Question

In this example of a Keynesian tax increase, the left-shift in Aggregate Demand resulting from the tax increase causes the price level to slide back to the $________ level..

Answer 1

Answer: With the left shift in Aggregate demand resulting from the tax increase causes the price level to slide back to equilibrium level.

Explanation:

When there is an increase in the level of the taxes by the government, the price of the particular good increases because of the taxes. This leads to the fall in the level of the aggregate demand of that good and there is a left shift in the aggregate demand curve.

But this will lead to the falling back of the price level to the equilibrium level because even though the demand falls but the supply level does not change. So there is an excess of supply level in the economy. This leads to the fall in the level of the price back to the equilibrium level and leaving the economy back to the normal situation.