Final answer:
A $500 tax cut will shift the aggregate expenditure curve upwards, resulting in a higher aggregate demand of 50 at every price level and a new equilibrium with increased output and potentially higher price level, likely leading to increased employment.
Step-by-step explanation:
When taxes decrease by $500, the aggregate expenditure (AE) curve will shift upwards because consumers have more disposable income to spend, which increases consumption. The magnitude of this shift depends on the marginal propensity to consume (MPC). For example, if the MPC is 0.9, the initial increase in AE would be $450 (0.9 times $500).
In this scenario, for every price level, the aggregate demand (AD) increases by 50. This shift will create a new equilibrium where the AD curve intersects with the aggregate supply (AS) curve at a higher level of output, meaning the equilibrium income will increase. The new equilibrium income is higher than the old one by the amount of the multiplier times the initial increase in AE.
If the AD increases uniformly by 50 at every price level, the new equilibrium can be identified by a rightward shift of the AD curve on the AD/AS diagram. The output will increase, and the price level might also increase depending on the slope of the AS curve. In terms of employment, with an increase in output, it is likely that employment will rise to meet the higher production demands, assuming there is slack in the labor market.