curve intersecting the same AS curve as before the tax cut.

Refer to the Graph Above