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Suppose the economy is producing at the natural rate of output and the government levy a...

Suppose the economy is producing at the natural rate of output and the government levy a tax on production. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.

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Answer #1

Answer : For first blank space : The answer is "increase".

For second blank space : The answer is "rise".

If a tax is imposed on production then the production cost increase. Hence producers will decrease their production level. As a result, the aggregate supply curve will shift to leftward. This decrease the output level and increase the price level in short run. Due to decrease in output level the employment level decrease which increase the unemployment rate. So, if tax is imposed on production then unemployment rate increase and inflation rise in short run.

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