please explain all parts of the question 10 Use the aggregal

please explain all parts of the question

10 Use the aggregale supply aggregate demand diagram to answer this question. Tha gov arnment decreases laxes without changing expenditure or monetary policy. Which of tho follawing statements IS correct? (a) The aggregate demand curve shilts downwards , (b) The aggregalo supply curvo shifts upwards.. (c) In the long run output does not change but inflation increasos. (d) In the short run output Increases but infation does not chango.

Solution

In this case the decrease in taxes will cause the disposable income to increase and so aggregate demand curve wil shift rightwards and so prices rises and output rises. In the long run output returns to equilibrium but inflation rises. The correct answer is C.