Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in inflation.

Question

Quizplus · Accepted Answer

In the long run, the natural rate of unemployment is determined by factors such as labor market policies and technology, not by fiscal policy like tax changes. However, lower income taxes can increase aggregate demand, potentially leading to higher inflation in the long run.

Suppose the Economy Is in Long-Run Equilibrium