Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the short run, cause an increase in:
A) the output level.
B) the price level.
C) the interest rate.
D) the nominal wage.
E) All of the above.

Question

Quizplus · Accepted Answer

A tax cut increases disposable income, leading to higher consumer spending. This boosts aggregate demand, causing an increase in the output level (A) and price level (B) in the short run. The higher demand for goods and services often leads to an increase in the demand for money, which can push up the interest rate (C). Additionally, as demand for labor increases to produce more goods, nominal wages (D) may also rise.

Assume the Economy Is Initially Operating at the Natural Level