If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then a decrease in the income tax rate 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 the equilibrium output.

Question

Quizplus · Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is at a level of output below full employment, where the aggregate supply is perfectly elastic. A decrease in the income tax rate increases disposable income, leading to an increase in consumption and aggregate demand. This results in an increase in the equilibrium output without affecting the equilibrium price.

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