If an increase in net taxes in the United States resulted in a very large decrease in aggregate output and a very small decrease 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

When the economy is on the very flat part of the short-run aggregate supply curve, changes in aggregate demand (such as those caused by changes in net taxes) lead to large changes in output and small changes in the price level. This is consistent with the described effects of an increase in net taxes.

If an Increase in Net Taxes in the United States