With an aid of AS-AD diagram, explain the effect on output when the government reduces the profits tax rate for corporations and raises subsidy for innovation and technology at the same time

When the government reduces the profit tax rate, the incentive for investments increases, so the investment expenditure increases, and thus the aggregate demand increases. Also, raising subsidy for innovation and technology means the government expenditure increases, so the aggregate demand increases as well. The price level will increase and the output level will also increase in the short run.

In the long run, there will be technological advancements, so the long run aggregate supply increases. Overall, the price level and output level will increase in the long run.