Problem
Consider the Aggregate demand - Aggregate Supply model, suppose the economy begins in a short run equilibrium with output equal to potential output.
- Assume that prior to the exogenous tax cut, the government had a balanced budget and zero debt. If Ricardian equivalence were to hold, what effect will the exogenous tax cut have upon our AD-AS diagram? What happens to output and inflation in the short run equilibrium? Explain your reasoning.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.