Assume that the economy is initially at the natural level of output. A permanent increase in...

Assume that the economy is initially at the natural level of output. A permanent increase in taxes will cause which of the following?

Question 7 options:

	a decrease in the aggregate price level, and no change in output in the medium run
	a reduction in unemployment in the short run
	a reduction in output and no change in the aggregate price level in the short run
	no change in investment in the medium run
	more than one of the above

Which of the following events will cause a reduction in the aggregate price level?

Question 4 options:

	an increase in T
	an increase in the markup
	an increase in output
	an increase in G
	an increase in the variable z

Solutions

Expert Solution

7) A decrease price level and no change in output in medium run

( Tax rise will reduce the incentive to invest and consume as less money will be left in the hands of people after paying taxes ,as result aggregate demand will fall,prices will fall .But in the longrun,taxes won't have any effect on natural level output even though prices will remain decreased.)

Other statements are incorrect because

* imcreased taxes will not reduce unemployment in shortrun as the producers will not be in a position to hire more labour

*ln the short run imcresed taxes will result in a decline in prices by reducing aggregate demand

*Taxes will be able to affect investment in medium run because they can influence interest rate.

8)increase in taxation

(With rise in taxes,people will have less income to spend ,aggregate demand will fall and prices will fall.)

Other statements are incorrect because

*increase in mark up leads to mark up inflation.

*G is a part of aggregate demand, a rise in aggregate demand will lead to demand pull inflation.(rise in prices)

*z represents aggregate demand the rise it will lead to demand pull inflation

Rahul Sunny answered 1 week ago

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