If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price level, then the U.S. economy must have been
A) on the very steep part of the short-run aggregate supply curve.
B) on the very flat part of the short-run aggregate supply curve.
C) on the very steep part of the short-run aggregate demand curve.
D) on the very flat part of the short-run aggregate demand curve.

Question

Quizplus · Accepted Answer

The fact that a very large increase in aggregate output occurred with a very small increase in the price level indicates that the economy was on the very flat part of the short-run aggregate supply curve. This suggests that there were significant idle resources in the economy that could be utilized without causing significant inflationary pressures. As a result, a decrease in net taxes could lead to a significant increase in aggregate demand without causing a significant increase in prices.

If a Decrease in Net Taxes in the United States