In response to a negative supply shock, the government decreases taxes. The MOST likely result of the government's tax decrease is a(n) _____ in unemployment and a(n) _____ in the aggregate price level.
A) decrease; increase
B) decrease; decrease
C) increase; increase
D) increase; decrease

Question

Quizplus · Accepted Answer

Decreasing taxes increases disposable income, which boosts consumer spending and demand, potentially decreasing unemployment. However, it can also lead to higher aggregate demand relative to supply, pushing up the aggregate price level.

In Response to a Negative Supply Shock, the Government Decreases