Question

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?

Short answer

To summarize, even while the GDP and price levels remain unchanged, a reduction in the tax burden moves the aggregate demand curve to the right.

Step-by-step solution

Explanation 

It's worth noting that a tax change boosts aggregate demand and real GDP in the short run.

A tax cut is believed to have no significant influence on actual GDP or price levels.

Lowering taxes does, in fact, lead the aggregate demand curve to shift to the right. The figure below illustrates this concept:

Explanation 

As seen in the diagram above, the equilibrium is initially at position E1 where AD1 intersects the SRAS curve. Currently, the GDP rate is $\$14.5$.

A tax cut has changed aggregate demand in this scenario $AD2$. As a result, a new equilibrium is established at site E2. At this level, the price is $120$, and the equilibrium real GDP is $\$15.5$.

As a result, price rises, and the level of equilibrium real GDP are both low.

To summarize, lowering taxes shifts the aggregate demand curve to the right, even if GDP or price levels remain unchanged.

Introduction 

The given is the significant action taken by the congress in short term

The objective is to determine what might account this outcome