In the aggregate demand-aggregate supply model, if firms expect businesses taxes to rise
A)current output will fall, but the price level will rise.
B)current output will rise, but the price level will fall.
C)current output and the price level will both rise.
D)current output and the price level will both fall.

Question

Quizplus · Accepted Answer

If firms expect business taxes to rise, their costs of production will increase. This will cause a leftward shift in the short-run aggregate supply (SRAS) curve, leading to a decrease in both output and price level in the short run. In the long run, prices are flexible and will adjust downward, leading to a further decrease in output and a decrease in the price level. Thus, current output and the price level will both fall.

In the Aggregate Demand-Aggregate Supply Model, If Firms Expect Businesses