Suppose the Economy Is at the Natural Rate of Output

question 17

Essay

Suppose the economy is at the natural rate of output.Explain how a tax increase reduces demand and increases unemployment.Why is the speed of the adjustment of wages and/or the role of expectations important in this situation?

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Definitions:

Labor Rate Variance

The difference between the expected cost of labor at standard rates and the actual cost of labor incurred.

Raw Materials Quantity Variance

The difference between the expected amount of raw materials required for production and the actual amount used, evaluated in terms of cost.

Labor Rate Variance

The difference between the actual cost of direct labor and the expected (or standard) cost, based on the standard hours worked and standard labor rate.

Variable Overhead Rate Variance

The difference between the actual variable overhead incurred and the expected variable overhead based on standard cost.