Final answer:
In the AD/AS model, a government tax cut results in a rightward shift of the AD curve, leading to a higher equilibrium price level and output. This change is likely to lead to increased employment due to higher demand for goods and services and increased production.
Step-by-step explanation:
The original question contains a mismatch, where it asks about the effects of an increase in business taxes, which would tend to decrease aggregate demand (AD), but then the scenario changes to a government tax cut which would increase AD. For the purpose of this explanation, we'll assume the scenario is a tax cut. When analyzing an aggregate supply and aggregate demand (AD/AS) diagram, an increase in aggregate demand can be represented by a shift of the AD curve to the right.
Identifying Equilibrium Before and After Tax Cut
In the original equilibrium, the AD and AS curves cross at a point that determines the original equilibrium price level and output. After the tax cut, consumers have more disposable income, and companies have more funds for investment, therefore aggregate demand increases. This increase in aggregate demand can be shown as a rightward shift of the AD curve by 50 units at all price levels, leading to a new equilibrium with a higher price level and output.
Changes in New Equilibrium
The new equilibrium after the tax cut will typically result in a higher output (real GDP) and an increased price level. The higher demand for goods and services often leads to increased production and, consequently, may lead to higher employment. However, the extent to which output and the price level change depends on the slope of the AS curve, which in turn depends on the economic conditions and the time frame considered (short run vs long run).