The graphs illustrate an initial equilibrium for the economy. Suppose that the government cuts taxes. Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting from this change. Then, indicate what happens to the price level and real GDP (or aggregate output) in the short run and in the long run.
Short-run graph: LRAS, SRAS, AD
Long-run graph: LRAS, SRAS
Aggregate price level
Aggregate price level
Short-run equilibrium
Real GDP
Real GDP
In the short run, the price level stays the same and real GDP increases.
In the long run, the price level increases and real GDP increases.