Question

1. Suppose the government raises taxes. Which curves in the aggregate demand and aggregate supply model would be affected, and which way would they shift?

2.Other things the same, what happens in the short run to the price level and quantity of output when the aggregate demand curve shifts to the left?

3. A decrease in what variable will raise the quantity of goods and services supplied, and shift only the short run aggregate supply curve to the right?

Answer 1

1. When the government raises taxes then its a fiscal policy contraction implies aggregate supply curve will be affected and shift to the left.

2. Other things being same, In the short run when aggregate demand shifts to the left and short-run supply curve being unaffected, both price level and output will fall below initial levels.

3. A decrease in wages or cost of the production shifts supply curve to the right and raise both quantity of goods and services supplied because both prices and output are low in the short run when prices are low wages would also decline and workers are ready to work at low wages thus increasing supply curve in the short run.