Consider a standard AD-AS model. If the SRAS curve is steep, a temporary tax cut leads to a relatively small increase in inflation and relatively large decrease in unemployment. Group of answer choices True False

The statement is True.

Here's why:

Step 1: Understanding the AD-AS model The Aggregate Demand-Aggregate Supply (AD-AS) model is used in macroeconomics to explain the behavior of the economy in the short run and long run. The model has three components: Aggregate Demand (AD), Short Run Aggregate Supply (SRAS), and Long Run Aggregate Supply (LRAS).

Step 2: Understanding the SRAS curve The SRAS curve shows the relationship between the price level and the quantity of goods produced in the short run. A steep SRAS curve indicates that the quantity of goods produced is not very responsive to changes in the price level.

Step 3: Understanding the effect of a tax cut A temporary tax cut increases disposable income, leading to an increase in consumption. This shifts the AD curve to the right.

Step 4: Analyzing the effect on inflation and unemployment When the AD curve shifts to the right, it intersects the SRAS curve at a higher price level, leading to inflation. However, because the SRAS curve is steep, the increase in the price level (inflation) is relatively small. The rightward shift of the AD curve also leads to an increase in output, which means more labor is demanded, leading to a decrease in unemployment. Because the SRAS curve is steep, the increase in output (and therefore the decrease in unemployment) is relatively large.

Therefore, the statement is true: If the SRAS curve is steep, a temporary tax cut leads to a relatively small increase in inflation and a relatively large decrease in unemployment.