Consider the Aggregate demand – Aggregate Supply model, suppose
the economy begins in a short run equilibrium with output equal to
– Assume that prior to the exogenous tax cut, the government had
a balanced budget and zero debt. If Ricardian equivalence were to
hold, what effect will the exogenous tax cut have upon our AD-AS
diagram? What happens to output and inflation in the short run
equilibrium? Explain your reasoning.