Starting from short-run equilibrium,the following occurs: personal income taxes are cut,business taxes are cut,and labor productivity rises.What is the effect on the price level and Real GDP in the short run?
A) Real GDP rises and the price level necessarily falls.
B) Real GDP rises and the price level necessarily rises.
C) Real GDP falls and the price level necessarily remains the same.
D) Real GDP rises and the effect on the price level cannot be determined.
E) Real GDP rises and the price level necessarily remains the same.

Question

Quizplus · Accepted Answer

Cutting personal and business taxes increases disposable income and investment, boosting demand and potentially increasing Real GDP. Rising labor productivity also increases Real GDP by making production more efficient. However, the effect on the price level is ambiguous because while increased demand can lead to higher prices, higher productivity can lower production costs, potentially offsetting inflationary pressures.

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