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1. Suppose that the economy begins at potential output. Now, there is a tax cut. a....

1. Suppose that the economy begins at potential output. Now, there is a tax cut. a. Use the Keynesian Cross diagram to show the effect, if any, of the tax cut on output in the short run. b. Explain how the economy returns to potential output. Be sure to describe what happens to inflation and the real interest rate as the economy returns to potential. c. What effect, if any, will the tax cut have on the long-run real interest rate and normal investment? d. Suppose that the tax cut includes substantial reductions in business taxes, and that the administration is right that cutting business taxes increases planned investment at a given real interest rate. How, if at all would this change the answer to part (c)? Please answer part d with a graph. Answers to this question have been posted but are not the answer i was looking for so do not post the same answer.

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