Suppose that the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. If the government increases the federal income tax, then in the short run, _____ will fall. However, in the long run, the _____ will return to the level that it was prior to the imposition of the tax.
A) the price level and output; output
B) output and nominal wages; price level
C) the real wage and output; nominal wage
D) the nominal wage and the price level; real wage

Question

Quizplus · Accepted Answer

In the short run, an increase in federal income tax reduces disposable income, leading to a decrease in consumption and aggregate demand. This results in a lower price level and output. In the long run, the economy adjusts, and output returns to its potential level, but the question does not specify what happens to the price level or wages in the long run, making A the best answer given the information provided.

Suppose That the Short-Run Macroeconomic Equilibrium Occurs in the Upward-Sloping