Refer to Figure 13.6 for the following questions.
Figure 13.6

-Suppose the federal government reduces income taxes. Assume that the movement from A to B in Figure 13.6 represents normal growth in the economy before the tax change. If the tax change is not effective and labour supply and savings do not increase because of the tax change, then the tax change will:
A)decrease the price level below P₂.
B)increase output above Y₂.
C)not change the price level.
D)shift LRAS₂ to the right.

Question

Refer to Figure 13.6 for the following questions.
Figure 13.6
 
-Suppose the federal government reduces income taxes. Assume that the movement from A to B in Figure 13.6 represents normal growth in the economy before the tax change. If the tax change is not effective and labour supply and savings do not increase because of the tax change, then the tax change will:
A)decrease the price level below P₂. 
B)increase output above Y₂. 
C)not change the price level. 
D)shift LRAS₂ to the right.

Quizplus · Accepted Answer

If the tax change is not effective and labour supply and savings do not increase because of the tax change, then the movement from B to C will not occur. This means that the economy will continue to produce at Y₂ and the price level will not change from P₂. Thus, the correct answer is C. The tax change will not shift the LRAS curve as it does not affect the long-run potential of the economy.

Refer to Figure 13.6 for the Following Questions