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Mon 8 Dec, 2014 08:17 am
20) For this question, assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following?
(a) an increase in the aggregate price level, no change in output and no change in the interest rate in the medium run
(b) a reduction in employment and no change in the nominal wage in the short run
(c) an increase in investment in the medium run
(d) a reduction in output and no change in the aggregate price level in the short run
thank you very much
@happyfreeme,
try drawing a graph and reasoning it out.
@Linkat,
if taxes are imposed, output will initially reduce due to increase in the cost of production faced by the firm and no change in the price level in the short run. this is because firms will not be able to charge a different price in the short run condition. so i suggest ( d) is the answer.
thanks
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