-Based on the diagram above,starting from a long-run equilibrium at point C,a tax increase that decreases aggregate demand from ADI¹ to ADI will lead to a short-run equilibrium at point ________,and eventually to a long-run equilibrium at point ________,due to falling inflation and the lowering of real interest rates by the Bank of Canada.

Question

-Based on the diagram above,starting from a long-run equilibrium at point C,a tax increase that decreases aggregate demand from ADI<sup>1</sup> to ADI will lead to a short-run equilibrium at point ________,and eventually to a long-run equilibrium at point ________,due to falling inflation and the lowering of real interest rates by the Bank of Canada. A) D;B B) D;C C) D;A D) B;C E) B;B

Quizplus · Accepted Answer

A tax increase that decreases aggregate demand will initially move the economy from point C to point D in the short run. Over time, as inflation falls and the Bank of Canada lowers real interest rates, the economy will adjust back to a new long-run equilibrium at point B.

-Based on the Diagram Above,starting from a Long-Run Equilibrium at Point