Effect of decreasing Taxes on SRAS and AD???

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I have always thought a decrease in taxes would shift both SRAS and AD outward, but apparently this isn’t the case with Schweser:
“An economy is in full-employment equilibrium. If the government unexpectedly decreases the tax rate, in the short run the economy is most likely to experience:
A) An increase in employment <– Answer
B) A decrease in the price level
C) No change in employment and an increase in the price level”
The answer key states that there is “an increase in aggregate demand [and] above-full employment causes upward pressure on wages that will reduce short-run aggregate supply”.
Is this accurate? So for the CFA: Decrease in Taxes –> AD shifts to the right, SRAS shifts to the left ???
Thank you!
 
The key situation here is a full-employment economy, so it is already running in its long-term equilibrium. A change in any important economic variable will make the economy to shift to a side (below or above the equilibrium). Lower taxes intensifies aggregate demand, so inflation increases in the short-term. About the wages we can assume two scenarios, rigid wages in the short-term or flexible in the short-term. Apparently, the answer assumes flexible wages in the short-term (Classical). As wages are part of the production cost of companies, higher inflation (prices of goods & services) pressures wages to increase. Higher production costs in the short-term make the least competitive companies in the economy to retract operations. This triggers an aggregate decrease in the short-term supply.
Just bear in mind that rigidity of prices (which includes wages; a wage is the price of labor force) is a key assumption of Keynesian theories. In the other hand, flexibility of prices are more associated with classical theories. Perhaps you are more common with the Keynesian thinking and got this answer a little bit confusing.
Hope this helps!
 
Thank you very much! I think I understand it. This seems like a subjective question … really hope they don’t test questions like these -_-
 
I wouldn’t say it’s subjective, it’s mainly about the sequencing of the effects. The primary effect of a decrease in taxes is a positive shift in AD (GDP/employment increases, price level increases). The subsequent effect is the negative shift in SRAS which will most likely bring the GDP/employment level back to its full employment rate (at a high price level), but that effect occurs later (not in the immediate short run), as SRAS adjusts to AD.
 
To be quite honest, I have never heard of SRAS shifting inwards and raising the P while decreasing Q. I’ve only seen a tax cut leading to the supply curve shift outwards in both the micro & macro scenarios. Shifting SRAS inwards just makes no intuitive sense to me, albeit Harrogath’s explanation was excellent.
I found an example (same example, queen’s link elaborates more) used by two business schools on the effect of a tax cut on SRAS:
On Page 7, Question 7 B: Tax cut –> SRAS either stays put or shifts outwards.
Queen’s: http://qed.econ.queensu.ca/pub/students/khans/ECON2450_AS4_S2_09_SOL.pdf
Berkeley: http://faculty.haas.berkeley.edu/arose/PS13.pdf
Examples basically say SRAS either doesn’t move or moves outwards as a result of a tax cut. I realize there are different economic models, so I won’t delve into this any further ………
Nevertheless, I don’t think looking into this at this stage will be much helpful … Thanks to everyone for their excellent responses.
 
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