Consider a tax cut which affects not only consumer disposable income,but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving.In the long run we would expect this tax cut to
A)decrease both the price level and increase real GDP.
B)increase both the price level and the level of real GDP.
C)increase the level of real GDP.
D)increase the price level.

Question

Quizplus · Accepted Answer

A tax cut that affects after-tax earnings from labor and financial assets will increase incentives to work and save, leading to an increase in aggregate supply. This will cause an increase in real GDP. While it is possible that the tax cut could lead to an increase in the price level, this is not a necessary outcome and will depend on various other factors such as the slope of the aggregate supply curve and the degree of economic slack. Therefore, option B and D can be ruled out. Option A can also be ruled out because a decrease in the price level is unlikely to be the primary effect of the tax cut.

Consider a Tax Cut Which Affects Not Only Consumer Disposable