If the expected price level increases at the same time that the federal government cuts taxes, in the short run
A)aggregate output and the price level will both increase.
B)aggregate output will increase, but the price level will fall.
C)aggregate output and the price level will both fall.
D)the price level will increase, but aggregate output may either increase or decrease.

Question

Quizplus · Accepted Answer

When the expected price level increases at the same time that the federal government cuts taxes, the price level will increase due to increased demand from consumers with higher disposable income. However, whether aggregate output increases or decreases is uncertain and depends on the specific circumstances of the economy. If the tax cuts lead to higher investment and production, aggregate output may increase. However, if the tax cuts lead to inflationary pressures that reduce consumer purchasing power and increase production costs, aggregate output may decrease.

If the Expected Price Level Increases at the Same Time