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Explain and graph how a recession is illustrated in the AD/AS model. Suppose a tax relief bill is passed, imposing tax cuts to the public. Illustrate and explain how this would impact your model

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Final answer:

A recession is shown in the AD/AS model by a leftward shift of the AD curve, leading to lower output and higher unemployment. A tax relief bill can lead to an increase in consumption and investment, shifting the AD curve rightward, potentially moving the economy out of the recession.

Step-by-step explanation:

How a Recession is Illustrated in the AD/AS Model

A recession in the AD/AS (Aggregate Demand/Aggregate Supply) model is represented by a fall in aggregate demand, which is illustrated by a leftward shift of the Aggregate Demand (AD) curve.

This leftward shift is typically caused by a decrease in consumption, investment, government spending, or net exports. During a recession, output decreases leading to higher unemployment, and the economy operates below its potential GDP.

The Effect of a Tax Relief Bill on the AD/AS Model

When a tax relief bill is passed, imposing tax cuts to the public, it can potentially lead the economy out of a recession. Tax cuts increase disposable income for consumers and businesses, which can stimulate consumption and investment.

Therefore, in the AD/AS model, this would be shown by a rightward shift of the AD curve, indicating an increase in aggregate demand. This shift could move the economy closer to its potential output, decreasing cyclical unemployment and promoting economic recovery.

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