Question

The economy is initially in short-run equilibrium when incomes taxes decline and productivity rises. If the change in aggregate demand is greater than the change in short-run aggregate supply, what will happen to the equilibrium price level and level of Real GDP

Answer 1

Answer: The Price Level and Real GDP will both Rise.

Explanation:

Income tax is declining so that means the Aggregate Demand Curve will shift to the right.

Productivity is rising so the AS curve will shift left.

If the change in the AD is more, prices and GDP will therefore both rise.

Answer 2

Answer:

If the aggregate supply—also referred to as the short-run aggregate supply or SRAS—curve shifts to the right, then a greater quantity of real GDP is produced at every price level. If the aggregate supply curve shifts to the left, then a lower quantity of real GDP is produced at every price level.

Explanation:

A shift in aggregate supply can be attributed to many variables, including changes in the size and quality of labor, technological innovations, an increase in wages, an increase in production costs, changes in producer taxes, and subsidies and changes in inflation.

In summary, aggregate supply in the short run (SRAS) is best defined as the total production of goods and services available in an economy at different price levels while some resources to produce are fixed... As prices increase, quantity supplied increases along the curve.