Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.Question 25Select one:a.The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.b.The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.c.The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.d.The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
Question
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.Question 25Select one:a.The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.b.The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.c.The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.d.The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
Solution
The correct answer is c. The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
Here's why:
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When the federal government enacts a cut in the personal income tax rates, people have more disposable income. This means they have more money to spend.
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As a result, consumer spending increases. Businesses see this increase in demand for their products and services, so they produce more to meet this demand.
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This increase in production is represented by a shift to the right of the aggregate demand curve in the aggregate demand-aggregate supply model.
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The aggregate supply curve is not affected because the tax cut does not directly affect the cost of production or the willingness of firms to produce goods and services.
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As the aggregate demand curve shifts right, the equilibrium price level and real GDP both increase in the short run. This is because the increase in demand causes prices to rise (since businesses can charge more when demand is high) and real GDP to increase (since more goods and services are being produced and sold).
Similar Questions
Using the aggregate demand-aggregate supply model, predict what happens in the short run when there is a general decrease in raw materials cost.Question 15Select one:a.The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.b.The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.c.The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.d.The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
A cut in direct taxes on households' income _____________.a.Has no effectb.Shifts the aggregate demand curve to the leftc.Shifts the aggregate demand curve to the rightd.Moves the economy along the aggregate demand curve
Which of the following will result in a rightward shift of the aggregate demand curve?ResponsesAn increase in the income tax rateAn increase in the income tax rateAn increase in exportsAn increase in exportsA decrease in the price levelA decrease in the price levelA decrease in household incomeA decrease in household incomeA decrease in government spending
The aggregate demand curve shifts to the right when:Question 1Answera.Consumer confidence increases and interest rates fallb.Government reduces spending and raises taxesc.Firms decrease investment and production levelsd.International trade becomes more restricted
What does the short-run aggregate supply curve show?Group of answer choicesThe relationship between the price level and the quantity of real GDP suppliedThe relationship between the unemployment rate and real GDPThe desired level of national expenditure at different price levelsThe relationship between labour supplied and the average wage rate
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