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In december 2017 congress passed a substantial decrease in

In December 2017, Congress passed a substantial decrease in taxes. Assume economy starts out at potential output.

a) What is the effect of the tax cut on the IS and MP curves in the short run?

b) According to the IS-MP model, what would happen to output and the real interest rate in the short run? Draw a diagram to explain.

c) What would happen to the AD and IA curves in the short run? Draw a diagram to help explain your answer. What happens to output and inflation in the short run?

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