Assuming an upward-sloping short-run aggregate supply curve, a decrease in taxes results in ________ in output and ________ in prices in the short run.
A) an increase; an increase
B) a decrease; an increase
C) a decrease; no change
D) no change; a decrease

Question

Quizplus · Accepted Answer

A decrease in taxes will increase spending and aggregate demand. This will result in an increase in output (real GDP) as production increases to meet the higher demand. However, as production increases, firms may face higher costs due to a shortage of resources and higher input prices. This can lead to an increase in prices (inflation) in the short run. Therefore, a decrease in taxes results in an increase in output and an increase in prices in the short run, which is represented by an upward movement along the short-run aggregate supply curve.

Assuming an Upward-Sloping Short-Run Aggregate Supply Curve, a Decrease in Taxes