Question

Given Change in Economic Factor Real GDP Price Level

Increase in foreign real national income (1) (2)
Decrease in wage rates (3) (4)
Beneficial supply shock (5) (6)
Decrease in government purchases (7) (8)
Increase in personal income taxes (9) (10)
Decrease in labor productivity (11) (12)

Based on the given change, what word (rises or falls) should go in blank (9) and blank (10), respectively, to summarize the resulting impact on short run equilibrium?
a) rises; rises
b) falls; falls
c) rises; falls
d) falls; rises

Answer 1

d)GDP falls; PRICE LEVEL rises

Step-by-step explanation:

Income taxes affect the consumption of the families as it reduces the disposable income Y (1 -t) = disposable income

As in this case, the income tax rate increase the consumption in the economy will decrease. This decrease will shift the demand curve to the left making decrease the GDP of the economy.

Because, there is an inverse relationship between the GDP and the price level, a decrease in the GDP will generate an increase in the price level.