In the basic Keynesian model, a tax cut: A. Reduces short-run equilibrium output B. Increases short-run equilibrium output C. Reduces potential output D. Increases potential output

B. Increases short-run equilibrium output. In the basic Keynesian model, a tax cut increases the disposable income of households, which in turn increases consumption spending. This increase in consumption spending leads to an increase in aggregate demand and therefore an increase in short-run equilibrium output. However, it is important to note that in the long run, the increase in output may not be sustained and could lead to inflationary pressures. Additionally, the impact of a tax cut on potential output would depend on how the government finances the tax cut (e.g. through borrowing or spending cuts) and how it affects incentives for work and investment.