Starting from short-run equilibrium,the following occurs: personal income taxes rise and foreign real national income rises.What is the effect on the price level and Real GDP in the short run?
A) The price level rises and Real GDP falls.
B) The price level falls and Real GDP falls.
C) The price level rises and Real GDP rises.
D) The price level falls and Real GDP rises.
E) There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

The effects on price level and Real GDP depend on the relative magnitudes of the tax increase (which reduces consumption and thus demand) and the increase in foreign income (which increases demand for exports). Without knowing which effect is stronger, the net impact cannot be determined.

Starting from Short-Run Equilibrium,the Following Occurs: Personal Income Taxes Rise