Problem: Aggregate demand shocks and the medium run
Suppose the economy begins with output equal to its natural level. Then, there is a reduction in income taxes.
a. Using the AS-AD model developed in this chapter, show the effects of a reduction in income taxes on the position of the AD, AS, IS, and LM curves in the medium run.
b. What happens to output, the interest rate, and the price level in the medium run? What happens to consumption and investment in the medium run?
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.