Suppose an economy is in long-run equilibrium

a) IF the economy is in the long run eqilibrum then a decrease in the taxes will shift the aggregate demand curve to the right, and disposable income in the market will increase, the new equilibrium in the market will be at a higher price and higher level of output, unemployment rate will fall.

b) if the market is left unchecked then as the wages adjust to the higher price level in the market the supply curve will shift to the left, as this will act as a negative supply shock and the new equilibrium will be at a higher price and lower level output, i.e. th =e equilibrium will adjust back to the potential output but the price will be higher. unemployment will rise and inflation will rise even higher.