Question

It is argued that a policy of tax reduction will result​ in: A. A shift from LRAS 2 to LRAS 1 with a lower price level and higher output. B. A shift from LRAS 1 to LRAS 2 with lower output at a lower price level. C. A shift from LRAS 1 to LRAS 2 with higher output at a lower price level. D. A shift from LRAS 2 to LRAS 1 with a higher price level and lower output.

Answer 1

Answer: Option(C) is correct.

Explanation:

Correct Option : A shift from LRAS 1 to LRAS 2 with higher output at a lower price level.

If there is a reduction in the tax, this will directly affect the disposable income of the people. Means that their disposable income increases with fall in the taxes.

Now, consumer will demand more because of higher disposable income and producers supply more as their cost of production decreases because of tax reduction.

So, LRAS shift rightwards from LRAS1 to LRAS2 in the diagram. And there will higher output and lower price level.