Refer to the graphs. Assume that the economy is initially at equilibrium where A

Question

Refer to the graphs. Assume that the economy is initially at equilibrium where AD2 and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. If the government implements a contractionary or restrictive policy, it would make the economy in graph 2

Multiple Choice

move from point C to point B.

remain at point C.

move from point C to point A.

move from point C to point D.

If graphed, the relationship shown would depict this economy's

Multiple Choice

Lorenz Curve.

Tax Freedom Curve.

Laffer Curve.

Phillips Curve.

Average Tax Rate Tax Revenue ($B) 20% $250 40 300 60 250 80 200 AS AD2 AD1 -- 0 1 2 3 4 5 6 7 8 9 10 0 Q1 Q2 Q3 Real Domestic Output Graph 1 Unemployment Rate (%) Graph 2

Explanation / Answer

(Question 1) Option (4)

Graph 2 shows that inflation rate and unemployment rate are inversely related. When government implements restrictive fiscal policy, aggregate demand falls, shifting AD curve leftward from AD2 to AD1, leading to lower output and lower price level (i.e. lower inflation). As inflation falls, unemployment rate rises, moving the economy from point C to point D.

(Question 2) Option (3)

Laffer curve shows relationship between average tax rate and total tax revenue.

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