Name: HAJAR ELFARED

CIN: 306653963

Assignment: Homework Number 2

Date of Submission: Feb 21, 2019

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Question :

“An increase in the income tax rate (fiscal policy) will have no impact on the
level of output or prices in the long run.” True or False? Explain

Answer :

False, An increase in the income tax rate in the long run cause a large shift to the
aggregate demand curve to the left. Whereas, the aggregate supply curve will shift to
the left but will be fairly large, because higher income tax rates provide financial
disadvantage, that tends to discourage people from work, save, and invest, leading to
a decrease in output.

However, the aggregate supply curve will shift only by a small amount. The long run,
will display a slightly lower level of real output with a large decrease in the price level .