Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new sources of oil are discovered in the country, then in the short-run
A)real GDP will rise and the price level might rise, fall, or stay the same.
B)real GDP will fall and the price level might rise, fall, or stay the same.
C)the price level will rise, and real GDP might rise, fall, or stay the same.
D)the price level will fall, and real GDP might rise, fall, or stay the same.

Question

Quizplus · Accepted Answer

A tax cut would increase aggregate demand (AD) and shift the AD curve to the right, leading to an increase in both real GDP and the price level in the short-run. The new sources of oil would increase aggregate supply (AS) and shift the AS curve to the right, leading to a decrease in the price level and an increase in real GDP. However, the effect on the price level might be offset by the increase in aggregate demand from the tax cut. Therefore, real GDP will rise, and the price level might rise, fall or stay the same, depending on the magnitude and direction of these two effects.

Suppose the Economy Is in Long-Run Equilibrium