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 medium run, have no effect on which of the following?
A) Output and the interest rate.
B) The interest rate and unemployment.
C) The price level and the interest rate.
D) Unemployment and the price level.
E) Output and investment.

Question

Quizplus · Accepted Answer

In the medium run, the economy returns to the natural level of output, so unemployment remains at its natural rate and the price level adjusts, leaving them unaffected by the tax cut.

Assume the Economy Is Initially Operating at the Natural Level