Question

Assuming that crowding out is not an issue, if Congress increases business taxes at the same...

Assuming that crowding out is not an issue, if Congress increases business taxes at the same time that the Federal Reserve conducts an open market sale, output and price level are likely to change in which of the following ways?

Output / Price Level

a) Increase / Decrease

b) Decrease / Increase

c) Indeterminate / Decrease

d) Decrease / Indeterminate

e) Decrease / Decrease

Business   Economics   
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Answer #1

Increase in business tax results people to invest less and thus investment will decrease and will shift IS curve to the left. When Federal Reserve conducts an open market sale, this means that they sell bonds and brings some liquidity which will result in decrease in money supply and will shift LM curve to the left.

This both lefyward shift of LM and IS curve will result in decrease in equilibrium real output. Thus at all price level lesser aggregate goods will be demanded and hence, will shift AD curve to the left. This leftward shift of AD will result in decrease in equilibrium output and decrease in equilibrium price.

Hence, the correct answer is (e) Decrease / Decrease.

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