Assume that an economy begins in macroeconomic equilibrium, then taxes are significantly decreased. As…

A tax cut raises disposable income and consumption, shifting aggregate demand right. With upward-sloping short-run aggregate supply, output and prices rise: expansion and inflation. Expansion with deflation and recession with deflation do not describe a positive demand shock; stagflation is a negative supply-shock pattern. A flat supply curve would damp the price effect, an implicit model limit.