Question

Aggregate supply in the short run (Range 2 of AS) Scenario: There is an increase in the tax rate on consumers.

Question 1) a. AD increases b. AD decreases c. AS increases d. AS decreases

Question 2) a. GDP growth rises b. GDP growth falls c. GDP remains unchanged

Question 3) a. unemployment rises b. Unemployment falls c. unemployment unchanged

Question 4) a. inflation increases b. inflation decreases c. inflation unchanged

Answer 1

1) If there is an increase in the tax rate on the consumer the disposable income the people have in their hand will decrease and they will demand less than what they were demanding before. This will decrease the aggregate demand in the economy. The answer is "B". AD decreases.

2) As the aggregate demand falls the GDP will also fall. The answer is "B". GDP falls.

3) With a decreased demand the production process will decrease and the firms will be producing less than what they were producing before this will force them to lay off some of their employees and this will increase the unemployment rate in the nation. The answer is "A", Unemployment rises.

4) As the demand in the economy is less the inflation will also cool down. Th answer is "B", inflation decreases.