Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ returning to the natural level in the long run.
A)remain continuously above the natural level of output until
B)move above and then below the natural level of output until
C)remain continuously below the natural level of output until
D)move below and then above the natural level of output before

Question

Quizplus · Accepted Answer

A temporary tax increase reduces disposable income, leading to a decrease in consumption and aggregate demand. This causes output to initially fall below the natural level. As the tax increase is temporary, expectations adjust, and output eventually returns to the natural level, moving above it before settling back.

Starting from Long-Run Equilibrium in the Dynamic Model of Aggregate