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Card 8 / 12:
A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?
Tax cuts increase consumer and investment spending, depending on where the tax cuts are targeted. This would shift AD to the right, so if the tax cuts occurred when the economy was in recession (and GDP was less than potential), the tax cuts would increase GDP and “lead the economy out of recession.”
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