Price level SRAS, SRAS AD, AD, Y, Real national output The diagram above shows a

Question

Price level SRAS, SRAS AD, AD, Y, Real national output The diagram above shows an economy initially in equilibrium producing an output of YI at a price level of Pl 10. Which of the following is likely to have increased the equilibrium level of output from Y1 to Y2 and the price level from PI to P2? A A cut in taxation and a fall in raw material prices. B A cut in taxation and a rise in raw material prices. C An increase in taxation and a fall in raw material prices D An increase in taxation and a rise in raw material prices. Briefly explain your answer

Explanation / Answer

Option A is correct

A cut in taxation would shift the AD curve to the right (increased disposable income) and fall in raw material prices would reduce the production costs and shift the AS curve to the right. Equilibrium level of output would increase and price level would also increase if magnitude of AD curve shift is greater than magnitude of AS curve shift.

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