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Suppose that the government reduces taxes on imported consumer goods. Use the model of aggregate demand and aggregate supply to explain what would happen to the price level and the output level of the economy in the short run?
Minh Nguyễn
The model of aggregate demand and aggregate supply can be used to explain what would happen to the price level and output level of the economy in the short run if the government reduces taxes on imported consumer goods. This can be illustrated with a diagram.
In the diagram, the aggregate demand (AD) curve is downward sloping and the aggregate supply (AS) curve is upward sloping. The equilibrium price level is determined by the intersection of the two curves. Initially, the equilibrium price level is P1 and the equilibrium output level is Y1.
When the government reduces taxes on imported consumer goods, the aggregate demand curve shifts to the right. This shift is represented by the movement from AD1 to AD2 in the diagram. The new equilibrium price level is P2, which is lower than the original price level. The new equilibrium output level is Y2, which is higher than the original output level.
In summary, the reduction in taxes on imported consumer goods leads to a decrease in the price level and an increase in the output level in the short run. This is due to an increase in aggregate demand.
David Denton
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