Figure 17.6
-Suppose the federal government reduces income taxes.Assume that the movement from A to B in Figure 17.6 represents normal growth in the economy before the tax change.If the tax change is not effective and labour supply and savings do not increase because of the tax change,then the tax change will

Question

Figure 17.6 
-Suppose the federal government reduces income taxes.Assume that the movement from A to B in Figure 17.6 represents normal growth in the economy before the tax change.If the tax change is not effective and labour supply and savings do not increase because of the tax change,then the tax change will

Quizplus · Accepted Answer

If labour supply and savings do not increase because of the tax change, the AS curve would not shift to the right. Therefore, output (Y) will remain the same at Y₂. However, since there is a reduction in income taxes, consumption spending (C) may increase which might shift the AD curve to the right. But since labour supply and savings do not increase, the price level (P) should remain the same at P₂. Therefore, the correct answer is C, that the tax change will not change the price level.

Figure 17.6 -Suppose the Federal Government Reduces Income Taxes.Assume That the Movement