Draw the graph · Macro · Aggregate demand and aggregate supply
An income tax cut
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Aggregate demand shifts right. Short-run aggregate supply stays put. Long-run aggregate supply stays put.
A tax cut raises disposable income, so households spend more at every price level. Consumption is a component of aggregate demand, so AD shifts right. The supply side has not changed. Output rises above potential.
The price level rises and real GDP rises, opening an inflationary gap.
Common mistake. Some students shift SRAS right because 'lower taxes help firms.' This is a tax on households, not on production costs. It works through spending.
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Lesson: Fiscal Policy Basics