If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the federal income tax will lead to:
A) an increase in the equilibrium price.
B) a decrease in the equilibrium price.
C) an increase in the equilibrium output.
D) a decrease in equilibrium output.

Question

Quizplus · Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is operating below full capacity, and prices are sticky. An increase in federal income tax reduces disposable income, leading to a decrease in aggregate demand, which results in a decrease in equilibrium output without affecting the price level significantly.

If the Short-Run Macroeconomic Equilibrium Occurs in the Keynesian Range