What macroeconomic impact would a tax cut have in a recession, most likely?

A tax cut will increase aggregate demand, reduce unemployment and result in inflation

Explanation:

Recession is a sustained period of significant fall in real GDP- a record of negative growth rate in real GDP. It causes loss of jobs and results in grave personal costs on households as people lose incomes for lack productivity.

The goverment can remedy recession by stimulating any or a combination of the expenditure components of aggregate demand; which are consumption, investment, government spending and net export.

A cut in personal income tax, for example, will increase the disposable income(income after tax), which will increase consumption tendency, and in turn increase the household purchases of goods and services. This will result to further series of spendings in the economy-multiplier effect and then cause a shift in aggregate demad to the right. The real output level will increase and unemployment will reduce.

However, an increase in real output, all other factors remaining constant, will drive up the price level- results in inflation.

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