For this question, assume that the economy is initially operating at the natural level of output....
For this question, assume that the economy is initially operating at the natural level of output. A reduction in taxes will cause:
A) an increase in the real wage in the medium run.
B) a reduction in the real wage in the medium run.
C) no change in the nominal wage in the medium run.
D) ambiguous effects on the real wage in the medium run.
Homework Answers
Statement - A reduction in taxes will cause:
Answer - C) no change in the nominal wage in the medium run
Explanation -
What is nominal wage? -- Nominal wage is the stock value of compensation an employee receives for his/her services. An increase or decrease in nominal wage is not adjusted with inflation.
In the above case, reduction in taxes will have no change in the nominal wage in the medium run as taxes are post nominal wage allocation. Change in taxes affect disposable income and not nominal wages.
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For this question, assume that the economy is initially
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