19. assume the u.s. economy is initially operating at full employment when the government decides to…

19. assume the u.s. economy is initially operating at full employment when the government decides to increase taxes. which of the graphs below would correctly show this occurrence? a. graph a b. graph b c. graph c

19. assume the u.s. economy is initially operating at full employment when the government decides to increase taxes. which of the graphs below would correctly show this occurrence? a. graph a b. graph b c. graph c

Answer

Brief Explanations:

When the government increases taxes, disposable income of consumers decreases. This leads to a decrease in consumption spending. Aggregate - demand (AD) is the sum of consumption, investment, government spending, and net exports. A decrease in consumption causes the AD curve to shift to the left. In the long - run, the economy is initially at full - employment (on the long - run aggregate supply curve, LRAS). A left - shift of the AD curve results in a lower price level (PL) and a lower real GDP (Y) in the short - run. Graph C shows the AD curve shifting to the left from AD to AD₂, which is consistent with the effect of an increase in taxes.

Answer:

c. Graph C