Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in price level.
A) a decrease; an increase
B) a decrease; no change
C) no change; an increase
D) no change; no change

Question

Quizplus · Accepted Answer

Lowering income taxes increases consumers' disposable income, leading to higher spending and demand in the economy. In the long run, this does not affect the natural rate of unemployment, which is determined by factors like market structure and policies, not by cyclical factors. However, the increased demand can lead to higher prices, thus increasing the price level.

Suppose the Economy Is in Long-Run Equilibrium