In: Economics
Assume a developed nation’s economy is in a long run equilibrium and shows signs of slow, steady growth. In addition to that, here are a few other facts and assumptions you should keep in mind: 1) Its currency has appreciated slightly over the last 6 months against all major currencies; 2) This nation recently abandoned all of its trade agreements with no word on if or when they might be renegotiated; 3) The central bank pushed the overnight bank-to-bank lending rate from 0% to 1% to 1 ½ % over the last 6 months; 4) The population is educated but lagging behind many other developed nations; 5) Consumer confidence is strong in some regions, weak in others; 6) Its monetary policy is sound. Fiscal policymakers plan to enact a significant tax cut. Given this nation’s current status, what impact will the tax cut have on this nation’s economy in the short run and long run? Use the AD/AS framework (but do not draw a graph) in your answer.