Assume That the Economy Is Initially Operating at the Natural

question 32

Multiple Choice

Assume that the economy is initially operating at the natural level of output. A simultaneous increase in taxes and a decrease in the price target by the central bank will cause which of the following?

• A) A reduction in investment in the medium run.
• B) An increase in the aggregate price level, no change in output, and no change in the interest rate in the medium run.
• C) An increase in output and an increase in the aggregate price level in the short run.
• D) A reduction in the interest rate in the medium run.
• E) A decrease in output and a decrease in the nominal wage in the short run.

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Definitions:

Increase

An upward adjustment in size, number, value, or strength.

Percent More

The increase in a quantity measured as a fraction of 100.

Reduced By

To decrease in amount or number by a specified factor or quantity.

First Year

The initial 12-month period in a particular context, such as employment, schooling, or living in a new place.