Answer to Question #279280 in Macroeconomics for Dan

Question

What is most likely to happen to inflation and real output growth if a government raises taxes and its economy has a year of excellent weather for growing crops? Illustrate your verbal answer with a graph. Label everything!

Answer 1

If a government raises taxes, then the aggregate demand will decrease, and AD curve will shift leftwards. And if its economy has a year of excellent weather for growing crops, then the aggregate supply will increase, and AS curve will shift rightwards. As a result the price level will definitely decrease, but the output level may either increase or decrease.