Suppose the economy is in long-run equilibrium. Senator A succeeds in getting taxes raised. At the same time, Senator B succeeds in getting major new restrictions on logging enacted. 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

Raising taxes and imposing new restrictions on logging would cause a decrease in aggregate demand, leading to a fall in real GDP in the short run. The effect on the price level is unclear and may depend on a mix of supply and demand factors. In the long run, the economy will adjust to the new equilibrium, which may involve lower prices, a smaller output level, and higher taxes.

Suppose the Economy Is in Long-Run Equilibrium