Refer to Figure 13.6 for the following questions.
Figure 13.6

-Suppose the federal government reduces income taxes. Assume that the movement from A to B in Figure 13.6 represents normal growth in the economy before the tax change. Also assume that aggregate demand does not change. If the tax change is effective and labour supply and savings increase because of the tax change, then the tax change will:
A)shift LRAS₂ to the right.
B)decrease output to less than Y₂.
C)not change the price level.
D)decrease the price level to less than P₁, but more than P₂.

Question

Refer to Figure 13.6 for the following questions.
Figure 13.6
 
-Suppose the federal government reduces income taxes. Assume that the movement from A to B in Figure 13.6 represents normal growth in the economy before the tax change. Also assume that aggregate demand does not change. If the tax change is effective and labour supply and savings increase because of the tax change, then the tax change will:
A)shift LRAS₂ to the right. 
B)decrease output to less than Y₂. 
C)not change the price level. 
D)decrease the price level to less than P₁, but more than P₂.

Quizplus · Accepted Answer

The tax change will lead to an increase in labour supply and savings, which will increase the economy's potential output. This will cause a shift in the long-run aggregate supply (LRAS) curve to the right from LRAS₂ to LRAS₃. The price level will not change as there is no change in aggregate demand. Therefore, choice A is correct as it represents the shift in LRAS to the right.

Refer to Figure 13.6 for the Following Questions