A tax increase that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.
A)decrease; increases
B)increase; decreases
C)decrease; may increase, decrease, or remain unchanged
D)decrease; decrease

Question

Quizplus · Accepted Answer

A tax increase can reduce aggregate demand, potentially lowering output in the short run, but its effect on inflation is uncertain as it depends on various factors like the state of the economy and monetary policy responses.

A Tax Increase That Affects Both Aggregate Demand and Potential