Assume that the economy is initially operating at the natural level of output. A simultaneous increase in taxes and a decrease in the price target by the central bank will cause which of the following?
A) A reduction in investment in the medium run.
B) An increase in the aggregate price level, no change in output, and no change in the interest rate in the medium run.
C) An increase in output and an increase in the aggregate price level in the short run.
D) A reduction in the interest rate in the medium run.
E) A decrease in output and a decrease in the nominal wage in the short run.

Question

Quizplus · Accepted Answer

An increase in taxes reduces disposable income, leading to lower consumption and output. A decrease in the price target by the central bank typically implies tighter monetary policy, which can further reduce output and nominal wages in the short run.

Assume That the Economy Is Initially Operating at the Natural