Final answer:
An increase in business excise taxes leads to a leftward shift in the AS curve, indicating a reduction in the quantity of goods produced, different from a tax increase on consumer income that shifts the AD curve left. Tax cuts can stimulate the economy during a recession by boosting consumption and shifting the AD curve right, increasing real GDP and reducing unemployment.
Step-by-step explanation:
True, an increase in business excise taxes will shift the aggregate supply (AS) curve to the left. This occurs because an excise tax is a tax on the production or sale of a good. An increase in production costs due to higher excise taxes can decrease the quantity of goods that businesses are willing or able to produce at a given price level, leading to a leftward shift in the AS curve. This is different from the effect of a tax increase on consumer income, which affects consumption and shifts the aggregate demand (AD) curve to the left, a common method for controlling inflation.
During a recession, tax cuts are often used as a fiscal stimulus. For example, in the 2001 recession, a tax cut shifted the AD curve to the right, resulting in increased real GDP and lower unemployment without significantly raising the price level, as the economy was below its potential output level.