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Question:

An economy is in full-employment equilibrium. If the government unexpectedly decreases the tax rate, in the short run the economy is most likely to experience:

A an increase in employment.
explanation

Short-run equilibrium may occur above full employment, for example as a result of an increase in aggregate demand caused by a decrease in taxes. Both employment and the price level increase in the short run. Above-full employment causes upward pressure on wages that will reduce short-run aggregate supply until, in the long run, output returns to its full-employment level with a still-higher equilibrium price level.

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