If money is neutral, then a tax cut would have the effect of
A) raising output.
B) raising the interest rate.
C) lowering the price level.
D) all of the above.

Question

Quizplus · Accepted Answer

If money is neutral, it means changes in the money supply do not affect real variables like output in the long run. However, a tax cut can stimulate economic activity by increasing disposable income, leading to higher demand, which can raise output in the short run. This increased demand can also push up the interest rate as people have more money to spend and invest. Additionally, higher demand can lead to higher prices, raising the price level. Thus, in the context of the question, all of the given effects can occur as a result of a tax cut, even under the assumption of money neutrality, which primarily concerns the long-term relationship between money supply and real economic variables.

If Money Is Neutral, Then a Tax Cut Would Have