Suppose that in the next year, the government plans a mass tax decrease on house

Question

Suppose that in the next year, the government plans a mass tax decrease on household income. In the 2 2 2 graph to the left, please adjust the curves appropriately to reflect this. In the graph to the right, please show what will happen to inflation as a result of the left graph's movement (if any) by moving point A 2 110 109 108 107 106 105 104 103 102 101 100 10 SRAS 2 AD Phillips Curve 0 246 8 10 12 14 16 18 20 Quantity of Output (thousand) 0 1 23 4 5 6 7 89 10 Unemployment Rate (%) 1 Compared to before the tax decrease, unemployment is higher. lower. O the same not enough information to tell conclusively.

Explanation / Answer

With higher disposable income to spend, the AD curve will shift to the right, raising prices and employment. This implies a movement of Point A upwards where inflation is higher and unemployment is lower.

Compared to the situation before, the unemployment is lower after the tax decrease, as firms hire more labor to cater the increased consumption.

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