Suppose that a short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. From this point, the government cuts the personal income tax rate. Compared to what it was in the short run, the nominal wage in the long run will be ____, and the price level will be:
A) lower; lower.
B) higher; lower.
C) lower; higher.
D) higher; higher.

Question

Quizplus · Accepted Answer

In the long run, a cut in the personal income tax rate increases aggregate demand, leading to higher prices and higher nominal wages as the economy adjusts to a new equilibrium at a higher price level and workers demand higher wages to compensate for the increased cost of living.

Suppose That a Short-Run Macroeconomic Equilibrium Occurs in the Upward-Sloping