The predictions of the Keynesian economic theory.
Explanation of Solution
Using the aggregate demand-supply model, the likely effects of the major tax cut when the economy is not operating at a capacity and the Fed accommodates by increasing the money supply is depicted in Figure 1.
In Figure 1, the horizontal axis depicts the
Concept Introduction:
Real Gross Domestic Product (Real GDP): Real GDP refers to the market value of all the final goods and services produced in an economy during an accounting year, measured at constant prices.
Aggregate demand (AD): An aggregate demand refers to the total value of the goods and services that are demanded at a particular price within a given period of time.
Aggregate supply: An aggregate supply is the total value of supply of the final goods and services in an economy within a given period of time.
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