Starting from short-run equilibrium, the following occurs: personal income taxes rise and foreign real national income...
Starting from short-run equilibrium, the following occurs: personal income taxes rise and foreign real national income rises. What is the effect on the price level and Real GDP in the short run?
| a) The price level rises and Real GDP falls. |
| b) The price level falls and Real GDP falls. |
| c) The price level rises and Real GDP rises. |
| d) The price level falls and Real GDP rises. |
| e) There is not enough information to answer this question. |
Homework Answers
When personal income tax rises, real disposable income of the consumer falls. This leads to a fall in his demand for goods and services.
This shifts the demand curve to the left. Keeping supply unchanged, this leads to a fall in the price level along with the quantity of goods and services produced, which in turn reduces GDP.
Thus, the correct option is: (b) price level falls and real GDP falls
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