Use an aggregate demand (AD) and aggregate supply (AS) model (short run model) to analyze this problem. Do not use a different model. Use AD & AS.
A. Represent an initial equilibrium price and output level with the economy operating at or near full capacity (Hint: think about the shape of the AS curve and what this means for where AD crosses along the AS curve).
Label the following: each axis, the AD curve, the AS curve, the equilibrium output level and the equilibrium price level.
B. Suppose there is a tax cut, holding constant government purchases and all other factors affecting the AD curve. Illustrate the short run effects on output and the price level and LABEL them.
C. Give a 2 -4 sentence explanation and include why the initial state of the economy matters in your explanation.