if an economy is at full employment and the government cuts taxes, a) inflation definitely will occur because the tax cut leaves more income in the hands of the public, permitting them to increase spending. since the economy is already at full employment inflation is the result. b) inflation definitely will not occur because tax cuts cause interest rates to rise, which causes reduced spending exactly equal to the stimulus of the tax cut. c) prices may rise a bit or a lot, depending on what the fed does. if the fed holds interest rates constant then the tax cut will cause only a small increase in prices, but if the fed holds high powered money constant the inflation can be quite substantial. d) prices will actually fall, because higher interest rates will result, and the economy will go into a decline because of the higher borrowing costs. e) none of the above statements are correct.