Refer to Figure 18.6 for the following questions.
Figure 18.6
-Suppose the federal government reduces income taxes.Assume that the movement from A to B in Figure 18.6 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 __________.

Question

Refer to Figure 18.6 for the following questions.
Figure 18.6 
-Suppose the federal government reduces income taxes.Assume that the movement from A to B in Figure 18.6 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 __________.

Quizplus · Accepted Answer

If labour supply and savings increase, it will lead to an increase in the potential output of the economy. This will shift the LRAS curve to the right from LRAS₂ to LRAS₁, leading to an increase in both output and price level. Therefore, choice A is the correct answer.

Refer to Figure 18.6 for the Following Questions